Cannabis, crypto offer big opportunities for independent ATM operators

The expansion of cryptocurrency ATMs may only be rivaled by that of cannabis dispensaries which only accept cash on today's retail landscape. Both industries represent significant opportunities for independent ATM operators.

Hence, it was no surprise the two topics were once again the top concerns for ATM operators during a panel session on the outlook for ATMs at the Amusement Expo International at the Las Vegas Convention Center.

While bitcoin has suffered a major price fall this year, cryptocurrency ATMs continue to expand. According to coinatmradar.com, which tracks crypto ATMs, the number of crypto ATMs in the U.S. has reached nearly 34,000 at the time of this report.

Vending, amusement and independent ATM operators have more options than ever for offering cryptocurrency as crypto ATM providers are looking for companies — such as the aforementioned vending, amusement at independent ATM operators — to serve as contractors.

Mark Cumming, Michael Guthrie, Phil Webb and John Newberry explore growth opportunities for independent ATM operators.

Business models for crypto ATMs

There are various business models for ATM operators to consider.

Panelist Phil Webb, president of PDQ Merchant Enterprises, a McHenry, Illinois based ATM operator, said an ATM operator can be subject to what he called an "IRS soft audit," depending on what arrangement he has with a crypto ATM provider.

The "level 1" arrangement is what Webb called the most "non-invasive." The crypto ATM provider places their machine in the ATM operator's location and pays them a finder's fee.

The "level 2" arrangement is where the ATM operator integrates the crypto ATM provider's app to allow the ATM to offer cryptocurrency. In this arrangement, the parties have a revenue sharing arrangement.

"Level 3" is similar to "level 1": the crypto ATM provider places their machine in the ATM operator's location and pays the ATM operator a commission.

"Level 4" is where the ATM operator buys and operates the crypto ATM. Under this arrangement, the operator has to validate the person buying the bitcoin. This is the only arrangement among the four that can invite a "soft" IRS audit.

Under "level 4," the operator may need to register as a "money service business" depending on the state, and must find a bank willing to work with operators offering cryptocurrency.

The IRS wants to see you are working according to IRS crypto rules, Webb said.

ATM operators who want to operate crypto ATMs should set up a separate corporation for this, said Webb. You don't want the IRS looking at anything but the crypto ATMs.

He also suggested having a separate bank for handling crypto accounts to prevent getting your bank account closed.

Regulations to consider

Panelist Michael Guthrie, vice president of sales at Spokane, Washington-based Cypress Advantage, which operates ATMs along the West Coast, agreed with Webb that a company selling cryptocurrency may need to register as a "money service business."

According to the Financial Crimes Enforcement Network, a bureau of the Treasury Department, a "money services business" includes any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities: currency dealer or exchanger; check casher; issuer of traveler's checks, money orders or stored value; money transmitter; and U.S. Postal Service.

Guthrie said he would choose to contract another operator to operate a crypto ATM, "so that it doesn't actually touch my own business."

Panel moderator Mark Cumming, manager of ATM Merchant Services, a Friendswood, Texas based ATM provider, agreed it is possible to run into problems with banks that don't want to work with cryptocurrency.

One of Cumming's customers had three locations where the bank made them remove the bitcoin software from the ATMs.

Cannabis opportunities

Cannabis dispensaries also present opportunities and challenges for ATM operators.

New Frontier Data, a cannabis business intelligence source, projects the legal cannabis industry in the U.S. to grow 11% annually through 2030, with cannabis now legal in 37 states plus Washington, D.C.

Cannabis dispensaries are expanding rapidly, and these establishments are not authorized to own or operate ATMs. Hence, since most dispensaries only accept cash, the panelists agreed they represent an opportunity for ATM operators.

Webb said since some banks are wary of doing business with cannabis stores, it is best to work with separate banks for this business.

'Cashless ATMs'

The panelists also said it's important to be aware of the "cashless ATMs" that are often found in cannabis stores. The customer swipes their card, inputs their PIN number, then gets a receipt which they use to buy products.

Earlier this year, Visa sent a memo to acquirers that it prohibits "cashless ATMs" whereby point-of-sale purchases are miscoded as ATM cash disbursements to the Visa Plus network but do not disburse cash.

The devices violate Visa rules.

Acquirers are subject to non-compliance penalties when they, or third party agents, do not comply with Visa's rules, according to the memo.

"What they (the cashless ATM operators) have done is they've taken a point-of-sale unit and added the software… to make it transact and make it look and operate like an ATM so it's actually paying interchange rather than charging interchange and that's where the networks have the major issue," Guthrie said.

"There's been a huge push of these machines in the cannabis locations," Cumming said. "A lot of people are actually running them as ATM machines."

Cashless ATMs: Who's liable?

Asked what party is held responsible in such a scenario, Cumming said the sponsor bank is responsible, but passes it along to the ISO that contracts with the bank.

"The ISO is the one that's going to get hit the hardest," Cumming said.

The panelists agreed ATM operators should pay attention to cannabis dispensaries with cashless ATMs since these dispensaries will need a traditional ATM once the cashless ATM is removed.

Software upgrades needed

Cumming presented a slide noting that before the end of the year, installed ATMs with an older encrypting PIN pad (EPP) will have to be replaced in certain cases. ATMs will have to be upgraded with software that supports TR32 Key Blocks if not previously done with hardware upgrades.

Key Blocks are used to protect the integrity and secrecy of the encrypted key, according to an information document provided by Geobridge, an Ashburn, Virginia based company that supports encryption, cryptography and payment applications to payment processors, issuers, terminal manufacturers and merchants.

"This is an important thing to pay attention to," Cummings said. "Their ATMs are going to shut down."

Overall, the panelists agreed the future for ATMs is bright.

"The need for cash is still out there, and events (where cash is needed) I believe are going to come back with a vengeance" Guthrie said.