The Next Big Cashless Play: Cannabis

Blunt question for PYMNTS readers (pun intended): Have you been inside a pot shop lately? One of the legal operations that are springing up in the states that have approved the above-board sale of marijuana products? Or do your views of marijuana retail still center around high school bathrooms, back alleys or sketchy dudes at heavy metal concerts?

We don’t mean to be aggressive, nor do we take a stance on the moral or political natures of legal weed. But when PYMNTS recently caught up with Charlie Wilson, CRO of Green Bits, a company that sells cannabis retail technology and services – including payments software – it became apparent that many players in the digital payments space might miss out on capturing their share of this growing revenue due to faulty perceptions.

As PYMNTS readers know, pot has gone mainstream, at least on the state level in the U.S. (and the federal level in Canada). But if familiarity breeds contempt, lack of familiarity leads to lost opportunity – in this specific case, the chance to serve up payment services to the legal pot industry, which could soon be unshackled from federal regulations that keep financial institutions and other payment companies on the sidelines.

Pot is more about boutique experiences these days – and even luxury offerings – than furtive deals done in the shadows and with a sense of anxiety. Pot retail is becoming much more akin to a Starbucks experience than tracking down that loser cousin of yours who knows a guy.

Cannabis Misconceptions

“Lots of executives from payments companies have probably not walked into (legal cannabis) stores,” Wilson told Karen Webster in a recent PYMNTS interview that served both as a review of the payments landscape for this emerging area of retail, as well as a list of misconceptions that are not only keeping banks, credit unions and payment service providers on the sidelines of this industry, but are also preventing them from doing the homework needed to prepare for its future growth.

First, a quick review of the situation: Even though legal pot keeps gaining traction – according to one official state estimate, the market in California alone will reach at least $5.1 billion by 2020 – the industry is largely cash-based, which means more friction and more risk of theft, including from pot shop employees. That’s because federal law still classifies pot as an illegal drug, which means financial institutions and other payment services providers that take part in legal marijuana retail run the risk of federal penalties.

At the same time, the political winds are turning in favor of untying that payments knot, as majorities from both main ideological corners are coming around to support some form or another of legal pot sales, as Wilson pointed out during the interview. The next year or so could see federal law offer safe harbor to financial institutions that service the pot industry, which in turn would spark (sorry, another pun) more payments innovation and participation – including from the payment card networks, which basically just have to tweak some software to get going on all this.

In short, untying that knot is perhaps not inevitable, but virtually all signs indicate it will happen – perhaps in 2020, Wilson said, depending on the calculus of the election that year.

Cannabis Payment Lessons

Politics aside, payments players need to start preparing now for that future instead of hoping to essentially cram the night before, at least in Wilson’s view.

Among the first lessons?

Pot, given its long history as an illegal drug, understandably still carries the stigma of criminality and fraud. But that’s not the case with legal pot operations, according to Wilson.

Those business owners are entrepreneurs and “not the bad actors” often associated with cannabis, he said, as they have passed through a gauntlet of state regulatory and licensing procedures, and even criminal background checks (investors in legal pot certainly do their homework, too). Nor is this industry “attracting terrorist financing or other AML targets,” he said, referring to money laundering. “There are a ton of safeguards already in place.”

Those protections include tracking technology that follows the product from soil to sales counter – a part of the industry that companies such as Green Bits are working to capture. That indicates the scope of opportunity available, even beyond payments.

Again, none of what Wilson told Webster was said in the service of making an argument for legal pot – that’s a political, moral and cultural question – but, instead, to make FIs and payment services players realize the stakes involved with this rapidly growing retail industry.

“Where can you find a new category to drive payments growth?” Wilson said. “There are very few left. Some of the big entities are taking a close look” at the industry in anticipation of the payments changes at the U.S. federal level (changes that could also open up legal marijuana payments in Canada, given its banks’ ties with the U.S. financial system).

No Road Map

Wilson said there are likely no payment parallels to what is happening with legal pot – sure, everyone likes to mention Prohibition, but that was well before the dawn of digital payments. He also said when that federal payments knot gets untied – and even the most skeptical observers do predict that will happen sooner rather than later – things will “move pretty quickly,” even with the absence of a historically based road map.

That means the time for study and planning is now. “Entities that do their homework will come to truly understand the nature of the industry,” Wilson said – and they will almost certainly gain an edge that will pay dividends in the coming years.