When considering the financial services (FinServ) challenges of the legal cannabis sector, the biggest point of friction that almost always comes to mind first is the point of sale (POS): enabling marijuana businesses to accept electronic payments from their retail customers.
That challenge is undoubtedly a major headache for the companies operating in this sector, which are often small businesses. Yet, the continued struggle for industry players to be adequately banked and have access to the right financial services impacts operations far beyond the POS, explained Dan Henry, chief executive officer of Dama Financial. In a recent interview with PYMNTS, Henry explored the FinServ compliance conundrum for the cannabis industry, noting that the struggle to get banked has ramifications that spread from the POS up the supply chain — impacting dispensaries, manufacturers, logistics providers, subcontractors, growers and beyond.
This challenge becomes apparent in the B2B eCommerce and eProcurement arena, and was one Helix TCS, a provider of ancillary services for the legal cannabis sector, faced following the firm’s acquisition of eMarketplace Amercanex International Exchange earlier this year in an effort to build out an online B2B marketplace for the industry. As Henry explained, though the platform allowed for companies to connect and agree on pricing, it was unable to facilitate transactions between those buyers and suppliers.
“It illustrates how, in terms of efficient operations of business and commerce, nothing is going to happen efficiently unless you’ve got various players securely and properly banked so they can move funds, and transact quickly,” he said.
Dama Financial recently announced an integration into Helix’s Amercanex platform to fill that gap. The company collaborates closely with banks and financial regulators to enable compliance escrow services for firms transacting on the platform, Henry explained, adding that companies will only be able to transact on the platform if they’re banked. (Dama also connects legal cannabis businesses to banking providers.)
Using existing ACH rails, Dama’s B2B payments solution addresses a major financial challenge for industry players, but Henry noted that some of the biggest problems the sector faces are not B2B, but business-to-government (B2G). The company is now collaborating with city and municipality officials to introduce a solution that enables industry companies to pay their taxes electronically, too. Henry pointed to the friction this solves, not only for traditionally cash-based cannabis companies, but for the state and city treasurers struggling to process literal bags of cash when local businesses pay their taxes.
A Shifting Regulatory Landscape
In a high-risk industry like cannabis, compliance is, unsurprisingly, the number-one focus for companies like Dama, working to provide FinServ for legal players in the space. However, that compliance hurdle is likely going to look a lot different with the anticipated passage of the SAFE Banking Act.
With the U.S. House of Representatives having passed the legislation, it now awaits Senate approval, though experts expect the bill to eventually become federal law. Intended to allow financial institutions (FIs) to legally provide banking and financial services to the legal cannabis sector, the legislation would — in theory — remove the competitive advantage with which marijuana-targeting FinTech firms like Dama operate.
On the other hand, industry players are increasingly warning that the SAFE Banking Act does not necessarily address every payment challenge in the sector. The legislation, Henry said, “merely has suggestions” for FIs on how they should navigate the sector, “and needs to have clear rules and guidelines that, I believe, should be even more stringent than existing guidelines out there.”
With hopes that the Senate more closely scrutinizes the legislation than the House, Henry noted that just because the law would enable a bank to serve a cannabis business, that doesn’t mean it necessarily should.
“A bank should only serve this industry if they’re willing to really bulk up on their compliance and oversight,” he said. “Just because it’s quote-unquote ‘legal,’ doesn’t mean every bank should bank it. And absolutely, I believe very few banks would be equipped to properly bank the industry.”
He’s not alone in this sentiment. YapStone Executive Vice President and General Counsel David Durant recently discussed this hurdle with PYMNTS’ Karen Webster, warning that the continued classification of cannabis as a Schedule 1 drug means “you will never get one of the big card networks to play without a safe harbor,” even with the passage of the SAFE Banking Act.
Similarly, a recent report from Politico concluded that the law probably wouldn’t lead to a surge in traditional banks’ entrance in the space, especially when it comes to the largest FIs. What it could do, however, is open the door for more credit unions, smaller banks and emerging FinTech firms to launch, boosting competition in the sector. According to Henry, though, the threat of new industry players isn’t his biggest concern for Dama Financial.
“My hope for anyone else looking to do this is that they do it right,” he said. “I think our biggest competition out there [is] not folks that will do it well, but those that will do it poorly and recklessly — that’s my biggest concern.”