In the United States, cannabis and credit cards do not mix.
Canadians have been able to plunk down their Visa or Mastercard for pot purchases since last October. In fact, credit was the only accepted legal payment method for Ontario residents buying recreational cannabis online - until April, when the first brick-and-mortar cannabis stores opened in the province.
But south of the border – despite tens of millions of Americans having legal access to recreational cannabis – ongoing federal prohibition means cash remains king in the industry. New legislation expected to pass this year aims to change that; the SAFE Act would allow banks and credit card companies to service the cannabis sector in states with legal markets. It’s passage would almost certainly spark a race to lock up deals with thousands of mostly cash-only U.S. cannabis businesses – and that’s a race one small Canadian company hopes to win.
“We are targeting upwards of a 50 per cent market share,” said Fern Glowinsky, CEO of Toronto-based Merrco Payments, noting roughly half her time has been devoted to preparing for a U.S. expansion for the better part of the past year. “It is not small potatoes. It is aggressive, definitely aggressive, but go big or go home, frankly.”
Through an integration with Cova Software, which supplies the point-of-sale infrastructure to most of the legal pot shops in Canada, Merrco already processes the majority of cannabis-related credit card transactions that happen anywhere. In what he calls the cut-throat world of payment processing, however, Gary Cohen warns the challenge facing Merrco’s ambitious expansion strategy is immense.
“It is such a challenging business, being the last folks who touch the retailers of North America [and] there are thousands and thousands of them and probably seven, eight or nine different hands that get a tiny piece of that 3 per cent fee that the merchant pays for processing,” said Mr. Cohen, Cova Software’s CEO. “With that razor-thin margin, everyone is going to be coming down and knocking on doors [once the SAFE Act passes].”
Just because using credit cards to pay for cannabis in the United States is, strictly speaking, illegal, doesn’t mean entrepreneurs haven’t come up with creative grey-market solutions.
“I literally get three calls every week now from people who give me some story about how they have cracked the code in the U.S. to do credit card transactions and with some of them we have gone to the next steps of diligence to vet out whether they can do what they say they can do, but in every case so far it is still money laundering,” said Mr. Cohen. “One set of guys, for example, actually came to talk to us about an agreement made between some island in the Bahamas and Spain in 1550 that basically allows for international banking and they were piggybacking off of that.”
“Some of them are just so outlandish, but that kind of pirate lore is what you hear about in cannabis banking right now, there are all these shenanigans going on,” Mr. Cohen said.
Entire business models have also formed around the concept of pre-loaded cards, similar to a transit pass. They allow consumers to purchase a card, load it from their regular debit or credit account, and use that card for cannabis purchases. Linx, for example, started with two Colorado dispensaries in 2015 and now its cards are accepted at cannabis retail stores in 21 states.
“We have a strategy” if the SAFE Act passes, Linx chief revenue officer Kevin Sen explained in an interview. “We already have our own gateway that is essentially like a payment processor, so even if credit cards came in directly, we could process those as well.”
Some owners of cannabis stores attempt an even simpler strategy in order to accept credit cards: deception. As far as the credit card companies are told, those businesses are not cannabis stores, but garden centres or gas stations.
“Any merchant, once they get a merchant account to process payments from a credit card, is given a merchant category code or MCC,” explained Sahar Ayinehsazian, an attorney in the Los Angeles offices of Vicente Sederberg who was previously the director of regulatory and government affairs for another cannabis payment solution provider called PayQwick. “That code is tied to the services that merchant provides, so if you are a restauranteur, for example, you get an MCC for restaurants or if you open a shoe store there is an MCC for that.”
“But there is currently no merchant category code that exists for cannabis,” Ms. Ayinehsazian said. “That means any cannabis transactions that do occur are miscoded, so they are definitely fraudulent.”
One particularly noteworthy case involved one dispensary in Colorado that was located next to a gas station for several years.
“The dispensary owner made a deal with the gas station owner to run a credit card terminal out to his dispensary, basically just an extension cord, and then gave the gas station owner a certain amount of money, let’s say $20,000 as well as a promise to cover any potential other losses,” Mr. Cohen recalled. “That ran for years before getting shut down, there are all these kinds of shenanigans that are going on.”
SAFE ACT SKEPTICISM
Merrco’s Ms. Glowinsky believes there is “increasing momentum” towards the SAFE Act getting passed and that once it does, “there will be an opportunity for those with the desire and the business acumen and appetite to enter the space as it would clear the path for payment transactions.” While she acknowledges the outcome is far from guaranteed, especially when it comes to predicting the outcome of proposed legislation, others question whether credit cards will come to the American cannabis world even if the SAFE Act becomes law.
“The mere fact that the SAFE Act redefines the cannabis transaction doesn’t automatically mean major card providers are going to get in,” said Mr. Sen of Linx. “It is not like you can just flip a switch the day after the Safe Act passes, and I’m not even sure it is going to pass, but I definitely don’t think we are talking about a floodgate event here.”
The credit card companies themselves are, at best, non-committal. Mastercard spokesperson Sandra Benjamin said the company “is not going to speculate on the potential outcome of legislation” and Visa spokesperson Marni Goldberg would only go a bit further, noting “Visa prohibits all transactions [in the United States] involving the sale or distribution of marijuana, until such time as federal law allows.”
Even if the SAFE Act does pass and legal experts give credit companies the all-clear, “they will still need to do an internal weighing of factors, including reputational risk,” said. Ms. Ayinehsazian. “Financial institutions and money transmitters tend to be very good at doing risk analyses and generally don’t like to open themselves up to unnecessary risk, so are credit cards going to come to cannabis in the next number of months? I don’t think so, but is it going to happen in the longer term? I definitely think so.”
CANADIAN STARTUP VS GLOBAL GIANTS
Assuming for argument sake that the SAFE Act does pass and the major credit card providers dive straight into the space, Merrco will still find itself facing off against multibillion-dollar payment processing giants such as Global Payments and World Pay. Neither of those two companies responded to multiple requests for comment on any cannabis-related plans they might have in the works, though part of the reason Cova does not have an exclusive relationship with Merrco in the U.S. is because another player could easily offer more scale.
“It was good to leave that opportunity open to someone who might be in a position to move faster and be an even better partner in the U.S.” said Mr. Cohen. “But that said, I could probably talk to Global Payments and they would say they’ll process my transactions for 3.5 per cent and then I could talk to Merrco and they could maybe do it for 3.25 so in that case I would actually have no incentive to go with the larger player.”
“That is probably what is going to happen, Fern [Glowinsky] is going to call me and say ‘Gary, we are on our way, you’ve got hundreds and hundreds of stores, let’s jointly go and make an offer,” Mr. Cohen said. “We would have to be competitive and more importantly we would have to be quick.”
Ms. Glowinsky, who prior to joining Merrco had previously spent 15 years with payment services giant Moneris, believes her new businesses is well positioned to punch above its weight.
“We have our arms wrapped around the sector, there are others but we are sector-focused and are committed to helping our customers address all the regulated aspects of the industry,” she said. “Whereas the larger guys are all things to all customers, we are sector focused on cannabis.”
THE ECONOMIC INCENTIVE
Aside from offering more convenient payment options for consumers, opening up the American cannabis industry to credit cards also opens up the possibility of upselling for cannabis retailers. Cova’s data shows customers spend on average 23 per cent more when credit card purchasing is available. That makes sense, Mr. Cohen said, when considering a typical U.S. cannabis store today is mostly cash-only and most have ATMs inside the store.
“But if I am only taking out $60 that is all I am going to spend, so [the SAFE Act] will bring in the upsell and as a retailer you obviously want that upside so really everybody wants it,” he said.
Then there is the increased safety of no longer having to operate as a cash-based business. In Oklahoma, for example, there are no banking or payment processing options available to cannabis businesses in that state, yet state taxes must be paid on the 15th of every month.
“So if I am a bad guy, I know that on the 15th, from every corner of the state, people are going to be coming with big bags of cash and you show where the tax office parking lots all are,” Mr. Cohen said. “I’m not a criminal, but if I was a criminal I could just pick them all off.”
Because of the potential to increase both safety and profits, Mr. Cohen sides with Ms. Glowinsky in arguing the entry of major credit card providers in the U.S. cannabis space will be swift.
“I think the door is going to swing open for Merrco and all these payment companies,” he said. “I think it is going to be a big, broad rush to go and get this done.”