Mastercard ban on cannabis debit-card purchases rocks industry

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Mastercard’s new hardline demand that banks and payment processors immediately halt cannabis transactions involving its debit card has upended the marijuana industry and put more licensed operators at financial risk, industry insiders told MJBizDaily.

The latest development, first reported by Bloomberg, is expected to affect adult-use and medical marijuana retailers the most as well as their customers.

Those consumers will likely revert back to the days of cash-only transactions – a throwback in an era when digital wallets are used to buy everything from groceries to gas.

It’s also a stark reminder that these types of business setbacks will persist without federal cannabis reform and as long as marijuana remains illegal under U.S. law, executives told MJBizDaily.

Earlier this year, cannabis operators were forced to scramble and find a new payroll provider after receiving a memo from Paychex advising that the company would no longer process direct deposits or offer other services for marijuana-related businesses.

Mastercard issued its cease-and-desist orders earlier this week to participating banks, Bloomberg reported.

“In accordance with our policies, we instructed the financial institutions that offer payment services to cannabis merchants and connect them to Mastercard to terminate the activity,” a company spokesperson told the news agency.

It’s widely believed the vast majority of marijuana debit transactions at U.S. marijuana stores are routed either through First Federal Bank of Florida or Dart Bank in Michigan.

Executives from the two banks did not immediately respond to MJBizDaily inquiries.

As a result of the Mastercard order, cannabis businesses said consumers will likely see more ATMs at stores.

Retailers and their supply chain will also have to deal with a lot more cash, which brings its own set of challenges and risks.

Marijuana companies are particularly vulnerable to break-ins and robberies given the highly cash nature of the business.

“We are taking a situation and making it harder for cannabis businesses to facilitate legal operations,” said Dawne Morris, co-founder of California-based Proteus 420, which makes point-of-sale (POS) and inventory software for cannabis companies.

“What this means is moving into heavier cash processes again, which increases theft, and potential for more (illicit) market operators to move back into a space prior to legalization.”

Dutchie pivots

Financial service providers in the cannabis space will have to find new solutions as well.

Technology platform Dutchie, which provides POS hardware and e-commerce solutions for marijuana retailers across the country, alerted customers on Monday via email it’s rolling out a new payment processing service utilizing Bitcoin and a digital wallet to “deposit, transact and receive funds,” according to an updated user agreement sent to customers.

“This alternative solution is intended to allow you to continue processing without any disruption,” the company told its marijuana retail partners in an email notification.

Bryan Barash, Dutchie’s vice president of external affairs, said the company is helping address an unfair playing field when it comes to financial services.

“We continue to strongly advocate for change to outdated and unfair federal cannabis policies while monitoring and reacting to the latest updates that impact day-to-day operations,” he told MJBizDaily via email.

Under the new service, Dutchie’s retail customers will essentially purchase Bitcoins from Dutchie partner Mobile Currency LLC equal to the amount of the corresponding dispensary transaction.

Those Bitcoins, according to the user agreement, will then be used to purchase cannabis products, in essence replacing debit-card transaction.

Bitcoin’s volatility and virtual currency status could spook some marijuana retailers and affect sales volume, according to cannabis banking expert Tyler Beuerlein.

“It’s certainly not ideal,” said Beuerlein, chief strategic business development officer for Colorado-based Safe Harbor Financial, which provides banking and lending services for cannabis companies and ancillary businesses.

“We’ve got a multibillion-dollar industry that’s still struggling to find its payment identity.”

Calls for federal reform emboldened

Mastercard’s abrupt decision to stomp out marijuana debit-card purchases has renewed industry pleas for lawmakers on Capitol Hill to address banking and other financial needs for one of the country’s faster-growing industries, despite widespread struggles to secure capital, increase retail access and compete against thriving underground markets.

“Mastercard stepping in to thwart the use of debit cards in cannabis via a pin debit system is another painful reminder of the lack of federal recognition of legal cannabis,” said Morgan Paxhia, a co-founder and managing director of San Francisco-based cannabis hedge fund Poseidon Investment Management.

“Legal cannabis deserves to be treated like every other business in this country. And 10 years later, we have no support from the federal government and Mastercard retrenching.”

Wendy Bronfein, co-founder of vertically integrated Maryland operator Curio Wellness, said the industry needs partners for banking, tax relief and safe and secure payments.

“Ultimately, the only way financial institutions are going to be comfortable working with us is by getting the OK from the federal government,” she said.

Passage of the SAFE Banking Act – which would allow banks to serve marijuana companies without fear of a federal crackdown – would harmonize state and federal law as well as provide guidance to financial institutions on engaging the industry, according to Brady Cobb, CEO of Sunburn Cannabis, which operates several medical marijuana stores in Florida.

“Hopefully this is a wake-up call that action is needed,” he said.

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.

Kate Robertson can be reached at kate.robertson@mjbizdaily.com.