Mastercard’s recent announcement that it would stop supporting the use of debit cards at cannabis dispensaries rocked retailers in the space, representing a major step back in the already dicey reality of payment processing for cannabis transactions. And Mastercard’s latest move isn’t the only financial restriction still facing the cannabis industry. In the absence of federal legalization, basic lending and banking services remain sparse and the dreaded IRS Tax Code Section 280E remains firmly in place. What do these ongoing barriers to normal business operations mean for cannabis businesses, and how can they overcome them?
Why did Mastercard suspend cannabis transactions?
Mastercard instructed financial institutions to stop allowing cannabis-related transactions to occur on its card network, citing the ongoing federal prohibition of cannabis as the reason for the industry-wide ban.
“Our rules require our customers to conduct lawful activity where they are licensed to use our brands. The federal government considers cannabis sales illegal, so these purchases are not allowed on our systems,” a Mastercard representative reportedly told Bloomberg, which first reported on the card network’s decision.
The result for many cannabis retailers is a return to cash-only transactions or automated clearinghouse (ACH) payments, each of which come with their drawbacks. Cash leaves cannabis dispensaries susceptible to robbery and can complicate accounting. ACH payments require customers to provide their bank account information, which can be a cumbersome and intimidating process in the retail environment.
What can cannabis businesses do?
If you do not want to operate as a cash-only enterprise or rely on ACH payments for transactions, there are a few solutions you might consider. Unfortunately, none of them are perfect and each has their own set of drawbacks.
You may be able to find a local or regional bank that provides a solution to your state-legal cannabis market. These banks may offer bespoke payment solutions, unlike national banks which are more likely to bristle at the fact the federal government still considers cannabis a Schedule I illegal drug under the Controlled Substances Act. Of course, taking advantage of these offerings means first finding a local or regional bank that offers them and then switching your banking over to them, which may be an arduous process in itself.
Some cannabis retailers may turn to cashless automated teller machines (ATMs), a long-standing method of working around the card networks’ restrictions on cannabis purchases. Cashless ATMs allow customers to “withdraw” the amount of their purchase (usually rounded up to the nearest multiple of 20) and then receive change in cash from a budtender. However effective, cashless ATMs are technically illegal and could be shut down at any moment if discovered, disrupting transactions and potentially bringing consequences to the dispensaries using them.
There is also a slew of FinTech companies emerging in the cannabis space, purporting to offer transaction solutions to beleaguered retailers and their consumers. For example, there are apps that allow customers to pre-load funds into an account, and then their account is scanned at checkout to pay for the cannabis. These third-party services can vary in terms of quality and reliability, though, so it’s important to do your homework before partnering with a solution. Some of these solutions also charge exorbitant fees that could eat into your profit margin, so be sure to get a clear breakdown of costs and fees before signing up.
Payment processing is one of many cannabis financial and banking challenges
As if the Mastercard news wasn’t troubling enough, cannabis businesses continue to face the same old challenges they have since state-legal cannabis markets first came into existence. Cannabis businesses still have to contend with difficulty accessing banking, a dearth of financing options, challenges in processing payroll, and a punitive tax code that prevents them from taking normal business deductions.
Banking has long been a challenge for cannabis businesses, for much the same reason as Mastercard chose to suspend cannabis-related transactions. Banks are often hesitant to work with an industry deemed federally illegal, even if the state-legal cannabis businesses are operating in a completely legitimate manner.
Not only is there a fear of federal reprisal should the government take a harder line toward state-legal cannabis markets, but with cannabis banking comes additional regulatory requirements that can be costly for banks to administer. These include know your customer (KYC) and anti-money laundering (AML) requirements that track every cent in cannabis-related accounts. It also means submitting suspicious activity reports (SAR) to the federal government in response to large cash deposits or significant transfers. For many banks, it simply isn’t worth the headache to work with legal cannabis businesses.
Financing has long been a challenge for cannabis businesses as well. Most banks won’t offer conventional loans or credit cards to cannabis businesses, leaving them with pricey alternative lenders or private investors as the only option. The optimism-fueled investment frenzy has also waned in recent years, as private investors have increasingly pulled their money out of the cannabis industry (likely due, in part, to these very same financial challenges). Even cannabis businesses with healthy revenue are counting on reinvesting their profits to stay alive. The lucky few who have secured credit cards must accept heightened interest rates and fees.
IRS Section 280E
Perhaps the biggest financial challenge facing cannabis businesses is IRS Tax Code Section 280E, which prohibits cannabis businesses from taking any business deductions outside of the cost of goods sold (COGS). This means indirect costs, like marketing and sales expenses, cannot be deducted from a cannabis business’s tax bill. The result is razor-thin profit margins, even for businesses that are bringing in significant revenue. Companies that would be immensely profitable in any other industry are seeing that margin eviscerated by tax liabilities, and Section 280E isn’t going anywhere without an act of Congress.
Is federal cannabis reform on the way?
Year in and year out there has been some tepid hope for federal cannabis reform, yet despite modest progress the flagship bills supported by the cannabis industry have yet to materialize into law.
Chief among these perennial bills is the Secure and Fair Enforcement (SAFE) Banking Act, which would protect financial institutions that offer services to state-legal cannabis businesses. Unfortunately, the bill appears to have stalled again, just as it has in several previous sessions of Congress.
Recently, Sen. John Cornyn (R-TX) called Senate Majority Leader Chuck Schumer’s (D-NY) prioritization of the SAFE Banking Act “wishful thinking,” signaling that it may still not have the support it needs to make it through the U.S. Senate. The bill has repeatedly died in the chamber in past sessions after receiving overwhelming approval in the House of Representatives. As Congress heads into a recess, things aren’t looking any better for the SAFE Banking Act than they have in the past.
There are also multiple federal legalization bills that have been proffered, the passage of which would effectively make the SAFE Banking Act irrelevant. However, the difficulty in raising support for even modest financial reform in the cannabis space suggests that federal legalization, an even heavier lift, is still far off. Indeed, legalization bills in past sessions of Congress, like the Marijuana Opportunity. Reinvestment, and Expungement (MORE) Act, have repeatedly died in Senate committees as well.
The rocky road to stability for the cannabis industry
While the new developments from Mastercard just add to the challenges facing cannabis businesses, it’s nothing new to entrepreneurs in this space. The cannabis industry has grown up under stigma and unfair restrictions, and yet it remains one of the fastest growing industries in the U.S. Despite the obstacles that crop up and throw the industry unprecedented curveballs, the cannabis community remains resilient and determined to continue growing the industry.
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