My last column addressed why cashless ATMs were not legal. Today, we discuss why some payment platforms are compliant.
A writer never knows what stories will resonate with an audience or how loudly. My December column about cashless ATMs was timely, with dispensaries across the country going cash-only as the feds cracked down on less-then-legal workarounds. Still, the high rate of clicks, reposts, and responses was unexpected. One reader, a payment platform expert witness, used our story to explain to his client’s attorneys why cashless ATMs were such a problem.
Another reader asked about decoupled debit, which I have come to learn could be a workable product for cannabis businesses. Decoupled debit is different from PIN debit—it feels similar, but when you peel back the layers it is much different. I briefly touch upon the differences below …
Ghost of the BIG bankcard company
Our experts assured me that PIN debit is not legal. At its core, PIN debit involves a bank or network-issued card and those issuers do not knowingly allow cannabis over their networks. To make PIN debit work typically involves concealment, which the feds consider to be fraud. The provider might simply lump their cannabis transactions into another merchant code, such as pharmacy. That works until the banks find out, whereupon the banks will terminate the network or simply refuse to accept any pharmacy transactions. As Yogi Berra once said, “It’s like déjà vu all over again.” We could be recycling the cashless ATM article and simply changing it to PIN debit.
Another reader, the chief marketing officer for a PIN debit provider, explained that we did not fully understand the product. That reader said they have many clients, including a roster in Massachusetts. The CMO set up a call between me and their in-house CAMS (Certified Anti Money-laundering Specialist) expert but canceled, stating they were busy managing an influx of new clients seeking a solution when their cashless ATM terminals stopped working. Then they went silent. When they resurfaced they stated, “As part of our initiatives for 2023 we are electing to not be involved in third party publications unless we have full control of the end product.” They never detailed my “few small inaccuracies with regards to the debit networks, how they work, and PIN Debit versus cashless ATMs.” I asked for the name of a local participating retailer so we could see how the system works, but they declined to provide one.
Needles in the trim stack
Our research and discussion with experts indicate the only workable solution, other than cash, is a platform built upon the automated clearing house, more commonly known as ACH. ACH is the engine behind many common payment applications, from Venmo, to PayPal, to Zelle. According to the Consumer Financial Protection Bureau (CFPB), the US government agency that makes sure banks, lenders, and other financial companies treat you fairly:
ACH is an electronic fund transfer made between banks and credit unions across what is called the Automated Clearing House network. ACH is used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine payments… A number of online payment services also conduct transactions via ACH, including most banks and credit unions’ online bill payment services. While many ACH payments clear quickly, because of the way in which an ACH is processed and precautions against fraud and money laundering, transactions can sometimes take several days to complete. (To learn more about ACH, I recommend this article on nerdwallet.com)
Decoupled debit
Two seemingly credible experts provided different explanations of decoupled debit, and both seem very plausible. I’ll explain the one that seems most relevant to today’s discussion.
Decoupled debit is basically a private card network. If you’ve been in a retailer or gas station that has its own debit card (that refills itself from your bank account), you’re using a decoupled debit card. It is decoupled from the conventional debit networks (which do not allow cannabis transactions) and funds itself via ACH but can generally only be used at the sponsoring retailer’s outlets.
The experts we spoke with all confirmed that ACH is an acceptable payment method. The challenge is that ACH does not have a manner to check balances in live time (like instantaneously during a retail transaction while at the check-out station) and ACH clears after the transaction, creating an opportunity for insufficient funds and a loss to the sponsor or retailer.
I spoke with the CEOs of two legal payment platforms—Dustin Eide, the CEO of CanPay, and Cathy Iannuzzelli, the president of Kind Tap. We learned that finding payment providers is easy, finding honest payment providers is a bit more challenging, and finding compliant payment providers is especially tricky. We identified only four. We spoke with two of them for this article.
With the industry scrambling to find replacement solutions to cashless ATMs and many vendors continuing to push PIN debit or other disguised payment methods as legal, I took a dive into workable solutions. My last column addressed why cashless ATMs were not legal. Today, we discuss why some payment platforms are compliant. Because this is such a timely issue in the cannabis industry, we get down to a granulated level.
CanPay
When Colorado legalized cannabis, Dustin Eide saw an opportunity to develop a legal payment platform. He had the first ingredient we have seen in common with other legal payment platforms—experience in the payment industry. Dustin recognized the challenge and saw the opportunity. With a background in traditional merchant services, he sought to design a plan that would avoid the worst ISO (independent sales organization, the small local firms that generally sell merchant services) practices and work efficiently for consumers.
Dustin quickly understood that the card networks were being honest that they would not allow cannabis transactions. But ACH does not touch a card network. FinCEN-regulated financial organizations were transparently using ACH and maintaining compliance with FinCEN’s Valentine’s Day 2014 guidance outlining the US Treasury’s “expectations regarding marijuana-related businesses” and “marijuana laws and law enforcement priorities.” He tested various solutions with banks to find a legitimate process.
Today, CanPay has more than 1,000 participating retailers across 31 states. According to Dustin, CanPay is accepted by 10 of the 13 largest publicly traded MSOs. Unlike a private network where the solution is one card per store, CanPay acts as a universal payment tool—it is one app per network of 1,000 unrelated stores, and its value enhances as they add more participating retailers.
How it works
CanPay is a containerized site that functions like a mobile web-based app. The icon is saved to a user’s home screen and when clicked, instead of launching a native app (locally stored), it connects to the CanPay website. It takes up no space on the user’s device and functions in many regards like Microsoft Office 365, working seamlessly on the local device but residing in the cloud. The app can be used at any retail store that is registered with CanPay.
To use the service, the customer opens the app and requests a code. The participating retailer scans the code, and the transaction is complete. If the code cannot be scanned, the retailer types it into their system. The codes are single use with a 30 minute use-it or lose-it lifespan. The code has no personal or banking data. The app has a live chat with real time live agents, whether the issue is signup or a problem at the point of sale.
CanPay was designed as a low-cost provider. Account fees generally cost the merchant 2% to 2.5% of the transaction amount. Higher rates can reach 3.5% and great rates are in the 1.5% to 1.75% range. CanPay priced itself at less than 2%, all-in, with no setup or fixed monthly fees.
Over six-and-a-half years since June 2016, starting with three dispensaries in Colorado, CanPay has processed more than $700 million in retail transactions. Customers sign up for the app online in about two minutes. Signup requires a name, phone number, email, address, and date of birth. The customer links in their bank account (which requires a bank routing number and the customer’s account number—CanPay claims its app has direct links to over 11,000 financial institutions). CanPay designates a unique spending limit, up to $5,000. Once signed up, the app is live and can be used at any participating retailer.
The consumer is not required to pre-fund the transaction or keep a balance on deposit with CanPay. The service is completely free to the consumer. Dustin explained that CanPay was designed to avoid what merchants hate—long-term contracts, exclusivity, monthly fees, compliance fees, activation, and setup fees. Consumers were familiar with Venmo, ApplePay, and other payment platforms, so CanPay sought to develop a dedicated cannabis payment network functioning exclusively over the ACH network (as many payment apps do). CanPay retailers can operate in full transparency regardless of the words (like cannabis, marijuana, or their slang references) in their business’ name. CanPay has presented its platform to federal bank examiners without pushback or objections.
More than 120 financial institutions participate in the CanPay network.
ACH is not immediate and has no payment holds, but CanPay guarantees payment even if the ACH fails. If an ACH request does fail, the customer can open the app to clear the failure by depositing funds to their bank account and initiating a fresh ACH transaction. CanPay does not assess a fee if the ACH fails, though the consumer’s bank might do so. CanPay clears transactions daily.
All transactions happen within the scope of federal enforcement priorities.
KindTap
KindTap’s founding team reviewed the cannabis payment market and realized all the compliant platforms were using ACH and there were no consumer credit products. The team knew the traditional payment networks were not available, so they developed their own network.
The KindTap team understood both the payment and credit side of the equation and knew that a consumer credit product was the missing link – the ability to buy now and pay soon after. Studies have shown that when consumers use a credit device like a credit card, average spending increases.
KindTap has reviewed nearly a year of payment activity and found that KindTap Credit customers spend over 50% more than when they pay with cash and over 20% more than when they pay with a bank account linked product like ACH.
How it Works
When a merchant signs up for a KindTap account, KindTap conducts due diligence that includes confirming the merchant has a state cannabis license in good standing and has a cannabis-approved depository account with a cannabis compliant bank. KindTap adheres to the Cole memo’s eight enforcement priorities. KindTap requires its clients have cannabis compliant bank accounts to assure day to day compliance and oversight of general financial transactions. This weeds out (no pun intended) operators who do not have a cannabis-friendly depository account.
KindTap is designed to be consumer friendly. Conventional credit card requires minimum payments structured so low that it can take years to pay off a balance. KindTap requires a minimum monthly payment of 25% of the outstanding balance to avoid systemic consumer debt. KindTap underwrites consumers for a credit line from $250 to $1,500. These limits are intended to keep consumers from overspending.
KindTap rolled out its service during COVID and as a result they focused on eCommerce. Customers can order online, in advance. To allow for in-store use, participating retailers can install a KindTap kiosk that allows the customer to place an order at the store. KindTap reported that the company is presently working on strategies to allow their system to function in most store environments (like at the check-out station). KindTap integrates into the ordering process, such that payment is made when the order is placed, regardless of when the order is picked up or delivered. Monthly statements, like credit card statements, are sent by email or available in the app. The consumer then pays the bill like any other standard credit card product. There is no transaction fee or annual fee to the consumer. The only cost to the consumer is an interest charge if the balance is not paid in full each month.
For the retailer there are no fees for set-up, no monthly fees, and no minimum usage is required. A retailer can cancel at any time. There is a transaction fee each time a sale is made with KindTap. These fees are higher than CanPay but still very competitive considering that KindTap is the only one that offers credit and research indicates consumers spend more when using credit.
KindTap opened its credit product in pilot form in October 2021, and officially rolled out in February 2022. Today KindTap is integrated with over 100 merchants and growing.
Like CanPay, KindTap has customer service agents available by voice, text, or email.
SAFE Banking
We asked how the SAFE Banking might impact these providers and their competitive positions.
Dustin Eide (CanPay) indicated that the final SAFE Banking Act might only cover depository institutions, which would leave the major card networks unprotected and therefore, likely remaining on the sidelines. Eventually, cannabis will be legal and the challenges we discuss today will disappear. Dustin developed the CanPay network with the ability to integrate in conventional credit cards sometime in the future. Even so, he believes the platform could survive on its own due to the attractive cost to the merchants. With young consumers acclimated to payment platforms from Zelle to PayPal, consumers might not want to abandon a convenient cannabis payment platform for their credit cards, but only time will tell.
Cathy (KindTap) believes the SAFE Banking Act will increase accessibility to depository accounts but won’t open the playing field to major payment networks. By the time Visa and Mastercard can enter the cannabis payment market, KindTap will have developed a sufficiently large portfolio of consumers to create an affinity card with rewards.
Finding the truth
Payment platforms are complex, with numerous players and layers and all sorts of fees for the merchant. One of our go-to experts suggested that, when interviewing a payment provider, ask the right questions and get responses by email (so you have it in writing). Among those inquiries, ask the vendor hawking payment solutions for the name of the bank they are selling transaction services for and confirm the vendor is a registered ISO with that institution. Do not accept an answer like, Oh, there are so many, I can’t name them all. You want to know their main banking affiliate.
Next, confirm they are reporting the transactions to the bank as cannabis related. The vendors will generally respond in the affirmative. Ask for a letter on the bank’s letterhead addressed to the vendor confirming the bank is aware they are processing cannabis transactions, and the bank has disclosed their cannabis processing to the bank’s regulator. That is the first big test. A reputable vendor and financial institution will provide such a letter. Someone playing games or disguising the transaction will slickly talk their way around it.
Banking is a very highly and tightly regulated industry. There is no, Well, they know what we’re doing but they quietly look away because they like the volume. Ask what merchant code they use for the transactions and then look up that code here. If the code doesn’t match the product, there could be deception and fraud. If there is no merchant code, ask about the process for submitting a transaction.
Takeaways
Visiting a cannabis store? With the KindTap and CanPay apps, you can leave your wallet behind (but bring your ID to prove you are at least 21).
Do you sell to consumers? Avoid the next wave of shutdowns and get yourself a compliant payment platform.
I write about the cannabis industry, but I am also involved in a few cannabis projects. One is Stone’s Throw Cannabis, a majority social-equity owned cannabis retail store that we hope will be open by mid-2023. The store is in downtown Boston, just across the street from South Station, the busiest commuter hub in all of New England; 85,000 travelers a day pass through South Station, and we’re 125 ft. from the entry to the bus terminal, 300 ft. from the entry to the train platform, and less than 200 ft. away from a new 51-story tower being constructed above the rail lines. That tower will have 156 luxury condos, 200 hotel rooms, and 756,000 SF of office space (I know all these figures by heart; if you are raising capital, you should fully understand your competitive advantage and commit it to memory). At present, it appears we will open under the name Firebrand Cannabis.
We need a payment platform, and, in part, that is what drove my deep dive into this subject.
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