Member Blog: The SAFE Banking Act Is Delayed. Again.
Here’s what cannabis businesses can do to make the most out of the current financial landscape.
Companies in the cannabis industry looking to start a relationship with federal banks and credit cards are going to have to wait a little longer. Despite bipartisan support, the Secure and Fair Enforcement (SAFE) Banking Act has stalled in the Senate; caught in minor disagreements, it has missed the opportunity for a vote during the summer session, leaving cannabis-related companies caught in financial limbo. Unfortunately, this isn’t new news: the first version of this bill was introduced to congress 10 years ago.
Politically, the main selling point is that the bill would boost the safety of the cash-heavy industry: Politicians point to an increased number of break-ins at dispensaries as a justification for allowing federal financial institutions to provide services such as bank accounts and credit card transactions to cannabis companies.
An easy political sell, the public safety angle – spelled out in the acronym SAFE – is usually the first (and only) benefit mentioned in the news. Yes, SAFE would allow dispensaries to shift away from cash transactions by permitting credit card companies to service businesses that produce, manufacture, distribute and sell cannabis, despite the fact it is a schedule 1 controlled substance.
But beyond preventing robberies, the bill would start to level the economic playing field for this growing industry that already faces an extremely high rate of federal taxation, on top of other disadvantages, such as higher transaction and banking costs that lead to pricing pressure – and make it tougher to compete with the illicit market.
Because of cannabis’ schedule 1 status, nationwide banks are not allowed to provide any services whatsoever to cannabis-related businesses. Even though the businesses are legal at the state level, national banks operate under a federal charter that prohibits such relationships – not just with dispensaries, anyone who does business with the cannabis industry – web designers, lawyers, marketers, etc.
(I learned that the hard way when, in the early days of working as a virtual CFO for cannabis companies, I had all of my Bank of America accounts – personal and business – frozen and shut down abruptly.)
Since federal banks cannot provide small business loans or even issue checking or savings accounts, cannabis-related businesses are limited to small banks (i.e. credit unions, state banks). They face higher borrowing costs, and receive lower interest rates, cutting them off from many of the privileges other industries enjoy. Best financial practices – like securing a line of credit or keeping operating cash in an interest-bearing account – may seem out of reach.
For cannabis-related companies that had been impatient to take advantage of this new legislation, the news is frustrating to say the least.
But there are lots of ways retailers can work within the current financial landscape. Here’s what I recommend.
- Seek an interest-bearing account – The smaller banks and credit unions servicing the cannabis industry typically do not offer these clients interest-bearing products. However, it is possible to find interest-bearing accounts for operating cash, for example through the fintech company Safe Harbor Financial, with rates starting around 1.5%.
- Secure a line of credit – With loans hard to come by, cannabis companies often feel as though they have to access capital from private investors, forcing them to give up equity. But seeking non-dilutive funding is possible – and recommended – once you’ve established your target operating cash balance of 10-30% of annual revenue.
Many cannabis friendly banks will offer unsecured lines of credit at rates of base rate +4% – but generally only in limited license states.
Note: although rates can be competitive in some cases, the amounts tend to be lower. However, since these facilities are often based on an amount per tax ID, multiple entities could each carry their own line of credit and increase total borrowing capacity.
- Facilitate compliant debit sales – We know cash-only can drive down retail sales and increase risk of theft or employee mismanagement. With credit cards unavailable, two popular, but non-compliant, solutions have been cashless ATMs and Mastercard and Visa debit cards. While cashless ATMs experienced a crackdown last December, the latest news suggests that Mastercard is also cutting off this popular work-around.
Rather than get caught up in the headlines, adopt compliant pin-based debit cards, through products such as Aeropay. Unlike traditional debit card transactions, customers will have a fee, and they’ll also have to set up a specific app to gain access, but as all other cashless options appear to be erased, the benefits outweigh the costs, especially for regulars.
Just make sure you’ve got a point of sale (POS) system with flexibility in terms of their API (application programming interface) – for example Flowhub – so that you can integrate the pin-based debit card payment method.
- Don’t pay monthly banking fees – While most banking institutions charge account fees to cannabis businesses, with a little research you can find some that waive those fees, for example Main Street Bank and Safe Harbor Financial.
- Keep deposits safe – Although the dust has settled since the collapse of Silicon Valley Bank, cannabis businesses should still keep an eye on managing their banking risk. Since programs like CDARS and ICS are not available to the industry, we recommend cannabis operators keep deposits at multiple banks to keep the highest possible FDIC insured balance.
Despite these financial obstacles and policy roadblocks, the cannabis industry continues to grow, year after year. Accessible banking products are out there – and as we wait for more federal legislative progress, it can be well worth the investment to do a little research to find out which ones best meet your businesses’ needs.
Member Blog: Dude, Where’s My Payments?
by Gary Strahle,
Cannabis industry merchant service providers get shut down. How has this impacted retailers and at what cost? Learn how operators are mitigating theft and working with the National Cannabis Industry Association to drive legislation.
In order to best understand what payment methods will suit you best, you must first understand the inherit risks that are associated.
Let’s put it bluntly; there is no such thing as a federally compliant payment in cannabis, not even cash. Given states have legalized the sale of medical adult-use cannabis, it is still very confusing and in some cases crippling when choosing your method of payments.
Cash is king.
Because federal banks legally can not do business with the cannabis industry, retailers have limited options for securing their resources. This makes dispensaries targets for theft. Criminals are coming after both product and cash which requires operators to make heavy investments in security systems. These include state-of-the-art video surveillance, 24/7 on-site security, steel doors, bulletproof glass, expensive safes, terrible insurance policies, and a lot of trips to your favorite credit union. State-chartered credit unions are the only banks accepting cash from cannabis businesses.
Although cash comes with some inherit benefits, coins don’t. Coin change is a big problem for retailers as there has been a national coin shortage. What are you supposed to do when your angry customer is complaining over the 75 cents you can’t return to them? Do you give them customer credit? Do you make an adjustment or a discount? Do you request your POS provider to create a “round up” feature that brings every cash-related transaction up to the nearest dollar?
Benefit: Tax Exposure.
Risk: Tax Exposure, Theft, Time, Money
So what about Cashless ATM?
A cashless ATM is where customers break out their debit card at the register to pay for their retail purchase. Just like any other ATM, you are drawing against an even $10 or $20 amount from your bank account. So if your purchase was for $17, a budtender would hand you back $3 cash in change for your purchase.
While there has been mixed results with cashless ATM’s there was a crackdown made by Visa and Mastercard to shutdown these types of transactions on their network. A significant number of retailers lost their capability to process all of a sudden and had to revert to cash-only payments. While a good chunk of the high risk payment providers were shut down, others continued processing without service interruption for reasons I will explain later.
Although cashless ATM payments can mitigate some of the risks involved with cash on hand, they are subjected to a number of costs that can factor into your daily management and or customer experience. First, if your payment terminals are not integrated with your retail POS, good luck reconciling your money at the end of the day. Budtenders will frequently miscode payments on the POS and assign card payments to cash transactions or vice versa. This makes it extremely tedious to reconcile your books. On the other hand, everyone hates ATM fees. Our colleagues have witnessed fees as high as $25 in places like Las Vegas. Typically you will see most cashless ATM fees between $3-3.50, however, it is common to see them even higher.
Benefit: Processed as an ATM transaction(not a Cannabis Transaction) Settlements are deposited directly into the bank.
Risk: Added fees to customer.
What is different about Pin Debit?
Pin debit allows charges to the penny. This is a cool way to allow customers to pay with their debit card without having to pay the ATM fees. It is relatively new and still unclear if these processors will get away with miscoding their RCC. If you looked at the customers bank statement you would see the charge from your dispensary just like a cashless ATM however the way it got there is much different. Processors are telling networks and banks that these are “pharmacy” transactions. When a customer calls the bank and discusses your transaction at a cannabis dispensary it would seem like things could start going down hill quick for both the payment provider and the merchant (dispensary). With all risk considered it remains as an option for many to process their payments. In conclusion what I’m about to share about credit payments would make you consider pin debit twice.
Benefit: To the penny charges, no ATM fees.
Risk: Miscoded RCC, Merchant Service Shut Down.
How about plain debit or credit?
Don’t do it. This from personal experience has impacted my life. A close family friend was indicted and served time in jail for fraudulently processing credit card payments for delivery giant Eaze. This was a get-rich-quick scheme that broke friendships, businesses, families, and a healthy portion of the retail cannabis industry. Just like pin debit, credit charges are miscoded but in this case purchases were being identified as “dog treats” or “flowers.” The charges would not show up on the customer bank statement as a purchase from a dispensary. Understanding the high risks associated with processing cards in such a way is explicitly fraudulent and has the highest likelihood of involving some form of trouble .
Benefit:Massive increase in Sales.
Risk: Non-payment, Chargebacks, Miscoded RCC, Merchant Service Shut Down.
In summary.
If you or your business are looking to service card payments for your customers, choose your options wisely. In my own personal opinion, you face the least amount of risk using an integrated cashless ATM solution, however if the customer is demanding a more traditional debit experience then it could be worth running a cost/benefit analysis.
The bottom line is that those who have the most dynamic and redundant integrated card payment solution will be the most continuous while mitigating the risks of cash. The payment providers getting shut down do not have redundancy in their network providers or payment methods and therefore non sustainable.
Some payment providers will eat the time in jail and or fines as they are or were able to make a significant amount of money greater than the cost of the punishment.
Until we can successfully make legislative changes being pushed forward by NCIA, those who care about making change should donate to their cause and participate in NCIA’s 11th Annual Cannabis Industry Lobby Days in 2023.
Author: Gary Strahle is a Technical Architect with over a decade worth of operational cannabis industry experience. 2023 NCIA Retail Committee Chairman. Avid surfer and golfer with a passion to help others.
Cannabis Cloud – Applications, Consulting & Payments. Founded in 2015, providing service to over 2,500 cannabis businesses. Specialized as a Salesforce Partner innovating industry standard solutions from seed to sale, Cannabis Cloud’s payments integrated Retail Point of Sale hosts a robust api for connecting Metrc as well as external menus such as Weedmaps or Leafly.
Committee Blog: Fundraising Basics in the Cannabis Industry
by Deborah Johnson, MCA Accounting Solutions & James Whatmore, MAB Investments
NCIA’s Banking & Finance Committee
Part 1 of a 3-part series
So, you discovered a pain point in the cannabis industry while brushing your teeth. You go on to craft a business plan and begin to execute on a minimal viable product to prove your hypothesis and test the market interest in your product. To date, you have funded this by volunteering your time and convincing some other contacts to contribute their time as well. You still have your full-time job, but it’s time to create a formal entity and grow this thing. How are you going to fund this? Well, there are some options and some of them have greater odds depending on your demographic. Are you considered ‘touching the plant” or not? Are you male or female? Are you a person of color or not? Do you have a track record of building businesses and raising funds?
Unfortunately, the data shows that it’s much more difficult to raise funds from angel and VC investors if you are a female or person of color. The following statistic is actually based on the traditional market, so level up the challenge if you are in cannabis:
“Venture dollars invested in sole female founders in 2020 represented 2.4 percent of overall venture funding… the percentage of U.S. venture dollars that went to sole female founders in 2020 dropped dramatically by stage. At the seed stage, 7 percent of VC dollars went to startups with only female founders. At the early stage, that figure was 4 percent, and at the late stage, a mere 1 percent.” – Crunchbase News.
Fortunately, the cannabis investment industry has approached this issue with several new funds and structures. We will touch on that later in this series.
Does your idea involve ‘touching the plant’? Currently, cannabis is illegal at the federal level. This comes with a whole host of challenges and opportunities. With federal illegality comes the opportunity for a startup to solve a problem before the more established, traditional market entities are willing to enter the industry. If you build it well enough, you are likely to be acquired once the market opens up. But you will have to deal with lack of access or restricted access to banking and processing, the IRS and 280E, the certainty of audits, and working within the boundaries of your state’s regulatory structure.
Now you have an idea, so, how to fund? Well, the first thing anyone considering investing in you wants to know is, what is your investment in yourself? Do you have savings, credit cards, personal real estate? For the earliest stages, this is often the first step. This is the “three peeps and a PowerPoint stage” — ideas and iteration come fast. There is no real cost for you to walk away. It is on your dime. You are living off of your day job and every resource you can apply for This shows commitment and the effort will be a key to demonstrating value in the future. Be scrappy.
You will also need to establish a banking relationship. If you are touching the plant this can be quite the struggle. Federal banks have to comply with the KYC – or Know Your Customer – rules and most are unwilling to take on the extra tasks and time it takes to manage a cannabis account and file Suspicious Activity Reports (SARS). Be ready to navigate the business world in cash – which includes security and safety and paying your taxes. Many local-based credit unions are rising up to the challenge, but that often involves extra, costly fees. And even if you are ancillary, if you choose a “green” enough name you are exposing yourself to having your account closed. This goes for processing too. It really behooves you to be as honest and clear about what you are doing and establish a relationship with your banker. NCIA has successfully advocated for the SAFE (Secure and Fair Enforcement) Banking Act (S. 1200, H.R. 2215) which provides a safe harbor to financial institutions doing business with state-legal cannabis providers. It sits in the Senate after having passed the House twice now, although now a new House version will still need to be approved.
As your concept solidifies, its demands of capital increase, with personal, social, business, and financial needs starting to grow past what you can provide alone. You need help. If you have a buddy willing to put an LLC together for you, that’s bootstrapping. If she wants something in return, you are at friends and family time. This is a good stage to build your early financial network and can really help with those next steps. This is a small round of insiders and is as much about personal capital as financial capital. A friend and family round is a direct contact on your part, and those relationships you made in the boot-strapping are good places to start. These early champions will build your social capital as they talk positively about you. Being a small group also creates scarcity. These subtle behaviors will help your valuation when it comes time for that. A good friend and family round will get you off to a right start with the resources for securing an accountant and other professional services to determine the right way to structure your company.
For these early funding stages, bootstrapping and friends and family funding demonstrate your validity as an investable partner for later rounds. No matter your hurdles, starting your fund journey on the right path will pay off down the road.
In our next blog, we will discuss funding options such as debt, angels, and venture capitalists, and where to find them.
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