Payments firms see green as more states legalize pot

Payments firms see green as more states legalize pot

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One area of certainty in the 2020 election is the momentum for legalizing cannabis, as a string of ballot box victories makes it harder for banks to avoid working with dispensaries and other legal marijuana businesses.

Five states — Arizona, Mississippi, Montana, New Jersey and South Dakota — passed some form of legalization, adding an additional $9 billion in potential revenue to an industry that’s already rapidly expanding. In addition, Oregon decriminalized small amounts of “hard” drugs such as cocaine, heroin and methamphetamine, suggesting political support for legalizing more controlled substances, at least in one blue state.

While payment companies probably won’t be lining up to provide technology for heroin immediately, cannabis clearly has momentum and thus far has been one of the election’s big winners.

But until the U.S. starts to resemble Canada — where the likes of Amex, Visa and Mastercard immediately jumped on board to handle legalized pot payments in 2018 — the election results are primarily a growth opportunity for the smaller companies that already target this market.

“State-legal cannabis had a great night last night,” said Dustin Eide, CEO of CanPay, which offers a closed-loop debit network for cannabis dispensaries. “As with every other state-legal market, we expect that some financial institutions in each of these new markets will step up and begin banking the cannabis industry there.”

Bloomberg News

The revenue makes weed attractive. The legal and recreational pot industry was on pace to pass $15 billion in revenue in 2020. The ballot initiative in the five states will add $9 billion in new revenue between 2022 and 2025, according to New Frontier Data. That would make the U.S. legal weed market worth $33 billion, up from New Frontier’s earlier estimate of $24 billion by that time.

Regardless of the outcome of the congressional and presidential elections, the size of that market will be hard for the new Congress to ignore. Among Tuesday’s declared winners in the 2020 Senate races is John Hickenlooper of Colorado, who is an advocate of national decriminalization. The state referendums are a welcome step for weed merchants, but federal recognition is still the big goal.

“Despite state-level changes, federally it remains as illegal as ever and banks technically shouldn’t be involved in these businesses at all,” said Gilles Ubaghs, a senior analyst at Aite Group, adding there are workarounds such as the Cole Memorandum, which advised against prosecution unless the business is breaking a series of laws.

The Financial Crimes Enforcement Network has also provided guidance that supports banking, but with close monitoring. “In practice, what this has meant is banking legal cannabis requires a lot of compliance considerations — and most banks which cross state borders have stayed away, as that gets messy,” Ubaghs said.

There is legislation in Congress, introduced in 2019 and tied to California Senator and Democratic vice presidential candidate Kamala Harris, to remove marijuana from the list of controlled substances. That legislation has stalled, partly due to the opposition of some Senate Republicans such as Mitch McConnell of Kentucky, who retained his seat on Tuesday.

But as legalization progresses slowly in Congress, more states are softening cannabis laws. Forty states allow some form of cannabidiol (CBD), though the specifics vary — not all states allow recreational marijuana, for example, and regulations differ.

The five states that voted to legalize weed on Tuesday also differed in what they allowed. Arizona voted to allow recreational use with a tax, Mississippi will allow medicinal marijuana, and Montana, New Jersey and South Dakota will allow recreational use.

For financial services and payment companies, that adds a regulatory hurdle but does not necessarily make the industry less attractive. What’s still complicated is the lack of a federal law, creating complications for firms that sell across state lines or wish to process e-commerce transactions.

“The pressure on Congress to regularize banking for the cannabis industry is now being felt across the country,” said Steven Hawkins, executive director of the Marijuana Policy Project. “One-third of the national population now lives in jurisdictions that have fully [medicinal and recreational] legalized cannabis.”

The legal recognition of cannabis creates political cover for financial institutions and payment companies, as happened in Canada.

“Once Visa and Mastercard are in, a lot of these cannabis payment fintechs will have to pivot pretty quickly,” Ubaghs said.

An earlier version of this article overstated the 2025 New Frontier Data cannabis revenue projection.

November 04, 2020 2:54 PM EST

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