The absence of traditional payments players in the legal cannabis industry has opened a unique opportunity for new entrants to facilitate payments for that merchandise.

“It’s created this wide-open field where you can come in, and if you have an idea, you can launch it and see if the market actually takes it on,” said Dustin Eide, CEO and co-founder of CanPay, a debit payment app for the legal cannabis industry. The cannabis payments industry is “driving innovation because we have to be super creative.”

Cannabis has been legalized for recreational use in 18 states and Washington, D.C. — and approved for medical use in several more — but its status as a Schedule 1 drug at the federal level has kept many banks and payments companies on the sidelines. Enter companies like CanPay and Aeropay, which have turned to the Automated Clearing House (ACH) network to facilitate cannabis payments in states where the business is legal.

The Financial Crimes Enforcement Network (FinCEN) issued guidance in 2014 for financial institutions that cater to cannabis-related businesses. Regional banks and credit unions tend to be “more comfortable” serving that market than big banks, said Dan Muller, founder and CEO of Chicago-based digital payments company Aeropay.

“Compliance is a major differentiator to being able to do this correctly,” Muller said.

Littleton, Colorado-based CanPay counts about 110 financial institutions in its network that are openly banking the cannabis industry. CanPay's partner merchants must bank in a compliance program that also meets federal guidance requirements, Eide said.

Federal restrictions also mean cannabis is an industry that depends heavily on cash, which allows these young payments companies to pitch their services as an alternative to dispensaries keeping large quantities of cash that can put their business at more risk. 

Following a recent rise in dispensary robberies in Washington state, CanPay and Aeropay are both mentioned on Washington’s Department of Financial Institutions' website listing financial services options for cannabis retailers. In California, Oakland and Los Angeles have also seen recent dispensary robberies — contributing to a renewed push to enact cannabis banking legislation at the federal level, which would help de-cash the state-licensed industry even while cannabis remains illegal federally.

Given the nature of the merchandise, there’s still a preference for cash among some customers who want the anonymity that the payment method offers. Eide said that’s a hurdle CanPay has had to overcome. 

“The bigger we’ve gotten, the more stores that accept, the more times they see other customers using CanPay to pay, the more likely those customers are to then engage with CanPay,” Eide said.

Turning to ACH 

The ACH network, facilitating electronic bank transfers, offered the transparency Eide wanted to bring to cannabis payments, allowing merchants to do business in their own names — a standard in payments generally, but something the cannabis industry has lacked.

That transparency stands in contrast to payment methods like cashless ATMs, a terminal on the counter that’s serving as an ATM where no cash is dispensed but money flows to the dispensary, Eide said. Visa has warned against this type of transaction, noting fraudulent use could be subject to penalties or compliance enforcement. 

Modern technology is a differentiator in the cannabis industry, too, Muller said. As the cannabis industry matures, the ability to integrate ACH into e-commerce providers or point-of-sale providers allows for a “normalized omnichannel buying experience.”

For both CanPay and Aeropay, merchants take payment by scanning a QR code on a customer’s phone in person, or through a website payment. 

CanPay charges merchants less than 2% of the transaction in what’s essentially a processing fee. Aeropay charges merchants 2.5% plus 25 cents per transaction. Merchants also pay a monthly fee for marketing, support and maintenance of $25 or more. Neither charges the consumer, whereas cashless ATMs charge consumers upward of $5 for each purchase, Eide said. 

Aeropay, which recently announced an integration with cannabis point-of-sale platform Flowhub, raised about $5 million in venture capital in March 2021, but the company would not share the amount of total funding it has received since its 2017 founding. Aeropay has hundreds of thousands of consumers on its platform, and moves millions of dollars per month in payments for companies in cannabis, gaming and cryptocurrency, with most of that coming from cannabis, Muller said. He wouldn’t provide more details.

At the end of 2021, CanPay, which works with about 800 merchants, handled about $500 million in state-legal cannabis purchases made through its web app. Founded in 2016, CanPay is “all self-funded, bootstrapped,” Eide said. “We pay for everything out of our revenues,” he said, declining to provide that figure. 

Visa, Mastercard sidelined for now

Traditional payments players may be absent for now, but cannabis payments executives expect it’s only a matter of time before they get involved, with federal legalization perhaps eventually providing the push. 

A Visa spokesperson said via email that transactions involving the purchase of cannabis “are not permitted on the Visa network, until such time as federal law allows.” 

Mastercard doesn’t allow such purchases on its network, either. Given the complexity of the cannabis situation between federal and state levels, “we continue to monitor the situation, seek guidance from regulators and inform merchant acquirers of any new developments,” a Mastercard spokesperson said via email. 

Executives focused on cannabis payments hope that by the time standard payments players move in, alternative payment methods will have firmly established roots. 

With major change at the federal level “probably some time off still,” Eide said, CanPay is focused on adding merchants and customers, so the debit app is accepted in most, if not all, dispensaries by the time federal legalization occurs. If major card networks get involved in cannabis, CanPay “could quickly add funding of purchases via debit/credit cards as an option for our customers,” Eide said.

Muller aims to prove that moving money fast and safely with ACH transfers is an alternative that “sits alongside any of those other methods, and then maybe even wins in the long run,” he said. 

“Things that we’re doing in cannabis might extend outward into mainstream payments, versus just mainstream payments coming in and sort of taking everything over,” he said.