Chicago entrepreneurs seek to bring cash-heavy retail industry into digital age
With legal cannabis sales in the U.S. projected to bring in about $3 billion in 2020, local fintech entrepreneurs are turning their attention to payment systems that can be used by the cash-heavy cannabis industry, which by federal law does not have access to nationally chartered banks.
Businesses with too much cash on hand evoke safety concerns — loss, robbery, theft and the chance of COVID-19 contagion, for starters. Some of the systems appear to be more workarounds than innovations, but all promise to reduce the amount of physical cash flowing between consumers and retailers.
Among the entrepreneurs is former Cboe Global Markets trader Terrence Patton, founder and chairman of CannaTrac Technology. CannaTrac is a cashless payment company that allows for payment by an app that also offers consumers a map showing which nearby dispensaries take it.
A physical CannaCard, developed in Chicago with the help of CannaTrac’s partner, Lisle, Illinois-based Valid USA Inc., is also planned for the coming months, Patton said.
Patton said as Cboe’s trading floor became more electronic, and as high-frequency trading gained ground, he looked for ways to leave the floor and reinvent himself, eventually settling on the cannabis industry after interviewing a number of stakeholders.
“A common denominator was the need to come up with a (payment) solution and make it work for everyone,” Patton said. He said he envisioned a payment platform that would work for banks, retailers and consumers, something that would do more than a mobile wallet.
Timing is crucial for Illinois
Coming up with a plan to bank dispensaries is particularly crucial in Illinois, with the state expected to hand out 75 new licenses next month.
Banking industry officials note cannabis-related business accounts require added bank resources to ensure they are in compliance with regulatory guidance and bank performance standards. That can be a heavy lift for banks that have limited resources and experience in the field.
In addition, banking sources said some of the regulatory surety offered by a 2013 Department of Justice memo issued during the Obama presidency by then-Deputy Attorney General James Cole titled “Guidance Regarding Marijuana Enforcement” was taken away in 2018 when it was rescinded by Attorney General Jeff Sessions under President Trump.
The Secure and Fair Enforcement (SAFE) Banking Act of 2019, passed by the U.S. House of Representatives but stuck in the Senate, would help alleviate bankers’ concerns, as it would clarify what is allowed for depository institutions that provide financial services to legitimate cannabis-related businesses, sources said, but the compliance lift wouldn’t get lighter.
Nonetheless, “there should be more banks and credit unions brought online in Illinois,” said Jay Caauwe, a partner with the consultancy Supercritical. “It’s very impactful, especially for social equity applicants for the licenses. Applicants need access to lending, and the more opportunities to connect with lenders, the more obstacles to success can be tackled,” he said.
All the ingredients that go into making a recognized business enterprise begin with banking, Caauwe said, adding that he hoped one bank might become the lender of choice and lead the way. “I think competition will allow for other state-chartered and regional banks to get involved, but the state could help by encouraging them to do so,” he said.
Patton sees CannaTrac as a payment solution “that would work for everyone, even those who do not have a smartphone.” For now, CannaTrac is onboarding dispensaries in preparation for the re-launch of the CannaCard in the coming months, Patton said. The CannaCard was first launched in January 2019, and the re-launch is an upgrade designed to have a more user-friendly platform.
The CannaCard app and card can be used with existing point-of-sale systems or from a smartphone. Once consumers load money into their holding accounts, it is sent to CannaCard so transaction payments can be withdrawn.
With both a mobile app and a credit card, CannaTrac also plans credit-card-type “rewards” earned for purchases and PUSH notifications delivered to consumers’ phones if they opt in.
As for banking, CannaTrac is currently working with Pacific Banking Corp., Partner Colorado Credit Union, and any other banks that are transparently working with cannabis businesses, according to Thomas Gavin, vice chairman and CEO of CannaTrac.
Hurdles for credit-card payments
While the need for cashless payments presents opportunities, there also are obstacles. In a July Chicago Payments Forum hosted by FinTEx and reported by FinTech Rising, Beth Horowitz Steel of payments consultancy Glenbrook Partners said it’s not just nationally chartered banks that are unwilling to get involved with cannabis clients. Credit card giants Mastercard and Visa also will not get involved in the U.S. market, she said.
Chris Rentner, co-founder and CEO at SpenceLabs, is taking a different approach. Rentner said his firm’s initiative was incubated within Burling Bank, a LaSalle Street financial institution that serves a number of large operators in the cannabis industry.
A value-added idea inside the bank at the start, SpenceLabs moved to a private company after going through various regulatory and compliance hurdles, Rentner said.
Rentner dismissed various other solutions in the marketplace, including cashless ATMs and gift cards. “In short, if you are using a plastic card with a network logo, you’re using a workaround that’s not completely legitimate,” Rentner said.
The SpenceLab app connects directly to Burling Bank, its state-chartered, FDIC-backed partner, through an API package that offers e-commerce checkouts that work much like PayPal and can be used for business-to-business payments.
For consumers, the Spence app functions like a mobile wallet, and displays a QR code that is scanned by the dispensary’s point-of-sale system to confirm the transaction. The company says it uses bank-level SSL encryption to receive and transfer funds securely to the retailer’s bank account in less than 24 hours. Because Spence offers integration with e-commerce, the system allows for online purchases.
The company started by looking at ways to facilitate payments, Rentner said, but has since layered on marketing options, including consumer insights and engagements to entice retailers to use the system.
Initially, Spence connected just with PharmaCann dispensaries, but Rentner said he expects other dispensaries to come online. In addition, he said Spence is projecting that real-time payments and consumer credit options eventually will be part of the network.
Normalizing the industry payment process
Also based in Chicago, AeroPay, founded in 2017, processes payments for more than 500 businesses, including restaurants, retail and nonprofits. The company recently branched out into cannabis payments through ACH (automated clearing house) transfers between banks, enabled via smartphone.
The AeroPay platform avoids card interactions and fees, and funds settle the next day or the same day depending on the business’s preference, said Daniel Muller, AeroPay’s founder and CEO. It’s a technology that is already accepted in the “non-high-risk world,” he said, noting that cannabis, CBD and ancillary “non-plant-touching” businesses all are considered high-risk by bankers.
“We’ve made extra effort to be compliant with state regulators in the medical and recreational (cannabis) space,” Muller said. “This is not a crypto or offshore solution. It requires hefty due diligence to pass funds from these businesses to banks who are moving money on their behalf. We want to certify that everything in that business is done above board.”
“We want to be the payment system that normalizes the industry,” he said.
Muller said AeroPay is available in all states where medical and recreational cannabis is legal. The company is working with a consortium of banks that he declined to name.