Senate push to legalize weed is mixed blessing for pot payment firms

A group of Senators is pushing for federal cannabis legalization this year, which would open the market for mainstream payment providers — and bring heavy competition to the payment companies that pioneered this space.

Senate Majority leader Chuck Schumer (D-N.Y.), and Sens Cory Booker (D-N.J) and Ron Wyden (D-Ore.) promised to release a discussion draft on reform that would end the federal ban and would introduce legislation that would address taxes and regulations.

A federal green light for cannabis could bring major competition to the market, as happened in Canada, where Amex, Visa and Mastercard declared their involvement on the first day pot became legal back in 2018.

But the firms that are already navigating the disparate state-level rules about cannabis sales aren't planning to give up the fight.

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"This would expand our market, but there are still a lot of hurdles," said Tom Gavin, CEO of CannaTrac, a cannabis payment technology company with offices in Denver, Chicago, Vancouver, B.C. and Dublin. "This will take time."

Regulation is key to the cannabis payments market since it provides an air of legitimacy for an industry that for years has existed outside the financial services mainstream, relegated to cash or workarounds like stored-value cards and reverse ATMs.

Operating like a merchant acquirer for legal weed, CannaTrac offers a card-based payment platform with financial services covering brick-and-mortar and online dispensaries. It also offers incentive marketing through an account Gavin likens to the Starbucks app.

"Our users carry a balance to increase the likelihood for multiple use," Gavin said. "Nobody loads a card for the exact amount of a sale."

The account supports cashless payments and the app includes an interactive map that shows what nearby dispensaries accept the CannaCard.

Another cannabis payment provider, CanPay, is hopeful about the political progress but is still not expecting a huge advancement in legalization in the near term. Even given the progress in Congress, a successful program to legalized pot on the federal level requires industry input and lobbying, said Dustin Eide, CEO of CanPay.

Denver-based CanPay operates a mobile-based debit payment system and partners with companies such as online marketplace Jane Technologies to create a network for pot payments.

"The card brands will continue to wait on the sidelines, enforcing their marijuana prohibitions until that time when marijuana is legalized at the federal level," Eide said. "What we will see, though, is an acceleration of community banks and credit unions joining their peers in banking the cannabis industry under federal guidelines. CanPay counts over 100 such financial institutions in its national cannabis banking network."

In an earlier interview with PaymentsSource, Tyler Beuerlein, Hypur's chief revenue officer, likened the expansion of payments support in cannabis to a race, with services becoming more mainstream and less cash-centric as more states loosen rules. A Congressional move would federalize the laws around weed, ostensibly opening the market to mainstream merchant acquirers and financial institutions that would no longer need to worry about federal backlash for entering the market.

"There's a significant chance of cannabis payments going more mainstream in 2021," said Gilles Ubachs, an analyst for Aite Group, adding financial institutions quickly embrace cannabis in other countries once legalized on a large scale, usually without much fanfare. "The new administration has been pretty explicit on changing cannabis laws, and politically speaking seems a fairly easy win in terms of both bipartisanship but also pleasing much of the base."

CannaTrac hopes that by building a specialization in the cannabis industry, it will be well positioned as legal weed becomes mainstream and attracts more attention from financial institutions.

"When you look at it from the thousand-foot view it's a very small piece of money for the [card brands]," Gavin said, adding CannaTrac has enhanced its platform to work across merchant categories, making steady flow of cannabis business a jumping point to broader payment volume.

Schumer, Booker and Wyden's statement signals a shift in policy in favor of cannabis. There's been bipartisan support to legalize cannabis for a few years, but former Senate Majority Leader Mitch McConnell (R-Ky.) and a group of Republican allies stalled legislation in the Senate.

The House in 2019 passed a cannabis banking bill but the measure did not advance in the Senate. Despite the political uncertainty, cannabis is growing quickly as an industry, expected to reach $25 billion in sales in the U.S. in the next four years. In the November election, cannabis legalization referendums passed in several states, and the result of the Georgia runoff elections in January turned the Senate over to Democratic control.