Why the Cannabis Industry Is Still an All-Cash Affair, Even as Legalization Continues

If you had to pick one example of a whole industry that deals in cash only, you’d be hard-pressed to find a better match than the cannabis business. Casinos might be the only other thing that comes close in terms of their total percentage of cash transactions; but even then, the majority of gambling venues are attached to other types of businesses like hotels, restaurants, and stores, where paying in other ways is standard practice. For marijuana related businesses – or MRBs for short – it’s all cash, all the time. Industrywide, it’s estimated that between 95 and 99 percent of all MRB transactions are carried out in cash.


Ask anyone why this is, and they’ll usually tell you it’s simple: MRBs have historically had a difficult time convincing banks to do business with them. While that first instinct may be close, though, it’s not quite correct. As legalization efforts have gained momentum over the past decade, things like bank accounts and even loans have become much simpler for cannabis businesses to obtain. But credit card processing has stubbornly remained almost entirely inaccessible – and that’s what’s kept MRBs dealing in cash.


Cannabis delivery billboard
Cannabis legalization has progressed to the point where you can announce on a billboard that you're selling it - but good luck finding a credit card processor. (photo: Adam Jones / Creative Commons 2.0)

To understand why credit cards have remained a stubborn holdout, even while some banks and credit unions have begun opening up to MRBs, we have to take a step back and look at the process that brought us here over the past two decades. Relatively speaking, it wasn’t all that long ago in this country that all types of cannabis were simply illegal everywhere.


As that began to change on the state level, but not the federal level, it presented some difficult decisions for both MRBs and for others who did business with them. Try to picture a 1930s America in which Prohibition had effectively stopped being enforced, but in which it had never been repealed and alcohol had technically remained illegal. That’s roughly the situation facing the cannabis industry today.


That’s where the important distinction between banks and card processors comes in: Banks deal with people. Card processors deal with transactions. It’s a soft distinction to be sure, but a critically important one in terms of who’s willing to do business with whom.


Here’s what that means in practical terms. If you’re a bank or a credit union – especially one that’s located entirely within a single state or metro area – then you have the opportunity to make a business decision about whether dealing with MRBs is worth it or not. That judgment might depend on any number of different, smaller decisions. What is the revenue opportunity? What do the specific state and local laws have to say about it? How trustworthy are the individual customers? And even, how does it align with the personal values held by the people in charge of the bank?


Cannabis retail storefront
A bank or credit union may have some leeway in deciding what constitutes a "legitimate" cannabis-related business, and whether welcoming them as customers is worth the risk. Card processors are more likely to follow standardized guidelines based on prohibited transaction types. (photo: GoToVan / Creative Commons 2.0)

The banking industry is notorious for its high burden of regulations: BSA, AML, OFAC, KYC, and a whole parade of other guidelines about proper auditing and reporting. But the positive side of that is, with the extra diligence required to satisfy these regulations when it comes to cannabis, you really do get to “Know Your Customers.” A much clearer picture takes shape about whether you can trust them, and whether they’re worth the risk. That’s a big reason why not all banks, but at least some banks, have opened up to MRBs.


For card processors, it’s much more cut-and-dry. If a transaction falls into a prohibited category, they just won’t do it. There’s generally no distinction made between different types of transactions from the same merchant. Overall, there isn’t a lot of room for case-by-case decisions, and so default the default answer for MRBs is no. And with no card transactions available, the cash starts to pile up.


So, then, if cannabis businesses were to gain more reliable access to card processing, they’d stop being so dependent on cash, right? Well, again, not so fast. While direct access to the card networks is rare for MRBs (in all our years dealing with them, we’ve only encountered two that had it, through smaller processors), workarounds do currently exist. These are typically in the form of an app or mobile wallet that acts as a buffer for the transaction. In other words, a card transaction is used to load funds into the app – and since that’s just a generic transfer of funds, not a cannabis-related transaction, it isn’t flagged. The purchase is then completed through the app using the loaded funds, and the card network need not be involved.


But even at the MRBs that accept cards directly, with no apps and no workarounds, a funny thing happens. A full 60% or more of their customers still choose to pay with cash voluntarily. It’s not hard to understand why, either! Even in cases where buying cannabis is completely legal, there are many reasons why you might not want to leave a paper trail that could be found by an employer, a family member, a litigation opponent, or any number of other entities who might later decide to hold it against you. In that respect, the heavy use of cash serves as a sort of barometer for the extent to which cannabis purchases remain a social taboo, despite their improving legal status.


The bottom line for MRBs, is that there isn’t just one reason why they do so much of their business in cash. Instead, it’s a trifecta of causes – legal, financial, and social. Until all three of those are relaxed, they are still going to be dealing with lots of cash!


As a cash automation company, one of the reasons we’ve been interested in MRBs is because of the unique circumstances that cause them to handle large amounts of cash. In fact, some of the larger cannabis retailers we’ve seen can turn over as much cash in a day as a bank branch! So, it makes sense that professional-grade banking equipment like a cash recycler can be a good fit for them.


While cash recyclers may not be as well-known in the retail world as smart safes, once these higher-volume MRBs find out about them, many of them wonder what took them so long to make the move to cash automation. If you’re interested to know more about how cash recyclers work, or about how cash automation can help you in a retail setting, download our cash automation white paper, or click to schedule a free, no-commitment consultation with one of our experts!


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