The cannabis industry has often had to be creative to operate. Since its early years, securing banking was extremely difficult and conducting payment processing nigh impossible, resulting in dubious workarounds that were perceived by much of the industry as necessary evils to doing business in cannabis.
As regulators develop policies and guidelines for banking cannabis funds, many of these workarounds are no longer needed. That’s great news for the cannabis industry, but that means that many common workarounds that are often presented as above-board may come under scrutiny sometime soon. Ripe for closer examination is the cashless ATM system, commonly used in dispensaries to accept debit cards from customers.
How recent payment processing shakeups could put cashless ATMs at risk
In February 2021, former Eaze CEO Jim Patterson pled guilty to conspiracy to commit bank fraud in connection with a cannabis payment processing scheme that fraudulently supported $100 million in prohibited cannabis transactions. The news rocked an industry long plagued by payment processing challenges.
In the cannabis industry, state-legal THC licensees have been hard pressed to find banking and merchant processing services, and what Eaze did was not uncommon. For years, these businesses were either forced to find workarounds – some less than legal – or operate wholly in cash. For many, these workarounds were the only realistic way to scale their business.
For most of that time, enforcement actions were minimal. The biggest risk was the termination of a bank account and a temporary disruption in payment processing capabilities. The news of Patterson’s guilty plea, however, suggests that law enforcement is cracking down on these cannabis payment processing workarounds. As one of the most common – and one of the most dubious – cannabis merchant processing workarounds, cashless ATMs are ripe to be the next target of law enforcement.
What are the issues with cashless ATMs?
A cashless ATM involves a system by which a customer “withdraws” enough money from a terminal in the dispensary to cover the cost of their purchase. Rather than dispensing cash, the terminal deposits the funds in the dispensary’s bank account and appears as an ATM withdrawal on the customer’s checking account. The cashier then gives the customer their change in cash, less a small fee.
Cannabis businesses have used cashless ATMs for years for two main reasons. First, legal cannabis businesses were historically locked out of banking and payment processing services. Second, the consequences for getting caught were usually minimal: It might mean the loss of a banking relationship, generally accepted as a reality of operating in the cannabis industry in the first place. However, in the wake of the law enforcement action against Patterson and his co-conspirators, the stakes have been raised. Now, cannabis businesses that violate federal law and regulations should expect grave consequences, up to and including criminal prosecution.
The problem with the cashless ATM approach is multi-faceted:
- Cashless ATMs violate federal banking regulations that apply to state-legal cannabis businesses. This is because cashless ATMs assume the facilitating bank is either ignorant that the “withdrawals” are debit payments, or they are willing to turn a blind eye. In either of these scenarios, detection is inevitable; the bank will eventually figure out the truth, while a complicit bank will eventually have to answer to federal bank examiners. At that point, everyone involved in cashless ATM transactions will be under a microscope, especially the THC licensee.
- The fee that dispensaries pass on to customers using a cashless ATM is a violation of a clause in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The clause, known as the Durbin Amendment, limits the fees that payment processors can charge those transacting on their networks. So, not only does the concept of a cashless ATM violate federal regulations on banking the cannabis industry, it violates a specific federal law.
When you look at the facts on the ground, it is inevitable that cannabis businesses will get caught up in a payment processing crackdown. Thankfully, though, there are fully compliant and transparent merchant processing options available.
How to transition to legally compliant cannabis banking and payment processing
If you are currently operating some form of payment processing in violation of federal regulations – either a cashless ATM or some other workaround – there is no better time than now to migrate toward a legally compliant solution. If a crackdown does indeed materialize, those businesses that have made a demonstrable effort to move toward compliant payment processing and banking will be better positioned to stay above the fray.
Unfortunately, the cannabis-friendly banks that offer compliant banking and payment processing services often don’t advertise that they work with the industry. So, how can you find a cannabis-friendly bank that will help you transition from shady workarounds to above board solutions?
Banking networks like Fincann have spent years learning the ins and outs of the cannabis industry and building meaningful relationships with financial institutions. Today, cannabis banking and merchant processing accounts are available to all sectors of the cannabis industry in all 50 states.
There are two compliant options when it comes to payment processing. The first, a merchant processing account, is used to support in-person debit card transactions. The second, ACH transfers, can be added to an ecommerce website to facilitate digital transactions. Both solutions are 100% compliant with federal regulations and supported by cannabis-friendly banks.
The cannabis industry of the future is here. Cannabis businesses have two choices: Continue lying to your bank, operating shady workarounds, and hoarding cash in the mattress, or work with a banking network to establish a fully compliant, transparent banking and payment processing relationship. One way is outdated and criminal, while the other way is legal, transparent and offers a competitive advantage. The choice is clear.