The cannabis industry continues to experience a huge roadblock when it comes to banking and facilitating financial transactions. Despite the popularity and rapid growth of the cannabis industry in the United States, as evidenced by more and more states legalizing its use and possession for medical and recreational use, any connection and facilitation of banks and the financial industry to cannabis businesses can still pose legal and regulatory risks.
In this article, we will discuss the banking challenges the cannabis business industry continues to face and what cannabis business owners can do to navigate these financial challenges, including financial performance and cash management effectively.
The Cannabis Industry in 2024
The global cannabis market is expected to reach $64.06 billion in 2024, with an annual growth rate of 3.01%. By 2029, it is expected to reach $74.29 billion, with the United States accounting for a massive chunk of this sales volume at $42.98 billion in 2024.
Federal agencies, specifically the Department of Health and Human Services (HHS), recommended in August 2023 that cannabis be reclassified from Schedule 1 of the Controlled Substances Act to Schedule III. This move would not necessarily legalize cannabis at the federal level but would make it regulated instead of prohibited.
The legalization of cannabis at a state level has reached its highest in 2023. As a result, three more states (Ohio, Minnesota, and Delaware) have legalized adult use of cannabis, capping the current count of states that have legalized recreational cannabis use to 25.
Why do cannabis businesses need banking?
Theft and robbery are at an all-time high, and cannabis businesses are one of the main targets of robbers, mainly because most transactions with cannabis businesses are made in cash because of the banking challenges they continue to face.
The federal ban on cannabis use disallows the straight payment of credit cards and debit cards to cannabis dispensaries, making them an attractive target for cash-on-hand robbery—internal or external.
With the digitalization of retail and the popularity of digital wallets, cannabis businesses continue to be left behind in offering easy cannabis payment alternatives and checkout options for their customers because of banking constraints. At the same time, the cost of maintaining physical cash storage is crucial for cannabis businesses—from security services to solid security systems, which can also cost a lot.
Gerald Lombardo, Head of Growth at Popl, says, “Digital and cashless payment methods would have significantly helped cannabis businesses monitor cash flow and accounting transactions, improve business safety, make tax payments easier, and improve customer transactions. Nonetheless, today, most cannabis businesses still have workarounds besides cash payments, including ACH transfers, cashless ATMs, and digital payment platforms without support from card or banking companies.”
Cannabis banking challenges
VISA and Mastercard prohibitions
While cashless ATMs are still rampant among many cannabis business retailers, VISA has explicitly indicated its stance against using this scheme through its payment channels. In a memo released in 2021, VISA reiterates that using their payment channels through debit cards to facilitate cashless payments in the form of cashless ATMs is against VISA rules. In a cashless ATM transaction, a buyer uses a debit card to pay for cannabis—rounded to whole numbers—to make it appear as if it were a withdrawal. Any change after that is given to the buyer in cash by the seller.
VISA reiterates that supporting this scheme violates the regulatory prohibitions set forth by VISA following federal guidelines in the Controlled Substances Act.
A strong statement from Mastercard in July 2023 also prohibited all cannabis transactions through their channel, either through bank cards or PINs.
Reputational risks
There is a stigma related to cannabis, and banks and financial institutions accommodating cannabis transactions and businesses are at risk of getting a negative rep from their other customers.
According to Ian Sells, CEO of Million Dollar Sellers, “Despite the continuous developments in the legalization of cannabis at the state level, banks remain wary of being called ‘weed banks’ and the attached stigma of dealing with cannabis—making cannabis banking still a struggle for many business owners.”
Federal anti-money laundering law
When banks deal with customers, they need to observe and be vigilant about federal anti-money laundering laws that encompass proceeds derived from unlawful and illegal activities—including cannabis retail as a federally illegal substance.
A bank employee who knowingly transacts and receives a deposit or allows withdrawal from a known marijuana dispensary transaction for more than $10,000 can face up to 10 years in prison, as well as criminal fees.
Bank secrecy law
The BSA, or Bank Secrecy Law, requires banks to implement policies to ensure their customers do not engage in unlawful activities, including cannabis sales. Bank employees who do not willfully report a case of suspected cannabis-related account can face up to 5 years in prison, as well as civil and criminal penalties.
Strategies for effective cannabis business financial management
Because of the regulatory restrictions imposed against the cannabis industry when it comes to banking, cannabis business owners need to continue to come up with strategies to manage their cash flow and financial transactions effectively:
Continue to adopt cashless payment solutions
Cannabis owners have come up with various cashless payment solutions to workaround the banking restrictions on credit and debit card payments:
- ACH Electronic Transfer. An ACH, or Automated Clearing House transfer, is an excellent alternative to card payments as it allows the buyer to transfer funds to a seller’s account in real time. However, a seller must have an ACH payment solution to facilitate this transfer.
- Debit Cards. Debit cards are not supported as a payment method in the U.S. since cannabis remains illegal at the federal level, and big financial institutions won't assume the risk. Cashless ATMs used to be a preferred method of using debit cards as a mode of payment, until crackdowns by Visa and Mastercard rendered it unviable, and retailers turned PIN Debit solutions instead. Similar crackdowns soon shuttered PIN Debit, which has remained highly impacted while some Cashless ATM solutions have made a return in 2024.
Read more on the best cashless payment options in 2024.
Work with experienced cannabis accountants
In a heavily regulated industry such as cannabis, cannabis business owners need to engage the services of the right professionals, such as accountants, to make sure that financial recording, cash flow monitoring, business debt, expense treatments, audits, and local and federal tax laws are correctly observed.
Accountants who are experts in dealing with cannabis businesses can significantly help business owners properly deal with cannabis taxation, considering that with different states legalizing cannabis locally, each also has different tax treatments.
Accountants will also help explain to cannabis business owners why expenses related to cannabis businesses cannot be claimed as deductible expenses because of Internal Revenue Code section 280e under the premise that cannabis is a trade or business that deals with ‘controlled substances.’
Utilize an accounting software.
Cannabis businesses are not prohibited from using accounting and other dispensary software, especially for those business owners who have multiple cannabis stores. Since cannabis businesses deal mainly with products that the federal government highly regulates, business owners must have accounting software that streamlines proper inventory management to track stock ins and outs, economic order quantity, stock levels, replenishments, and inventory prediction.
“Good accounting software for a cannabis business should allow business owners to keep operations efficient and effective, from managing their cash flow properly, maintaining compliance, accounting for taxes, and accessing financial records in the cloud,” says Andrew Pierce, CEO at LLC Attorney.
Open a cannabis business bank account
While bank transactions remain difficult for cannabis business owners, opening a bank account with the right bank is not impossible. The first step is finding a bank or financial institution that allows such transactions, mostly regional banks and credit unions. Despite some states legalizing cannabis, the conflict between local and federal laws keeps banks at a standstill on how to deal with cannabis businesses looking to open deposit accounts with them.
A significant move that would help cannabis businesses legally do transactions with financial institutions is the SAFER Act, or the Secure and Fair Enforcement Regulation Act. The SAFER Act allows all businesses, including cannabis-related businesses, access to deposit accounts, insurance, and other financial services.
This Act also protects financial institutions from serving cannabis-based businesses and reducing their cash transactions, thereby protecting the public interest from the rampant threat and robbery of cannabis businesses. Because of this, cannabis business owners can minimize manual recording and paperwork to record financial transactions and cash flow, improving operations and financial management in the long run.
However, if this act becomes a law, it does not necessarily force financial institutions to openly welcome cannabis business owners. According to the American Bar Association, financial institutions should still take a ‘risk-based approach’ in assessing individual customer relationships.
Today, the SAFER Banking Act passed the Senate Banking Committee and is currently slated as one of the Senate’s top priorities in 2024.
Conclusion
Before the SAFER Act is fully implemented into law, cannabis business owners will continue to struggle in dealing with financial management and operations, especially with the continued crackdown of major payment networks against cannabis transactions.
However, all hope is not lost as the cannabis industry keeps itself afloat with the help of cashless payment methods with the help of cannabis payment software available in the market. Despite the banking challenges, cannabis business owners would need to resort to available methods and seek help from professionals well-versed in the cannabis industry to maintain business operations until the SAFER Act is recognized and enacted by the government.