Tag Archives: cash

Don’t Go Down with the Ship: How to Create a Cash Influx for Your Cannabis Business During Hard Times

By Adam Benko, Brian Mayfield
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It takes a lot to hack it in the wild world of cannabis.

To dip your toes in this game and open your own business, it could cost you between a quarter to three-quarters of a million dollars after licensure and other start-up expenses – and the battle doesn’t end there. Recent data supports that the turnover rate for the cannabis industry at large is extremely high when compared to other industries, coming in at a whopping 40-60% within the first 2 months.

Oh, and let’s not forget: we’re not living in the easiest of times in general. The Bureau of Labor Statistics now reports that inflation has hit 9.1 percent, the highest ever recorded level of inflation since records began. We know that people are struggling all over the place – and those struggles are even more amplified for cannabis operators and business owners. It’s no secret that amid these struggles, many legacy operators, MSOs and mom-and-pop brands alike are making the tough decision to take on costly loans, seek funding or even ultimately close their doors.

Every time a customer abandons their cart, your business is leaving money on the table.

But, in times like these, you have to remember what brought you to the table to begin with. The cannabis industry is still projected to hit a valuation of over $33B by the end of 2022 and despite the blood in the water that we’ve seen lately, operators of all sizes are still getting wins and making a profit. So, do you throw the towel in and give up on your dreams? Should you just accept that all hope is lost?

Absolutely not.

If you’re a cannabis operator who is struggling, you aren’t alone – and more importantly, you aren’t out of options yet. Not ready to go down with the ship just yet? We didn’t think so.

Here are five, expert-approved tips to create an influx of cash for your cannabis business without significantly increasing spending:

  1. ‘Trim the Fat’ of Your Business by Cutting Lean Costs

While it may seem obvious, many cannabis operators forget that “nice to have” is not the same thing as a “must have” when it comes to keeping your doors open and your bottom line healthy. Take an eagle-eyed second look at your budget and cut back as much as possible on areas that aren’t boosting revenue. Reconsider the “extras” – like software solutions, hiring non-essential staff and slow-moving inventory – and focus your attention on the products that contribute the most to your bottom line.

  1. Make Your Customers a Priority
Focus your attention on the products that contribute the most to your bottom line.

One of the biggest mistakes that cannabis brands make is throwing so much of their marketing budget into getting new customers through the door while neglecting to show existing customers the attention they deserve for their loyalty. In today’s market, cannabis consumers have more options than ever. Why should they keep choosing you? Happy customers are customers that will weather the storm with you. Honing in on targeted ads and marketing efforts geared toward existing customers, in combination with loyalty perks, VIP deals and more is a great way to ensure your business is truly unforgettable in the eyes of the customers that keep your doors open. Looking for an extra leg up? Here’s an insider pro tip: refer-a-friend programs are a great way to get the best of both worlds and help those marketing dollars stretch a little further.

  1. SOS: Save Our Shopping Carts

Shopping cart abandonment is a serious problem for cannabis retailers – and it happens all the time. For mobile users, it can creep as high as 85%. Shopping cart abandonment happens when a potential customer visits your site, builds an order in the cart and then either forgets to check out or chose not to execute the purchase. Every time a customer abandons their cart, your business is leaving money on the table. Fight back against shopping cart abandonment by providing clear calls to action through the shopping and checkout process and targeting customers with emails or SMS messages that include discount offers or reminders to check out.

  1. Pump Up Your Payment Solutions

It’s like Canadian rapper and singer-songwriter, Drake, said in his hit song, “Omerta”, “I don’t carry cash ‘cause the money is digital.” 

Payment providers often give back a portion of transaction fees to business owners.

Let’s be honest, it’s 2022 – not a lot of people love carrying around cash. If your cannabis business is cash-only, you could be missing out on extra revenue from card and mobile payment-loving customers. On average, mobile payment users, on average, spend approximately twice as much through all digital channels as those not using mobile payments. Cash-only retailers also miss out on upsell opportunities by limiting themselves – let’s say a customer comes in with $40 in cash, they won’t be able to pick up that extra pack of cones or the grinder they were eyeing up at the checkout if they’re limited to cash-only transactions.

In addition, retailers who patronize payment solutions via debit card providers or online ACH can benefit from payment kickbacks as an additional stream of income, as these payment providers often give back a portion of transaction fees to business owners.

  1. Don’t Forget About Employee Retention Credit (ERC)

If you haven’t heard of ERC – you could be leaving as much as $26,000 per employee on the table. Many cannabis business owners would be surprised to learn that they can still take advantage of the employee retention credit program that started during the pandemic.

The program was launched in March 2020 as a way to help offset the financial struggles of business owners during COVID-19. But, even this year, cannabis business owners can seek cash relief through ERC – employers can retroactively claim the ERC based on financial struggles they experienced during 2020 and the first three quarters of 2021.

Started your cannabis business after February 2020? You still may qualify under specific ERC provisions that can provide up to $100,000 in refundable credits.

At MJstack, we understand the trials and tribulations that cannabis professionals go through every day because we’re right here working alongside you.

Our team of professionals is familiar with cannabis and what it takes to make the cut in this world. Ready to boost your business and safeguard your investments against whatever comes next? Contact us today to learn more and book your FREE consultation.

Risk Management Considerations for Cannabis Retailers in New Jersey

By Eric Schneider
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Despite the US making cannabis regulations challenging to navigate, the industry is snowballing toward profitability. New Jersey legalized adult use cannabis on April 21 this year. One month earlier, The Garden State began accepting applications for Class 5: Retailers, Dispensing and Delivery.

Although New Jersey isn’t shy about its licensing requirements and standards, many people want to know how retailers can stay in the game for the long run. So, let’s talk about risk management considerations New Jersey retailers need to know.

Top Risks Cannabis Retailers Face in New Jersey

Regardless of what kind of retailer you operate —medical or adult use — it’s critical to know what you’re up against. The following are the most common risks we’ve watched cannabis retailers face daily in New Jersey, making a customized risk management strategy necessary.

Theft

Like other retailers, New Jersey cannabis retailers are vulnerable to theft. Unfortunately, theft can come from various angles, such as in-store, in-transit and insider crime. Besides cannabis retailers typically having a well-stocked inventory, it’s not uncommon for them to have more cash on hand than most other businesses.

Although the SAFE Banking Act could positively impact the cannabis industry, it’s in a notorious stall yet again. Briefly, the SAFE Banking Act would no longer allow financial institutions, such as banks and credit card companies, to refuse to do business with cannabis companies. However, cannabis retailers must operate in a cash-only environment, for now, forcing them to make bank runs multiple times a day. We probably don’t have to explain how enticing a significant inventory and fat bank bags look to criminals.

Cybersecurity

Since the onset of the global health crisis, the cyber liability landscape has nearly spun into a death spiral. In other words, cybercriminals sat on the edge of their seats during the pandemic, waiting to pounce on anything that looked slightly vulnerable. Remote workers, small businesses, and emerging industries were hard-hit.

It’s no surprise that New Jersey cannabis retailers face many cybersecurity risks through their point of sale (POS) systems. Additionally, retailers often gather and store personal information, such as email addresses, credit card numbers, shipping addresses, etc. Hackers and cybercriminals gravitate to this vital data rapidly.

Property Damage

In addition to the risk of theft, as mentioned above, cannabis retailers must protect their property from losses. Without adequate protection, damage to equipment or buildings could add up to high out-of-pocket costs. Consider the damage a weekend office fire or late-night vandalism would cause. If property damage occurs, retailers must figure out how to sustain business operations while recovering from the loss simultaneously. As a result, New Jersey retailers must protect their property and maintain business continuity.

How to Customize a Risk Management Strategy

Watch or listen to any news reports and there’s a decent chance that you’ll feel some slight sense of doom and gloom. And sure, a lot is going wrong in our world; however, that doesn’t need to impact how you perceive your businesses. Instead of casting a massive net over every possible risk that you can imagine, we recommend trying the following 5-step approach. Here’s the gist:

  1. Identify: Pinpoint high-level risks that are specific to the cannabis industry. Then, let the process trickle down to focus on company-specific exposures.
  2. Analyze: Determine how badly a particular risk could harm your retail company. How much will this hurt should the “what-ifs” play out?
  3. Evaluate: Categorize risks according to how risk tolerant your company is. Will you avoid, transfer, mitigate or accept the risk?
  4. Track: Use your history or the stats from a similar retailer to map out how you’ve handled the risk over time. Older retailers have an advantage over younger retailers, of course, but you can still get a feel for your risk management style.
  5. Treat: Make good on your evaluation promises by avoiding, transferring, mitigating, or accepting the various risks you identified.

Recommended Insurance for New Jersey Retailers

Sales totals in the first month of New Jersey’s adult use market

The New Jersey Cannabis Regulatory Commission issued detailed requirements for new cannabis businesses. That said, part of the application requirements considered is the plan for companies to obtain liability insurance. Many new retailers opted for a “letter of commitment” as opposed to a certificate of insurance (COI), stating their plans for obtaining the following coverages:

  • Commercial general liability: Protects cannabis companies against basic business risks.
  • Product liability: Protects against claims alleging your product or service caused injury or damage.
  • Property: Reimburses cannabis companies for direct property losses.
  • Workers’ compensation: Covers employees if they are injured on the job and can no longer work.

In addition to the required insurance coverages, we recommend New Jersey retailers customize their risk management package with these policies:

  • Crime: Protects your cannabis company against specific money theft crimes.
  • Cyber: Protects your cannabis company against damages from specific electronic activities.
  • Directors & officers: Protects corporate directors’ and officers’ personal assets if they are sued.
  • Employment practices liability: Protects cannabis companies against employment-related lawsuits.
  • Professional liability: Protects cannabis companies against lawsuits of inferior work or service.

With more states in the US entering the marketplace soon, New Jersey is doing its fair share of the heavy lifting by spearheading the onboarding process. Remember, doing your due diligence at the start pays off in the long run — New Jersey retailers are proving that. Consider teaming with a commercial insurance broker calibrated to the cannabis industry, so you get the most out of your broker, marketplace and the cannabis industry as a whole.

State of the US Cannabis Payment Processing Market: An Interview with Executives at KindTap and Aeropay

By Aaron Green
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Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and traditional payment processors have been cracking down on these offerings as they are often non-compliant with regulations and policies.

Two companies, KindTap Technologies and Aeropay, are addressing the cannabis industry’s payment processing challenges with innovative digital solutions geared towards retailers and consumers.

We interviewed both Cathy Corby Iannuzzelli, president at KindTap Technologies and Daniel Muller, CEO at Aeropay. Cathy co-founded KindTap in 2019 after a career in the banking and payments industries where she launched multiple financial and credit products. Daniel founded AeroPay in 2017 after a career in digital product innovation, most recently at GPShopper (acquired by Financial), where he oversaw the design and development of over 300 web and mobile applications for large scale Fortune 500 companies.

Green: What is the biggest challenge your customers are facing?

Cathy Corby Iannuzzelli, co-founder and president at KindTap Technologies

Iannuzzelli: Our customers include both cannabis retailers and their end consumers. As long as cannabis is illegal at the federal level, normal payment solutions such as debit and credit cards cannot be accepted for cannabis purchases. This has resulted in heavy cash-based sales and unstable, transient work-around ATM payment solutions that can be ripped out with little notice, disrupting the entire business. The lack of a mature payment network to support retail payments for cannabis purchases is a huge challenge for all stakeholders. Cannabis retailers bear the high cost and safety issues of operating a heavily cash-based retail business. Consumers encounter several friction points that require them to change their behavior when purchasing cannabis relative to how they purchase everything else.

Muller: Our cannabis business customers have faced a constantly changing and, frankly, exhausting financial services environment. From the need to move and manage large amounts of cash, to card workarounds, added to the disappointment from legislation around the SAFE Banking Act, these inconsistencies have acted as a roadblock to their potential growth and profitability. Aeropay is in the position to be a stable, long-term, reliable payments partner ready to help them scale their businesses. We believe these opportunities are limitless.

Green: What geographies have got your attention and why?

Daniel Muller, CEO and founder of Aeropay

Iannuzzelli: KindTap’s focus is on the U.S. market where federal policy has created the need for alternatives to traditional payment networks. KindTap is available in every U.S. state where cannabis is legally sold. In terms of our distribution channels, KindTap’s digital payment solution was brought to market during the COVID-19 pandemic when curbside pick-up and delivery became critically important. These channels are where the exchange of cash at pick-up posed the greatest security risk to employees and customers. Our early integrations were with e-commerce platforms focused on delivery and pick-up orders, and our integration partners have strong customer bases in California and the northeast. So, while KindTap can provide its “Pay Later” lines of credit and “Pay Now” bank account solutions anywhere, we have heavier penetration in those regions.

Muller: California, for its established tech culture and how it plays into the cannabis industry – your product simply has to live up to their tech standards to be heard. Also, Chicago, our headquarters, with its newly emerged commitment to financing the cannabis industry and bringing with it a more traditional business approach. In Chicago, you have to have elevated standards of professional practices in any industry you enter. And of course, we love to watch emerging markets like New York and Florida as they head towards adult-use and what shape cannabis and payments will take.

Green: What are the broader industry trends you are following?

Iannuzzelli: We continue to see a strong transition from cash and ATM transactions over to digital payments. Since KindTap has a fully-integrated payment “button” on e-commerce checkout screens, the adoption rate of end consumers to that one-click experience is quite strong. We are also seeing trends of more “express lines” in the retail environment – for those KindTap users who paid online/ahead – and faster/safer delivery experiences to people’s homes since there is no longer the need to collect any payment upon delivery. We are firm believers in the delivery/digital payments combination and a strong increase of that trend as more states allow for delivery.

Muller: The cannabis industry is starting to normalize payments and mirror traditional online and brick-and-mortar. With bank-to-bank (ACH) payments, cannabis businesses can now offer modern customer shopping experiences including pre-payment for delivery orders without the need for a cash exchange at the door, offering the option to buy online pickup in-store and contactless in-store QR scan-to-pay customer experiences. With these familiar and customer-driven options now available, we are seeing widespread adoption, as well as meaningful increases in spend and returning customers.

Green: Thank you both. That concludes the interview!

About KindTap: KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly-regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions. Learn more at kindtaptech.com.

About AeroPay: AeroPay is a financial technology company reimagining the way money is moved in exchange for goods and services. Frustrated with the current, antiquated payments landscape, we believe there is a better way to pay and a better way to get paid. AeroPay set out to build a payments platform that works for all- businesses, consumers, and their communities. Learn more at aeropay.com.

How Section 280E is Still Hindering the Cannabis Industry

By Jay Jerose
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The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.

Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.

What is Section 280E?

Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.

However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.

Impact of Section 280E on Businesses

 What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates. 

The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.

Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.

Legal Actions and Challenges to Section 280E

There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income

Tax Court and Section 280E

The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.

The Future of MRBs and Section 280E

All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.


Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.

Keep ‘em Safe: Cash, Records, Products, People – Technology Helps Cannabis Businesses Succeed

By Dede Perkins
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It wasnt that long ago that cannabis was underground, sometimes literally, and operators protected what was theirs any way they knew how. Before legalization, cannabis operators needed to secure their plants, cash, supplies and equipment not just from people who wanted to steal them, but also from law enforcement. The legacy cannabis market is now transitioning into a legal one, and licensed operators are joining the industry at an incredible rate, but security is still part of the success equation. Like before, operators need to protect plants, products, equipment and cash, but they now also need to protect records, privacy and data, and do so in a manner that complies with state regulations.

Cannabis regulatory authorities set security guidelines that cannabis business owners must follow in order to obtain and renew operational licenses. For instance, there are state-specific security regulations regarding video surveillance, camera placement, safes, ID verification, and more. While security measures help protect the business, they also protect the public. Its a win-win for everyone involved. Here are five best practices and techniques to protect cash, records, products and people.

Hybrid cloud storage

State regulations call for reliable video surveillance footage that is accessible, in most cases, 24/7 and upon demand by cannabis regulatory authorities and local law enforcement acting within the limits of their jurisdiction. SecurityInfoWatch.com reports that video data is the industrys next big investment, meaning there will be an increased demand and need to store video surveillance footage. Most states require video surveillance footage to be retained for a specific amount of time, often 45-90 days or longer if there is an ongoing investigation or case that requires the footage. While some businesses only retain video data for the state-required length of time, others choose to keep it longer.

Storing data on-site can become expensive and precarious. Best practices call for a hybrid cloud storage solution model as it provides on-site and both public and private cloud data storage solutions. This model provides users with the ability to choose which files are stored on-site and which files live in the cloud. Doing so improves file accessibility without impacting or compromising on-premises storage. In addition, its helpful to have two methods of digitizing data, for safetys sake. In the event an on-site storage method crashes—though hopefully this wont ever happen—theres a version available off-site via the cloud. That said, with cloud-based storage solutions come cybersecurity threats that must be managed.

Cybersecurity

Dispensaries are prime targets for burglary. Defending a storefront requires a comprehensive security plan

Due to the ongoing COVID-19 pandemic, more businesses are online than ever before. Unsurprisingly, cyberthreats are on an upward trend, including in the cannabis industry. Earlier this year, MJBizDaily reported that a data breach exposed personal information of current and former employees of Aurora Cannabis. The incident involved unauthorized parties [accessing] data in (Microsoft cloud software) SharePoint and OneDrive”. Although this breach involved only employees, confidential customer information is also at risk of being compromised during a data breach. 

On a separate occasion, an unsecured Amazon S3 data storage bucket caused a large-scale database breach that impacted almost 30,000 people across the industry, according to the National Cannabis Industry Association. The breach included scanned versions of government-issued ID cards, purchase dates, customer history and purchase quantities. Unlike the Aurora Cannabis breach, this one included customer data. 

Just like other more established industries, the cannabis industry needs to protect and secure confidential data. If you dont have a cybersecurity expert on your team, consider hiring a consultant to evaluate your risk or partnering with a credible cybersecurity technology company to implement proactive solutions. Before signing a contract, do your due diligence. Does the consultant and/or technology company understand the compliance regulations specific to the cannabis industry? Do their solutions meet the regulations in the state(s) where your facility operates? Taking the time to protect your companys data before a breach occurs is proactive, smart business.

Smart Safes 

A smart safe like this one can helps secure cash handling

Smart safes help secure cash handling, which given the difficult banking environment for cannabis companies, means theyre on the list of best practice security technology products. What is a smart safe? A smart safe is a device that securely accepts, validates, records and stores cash and connects to the other cash management technology solutions such as point of sale systems. They connect to the internet and provide off-site stakeholders visibility into a facilitys cash position.

A high-speed smart safe counts cash by hand faster than a human and is an overall more secure way to deliver cash bank deposits. At the end of the night, making a deposit at a physical bank location can be dangerous, exposing your cash and the individuals responsible for making the deposit to unsecured threats. Using a smart safe reduces that threat and also helps cannabis operators comply with financial recordkeeping and documentation requirements. Due to federal cannabis prohibition, many cannabis businesses lack enough insurance to fully cover their exposure to cash theft, which has led to a trending industry-wide investment in smart safes.

Advanced access control

Best practice access control means more than a ring of keys hanging off the facility managers belt. Advanced access control gives cannabis business owners and managers the ability to manage employee access remotely via the cloud. This feature can limit access areas within a facility, enabling an individual to revoke access instantly from a remote location making it a useful tool in the event of a facility lockdown or emergency. A mobile app and/or website can be used to lock or unlock secure doors, monitor access in real time and export access logs.

Advanced access control devices arent a standard in the industry yet. Although many state regulators dont require cannabis businesses to utilize advanced electronic access control, using this technology is a best practice and may be required in the future.

Compliance software 

Understanding the ramifications and keeping up with state-mandated compliance is challenging. While state regulations can be found online, theyre often in pieces, leaving operators unsure about whether or not they have them all. Once an operator is confident that they have the most current version of all the laws, rules, and regulations that apply to their cannabis business, making way through the dense legal jargon can be exhausting. Even after multiple readings, it can be unclear about how to apply these guidelines to the operators cannabis business, which is one reason cannabis businesses work with a trusted legal counsel to meet compliance requirements. For trusted advisors and cannabis business licensees and operators alike, cannabis compliance software solutions are designed to not just check boxes for a cannabis business, but to help everyone involved understand how the regulations apply to the operation. These solutions improve accessibility so that employees at all organizational levels understand the rules and requirements of their position and the products they work with.

In addition, compliance software can help licensees and operators establish and implement best practice SOPs to meet regulatory requirements. Because the cannabis industry is young and many operators are moving fast, many cannabis businesses are vulnerable to security breaches and threats. Prioritizing security and compliance can help cannabis leaders protect against potential threats. Investing in the latest and most innovative security technology solutions—beyond what is required by state regulations—can help operators outsmart those who seek to steal from them and position their companies as industry leaders that prioritize safety and compliance, protecting not just cash and products, but the people who work in their facilities and the customers who purchase their products.

Payment Processing & Consumer Credit: An Interview with KindTap Co-Founder

By Aaron Green
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Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and payment processors have recently been cracking down on these offerings as they are often non-compliant with regulations and policies.

KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions.

We interviewed Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies. Cathy co-founded KindTap after a career in the banking and payments industries where she launched multiple financial and credit products.

Aaron Green: Cathy, thanks for taking the time today. How did you get involved in the cannabis industry?

Cathy Corby Iannuzzelli, co-founder and chief payments officer at KindTap Technologies

Cathy Corby Iannuzzelli: I’ve been in the payments industry for a long time. I was doing some consulting a few years ago for a client in Colorado and that gave me exposure to the issues in cannabis like the fact that you couldn’t have real payments in cannabis. Then, a close family member with health issues turned to medical cannabis when nothing else seemed to work. I was amazed by the difference it made in her life. At that point, I put those two things together and I said, I need to focus on helping this industry get a real cannabis payments solution because I thought it was ridiculous that you had an industry of this size and importance that had been abandoned by the payments industry.

Aaron Green: Can you highlight some of your background prior to entering cannabis?

Corby Iannuzzelli: Throughout my career, I’ve been a banker, I’ve been a payment processing executive and I’ve been a consultant. So, I’ve kind of done it all in the payments and financial services space.

Aaron Green: Why is it that most dispensaries only take cash?

Corby Iannuzzelli: In the US, even though cannabis is legal in many states, it’s still illegal federally. There are big banks and card networks like Visa, MasterCard, etc., who are national, even global companies and frankly, the executives of those companies don’t want to end up in jail for violating national laws. So, they have put cannabis dispensaries on what’s called a “prohibited merchants” list. This means you cannot accept Visa, MasterCard, Discover, American Express, or similar payments as a cannabis business and so it’s forcing the industry to a cash-based solution.

About the only thing you’re seeing that’s not cash in dispensaries are ATMs. But if you think about it, ATMs are machines where the consumer goes and pulls cash out and pays upwards of $5 or more in fees for doing that. They then hand that cash back to the dispensary who then has the costs of having to deal with that cash. The industry is just stuck in a cash-based business until federal legislation changes.

Aaron Green: I’ve been to some dispensaries where they accept credit cards or debit cards. What is going on there?

Corby Iannuzzelli: I’ve heard reports of consumers who’ve been able to use a credit card or a debit card in a dispensary. Sometimes the processor who sold that solution to the dispensary says, “Oh, it’s compliant, I guarantee you it’s compliant.” But if you dig in, that’s not the case. And eventually, Visa or MasterCard figures it out and shuts it down. In some cases, it’s outright fraud where the processor who sold the payment terminal to the dispensary is misrepresenting it as say a doctor’s office rather than a dispensary. There’s no merchant category code in the payment networks that says this is for processing dispensary payments, so they pretend it’s something else until they get shut down.

When they do get shut down, I’ve heard of cases in Las Vegas where it was basically 100% Visa or MasterCard one day and 100% cash the next day. It completely disrupted the whole business. It’s not just the retail store, but the inventories and everything else throughout the business.

“About the only thing you’re seeing that’s not cash in dispensaries are ATMs”

There have also been some cases where you’ll see something called a cashless ATM. In a store, they call it a debit card transaction. It’s really a cashless ATM where the consumer is making what looks to the ATM network like a cash withdrawal in $10 or $20 increments, but the consumer is getting a receipt instead of cash, and they’re turning around and handing that receipt back to the dispensary who then makes a change because the cashless ATM only dispensed in $10 or $20 increments.

Now ATM networks are looking at these cashless ATM transactions to see if they are compliant. Do consumers know the fees that they’re paying? Are these transactions coming in and looking to the network like real cash when it’s not? Cashless ATM transactions are probably the most common thing you see, but that’s being called into question after the Eaze incident where a large company was misrepresenting its terminals. The federal government stepped in and called it bank fraud and the individuals behind it, the executives, are in jail. Since then, the networks are looking at this and saying, what about these cashless ATMs? Are those transactions within our rules, or is there something funny going on here?

Aaron Green: So, to summarize here: you’ve got federal regulations at the national level that says that cannabis banking is not allowed so major institutions are not offering it. Yet you found a way through the regulations and compliance issues. I’m curious can you pull back the curtains a little bit and tell us how you came up with a solutionhere?

Corby Iannuzzelli: Well, we came up with the solution by stubbornly refusing to believe that cannabis payment processing could not be done in a compliant manner. We just said, “there is a compliant way to do this, let’s figure it out.” We took the same components that are out there for the financial services and payments industry and reassembled them in such a way that we do not violate any rules. We do not use any of the Visa, MasterCard, Discover or Amex rails, we built our own network. We have direct contracts with the merchants and direct contracts with the consumers. We control everything and all the funds flow through regulated financial institutions. So, we designed something that looks and acts to consumers and retailers the way Visa and MasterCard look and act when a consumer goes to make a purchase, but they run on a separate set of payment rails and in compliance with banking regulations and state regulations. When you’re looking at the problem from a different perspective, sometimes you can come up with a better answer.

Green: On the consumer side, what does that user experience look like?

Corby Iannuzzelli: Our product is completely digital. The consumer experience starts with integration at the online checkout. When it’s an e-commerce shopping cart and somebody is placing an order, they will see a button called “Pay with KindTap.” The first time they click that button they’re automatically brought to our integrated web app where they do a quick and easy application for our digital revolving line of credit product. If approved, they instantly go back to the checkout screen and their first purchase will just happen immediately, with flexible payment options over time. If the consumer decides they don’t want our KindTap credit and would rather have a pay now-product where we pull the funds from their bank account, then the consumer can do so. So, there is no physical card per se, it’s integrated like PayPal or Affirm at the point of checkout online. For the consumers who use KindTap credit, there is a mobile app where they can see their transactions, view statements, pay their bills, etc.

Additionally, there is a loyalty program for all purchases – KindTap credit or through the consumer’s bank, because we feel very strongly that a lot of the reasons consumers choose to pay with one card over another is the points and the rewards that they get. So, we’re providing loyalty rewards with KindTap so that consumers can get rewarded for that spending with KindTap and it’s better for the retailers.

Green: On the retailer side, what does that experience look like and what is your business model?

Corby Iannuzzelli: We are not going store by store doing integrations, rather, we’re integrating with various software, delivery and e-commerce providers. That gives us broad reach and ability to expand rapidly in various state markets where cannabis is legal. Once a merchant says “yes, I want to be a member of the KindTap Merchant Network,” then we work to get them set up on our platform in a matter of days. The merchants receive continuous support from our success team, marketing co-investment and a depth of analytics reporting. We made the entire process and ongoing operations streamlined and frictionless for both merchants and consumers.

Aaron Green: What are the benefits of moving from cash to credit type of payments?

Corby Iannuzzelli: On the retail side, there are the obvious benefits of not having all the security, safety and theft issues associated with operating a physical cash business. Consumers very often don’t carry cash anymore, except when they’re making a cannabis purchase. There are a lot of hidden costs to retailers because payments are not just about moving money from the consumer to the business.

“I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out.”Payment options – or lack thereof – can shape where people shop, how much they spend and what they buy. It’s a proven science how consumers make impulse purchases. If you’re a cash-based business in cannabis, and you’re trying to get somebody to make an impulse purchase, and they walked in with $100, then you can’t get them to spend more than $100, no matter how creative your marketing is! The consumer is limited by how much cash they have in their bank account or in their pocket at that point in time. So, it’s really about the upsell that comes with the bigger basket sizes that retailers experience when you move from a cash-based business to credit and suddenly, the merchant doesn’t have to deal with long lines of consumers on payday when the store was beyond slow two days before. Now the consumer can spread purchases with the thinking, “I’d rather not be the one standing in that line on payday. I’m going to go Wednesday [instead of Friday] because I have KindTap credit so I can budget and manage my cash flow throughout the month rather than around my paydays.”

So, we think that the lack of an efficient and effective payment system for cannabis is holding back sales. We all focus on how much the industry is growing. KindTap thinks about how much faster it could be growing if it was supported by a decent payment system.

Aaron Green: What are some other cash-only markets you are looking at?

Corby Iannuzzelli: We are laser-focused on the cannabis ecosystem and bringing a compliant credit and loyalty-based digital payments solution to cannabis merchants and customers and rewarding those stakeholders for accepting/using KindTap. Additionally, we are planning to extend the KindTap Merchant Network so that consumers can use/earn our loyalty points with other goods and services they’re purchasing that are adjacent to cannabis or that are important to the cannabis consumer. That’s the direction we’re going.

Aaron Green: Today people can receive gas points for spending with their credit card. Now with KindTap, you can spend to get cannabis points?

Corby Iannuzzelli: That’s exactly right.

Aaron Green: What in either cannabis or your personal life are you most interested in learning about?

Corby Iannuzzelli: Personally, I am most interested in seeing breakthrough technologies in climate change. We’re going to need to correct this situation and I’m reading about collecting carbon dioxide from the air and burying it in the earth and things like that. I really am optimistic that with so many scientific breakthroughs we’ve had that we’re going to be able to figure this out. Certainly, it’s going to take a lot of smart people and a lot of investment, but I really look forward to watching them do their stuff and hopefully taking us out of this nightmare situation that we’re heading into if we don’t make some changes.

Aaron Green: Thanks Cathy, that concludes the interview.

Corby Iannuzzelli: All right, thanks Aaron!

Current Trends in Banking for Cannabis-Related Businesses

By Paula Durham, CFE, CCCE
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Cannabis is still federally illegal and is included on Schedule 1 of the Controlled Substances Act (CSA), along with such other substances as heroin, fentanyl and methamphetamines.1 It is a federal crime to grow, possess or sell cannabis.

Despite being federally illegal, 36 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or adult use purposes,2 and both direct and indirect cannabis-related businesses (CRBs) are growing at a rapid rate. Revenue from medical and adult use cannabis sales in the US in 2019 is estimated to have reached $10.6B-$13B and is on track to reach nearly $37B in 2024.3

Because the sale of cannabis is federally illegal, financial institutions face a dilemma when deciding to provide services to CRBs. Should they take a significant legal risk or stay out of the market and miss out on a significant revenue opportunity? So far, the vast majority of financial institutions have been unwilling to take the risk, resulting in a dearth of options for CRB’s. Until recently, cannabis business operators had few options for financial services, but times are changing.

This piece will discuss current trends in banking for cannabis-related businesses. We will cover differences in legality at state and federal levels, complexities in dealing in cash versus digital currencies, Congressional actions impacting banking and CRBs and how banking is changing. The explosion of state legalization of cannabis over the past several years has had a strong ripple effect across the US economy, touching many industries both directly and indirectly. Understanding the implications of doing business with a CRB is both challenging and necessary.

Feds Versus States

Money laundering is the process used to conceal the existence, illegal source or illegal application of funds.4 In 1986 Congress enacted the Money Laundering Control Act (MLCA), which makes it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.”5 Therefore, CRB transactions are technically illegal transactions under the MLCA.

Financial institutions therefore face a risk of violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (BSA) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.6

Federal authorities continued to aggressively enforce federal cannabis laws

In short, because cannabis is illegal at the federal level, processing funds derived from CRBs could be considered aiding and abetting criminal activity or money laundering. States, however, began legalizing cannabis in 1996, and by 2009, thirteen states had laws allowing cannabis possession and use.7 Despite this legislation, federal authorities continued to aggressively enforce federal cannabis laws.8 That changed under the Obama administration when, shortly after being elected, President Obama stated that his administration would not target legal CRB’s who were abiding by state laws.[9] In an attempt to provide clarity in this murky environment, beginning in 2009, the Department of Justice (DOJ) issued three memos designed to guide federal prosecutors in this area. However, none of the DOJ memos issued from 2009 through 2013 addressed potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis.

To assist financial institutions in navigating potential financial crime implications of banking CRBs, the Financial Crimes Enforcement Network (FinCen) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (2014 Guidance).9 According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.

The 2014 Guidance requires those who choose to provide services to CRBs to design and implement a thorough customer due diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.9 In addition, financial institutions are required to file a Suspicious Activity Report (SAR) for every transaction they process for a CRB, should they choose to accept the business.

Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law and, therefore, does not eliminate the legal risk to financial institutions.10 By its very nature, the 2014 Guidance was a temporary fix, subject to changing views of different administrations, evidenced by the fact that all three of the DOJ guidance documents noted above were rescinded by then Attorney General Jeff Sessions on January 4, 2018.12 The DOJ enforcement posture could change once again in a Biden administration. Biden is on record as favoring decriminalization, and Attorney General candidate Merrick Garland has stated that if confirmed he will deprioritize enforcement of low-level cannabis crimes. Garland also believes using limited government resources to pursue prosecution of cannabis crimes states where cannabis is legal does not make sense.12

Because of the uncertainty and high risk, most banks remain unwilling to serve CRBs. Those that do serve CRBs charge exorbitant fees (fees of $750-$1,000 or more per account per month are not uncommon), pricing many smaller operators out of the financial services market.

Cash is King – Or Is It?

Cannabis operators have discovered the old adage “cash is king” is not necessarily true when it comes to the cannabis space. Bank-less CRBs are forced to utilize cash to pay business expenses, which can be particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the providers that are difficult, if not impossible, to pay in cash. For example, cannabis operators have been turned away from IRS offices when attempting to pay large federal tax obligations in cash. Likewise, cannabis operators have been unable to utilize payroll processing companies to administer payroll and benefits for their businesses because the processors won’t take cash. CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.

Because dealing in cash is so difficult, CRB operators look for workarounds such as using personal credit/debit cards to purchase business equipment and supplies. This doesn’t eliminate the cash problem, however, because the credit card holder will likely have to accept cash as reimbursement. Such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.

CRBs often have large sums of money onsite

Some bank-less CRBs try to skirt the system by obtaining bank accounts in the name of management companies or other entities one step removed from the actual business. While operators often choose this route in an effort to streamline business and operate out of the shadows, it again runs afoul of banking laws. Transferring cannabis related financial transactions to another entity is actually the very definition of money laundering – which, as noted above, is defined as the process used to conceal the existence or source of “illegal” funds.

In addition to the difficulties in making payments or purchasing business supplies, operating in a cash-heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and transport large sums of cash when purchasing product or paying bills, making them a target for robbery. In 2017, there was a spate of dispensary robberies across the Phoenix Metro area, including one at Bloom Dispensary that took place during operating hours.13

Managing all that cash increases the cost of doing business as well, in the form of increased labor, insurance, and security costs. Cash must be counted and double counted, which can be time consuming for staff, not to mention the time it takes to deliver physical cash payments to hither and yon. Ironically, lack of banking significantly decreases transparency and clouds the waters of compliance, as operating strictly in cash makes it easier to manipulate reported financial results.

Potential Congressional Solutions

In recent years Congress has undertaken several efforts to pass legislation designed to address the state/federal divide on cannabis, which would likely clear the way for financial institutions to provide services to CRBs, including:

  • R. 1595 – Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”);
  • 1028 & H.R. 2093 – Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act); and
  • 2227 – Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act).

The climate in Washington DC, however, did not allow any of these initiatives to pass both houses of congress. Had any been sent to the White House, President Trump was unlikely to sign them into law.

The cannabis industry has new reason to believe reform is on the horizon with shift in political leadership in the White House and Senate. Newly anointed Senate Majority Leader Chuck Schumer recently committed to making federal cannabis reform a priority, and President Biden appears committed to decriminalization, reviving the hope of passage of one of these pieces of legislation.

The Changing Banking Landscape

Even though there is little in the way of formal protections for financial institutions, and with the timeline for a legislative fix unknown, an increasing number of banks are working with cannabis operators.

According to FinCen statistics, there were approximately 695 financial institutions actively involved with CRBs as of June 30, 2020. It is important to note that these statistics are based on SAR filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer.

Number of Depository Institutions Actively Banking
Cannabis-Related Businesses in the United States
(Reported in SARS)14

There are arguably more banking institutions offering services to CRBs than ever before. The challenges for CRBs are (1) finding an institution that is willing to offer services; (2) building/maintaining a compliance regime that will be acceptable to that institution; and (3) cost, given the high fees associated with these types of accounts. 

How CRBs Get Accepted by Banks

The gap between CRBs’ need for banking and the financial services providers’ sparse and expensive offerings to the sector has created an opportunity for third-party firms to intervene and provide a compliance structure that will satisfy the needs of the financial institutions, making it easier for the CRB to find a bank.

These third-party firms perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following FinCen guidance required to receive banking services. After the completion of due diligence, they connect the CRBs with financial institutions that are willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These firms often provide additional services such as armored car and cash vaulting services. Some of these firms also offer vendor screening, pre-approving vendors before any payments can be made.

One such firm, Safe Harbor Private Banking, started as a project implemented by the CEO of Partners Credit Union in Denver, Colorado, who set out to design a cannabis banking program that would allow Partners to do business with Colorado CRBs.15 The program was successful and has since expanded into other states who have legalized cannabis. Other operators include Dama Financial and NaturePay.

While these services offer hope for many CRBs, the downside is cost. These services perform the operations necessary to find, open, and maintain a compliant bank account; however, the costs of compliance are still high, pricing some small operators out of the market.

Is Digital Currency an Answer?

 Digital currency is also making its way into the cannabis world. Digital currency, or cryptocurrency, is a medium of exchange that utilizes a decentralized ledger to record transactions, otherwise known as a blockchain. One of the largest benefits of blockchain is that it is a secure, incorruptible digital ledger used for, among other things, financial transactions.16 Blockchain technology offers CRBs a transparent and immutable audit trail for business and financial transactions. Several cannabis-specific cryptocurrencies have sprung up in the past several years, including PotCoin, CannabisCoin, and DopeCoin, to name a few.

In July 2019, Arizona approved cryptocurrency startup ALTA to offer services to the state’s medical cannabis operators.17 ALTA describes itself as a “digital payment club where cash-intensive businesses pay each other using digital tokens instead of cash.”18 ALTA members purchase digital tokens that are used to pay other members using a proprietary blockchain based system. The tokens are redeemable for US dollars at a stable rate of 1:1, and CRBs do not need a bank account to participate in the ALTA program.

ALTA proposes to pick up members’ cash and exchanges it for tokens, which are then used to pay other members for goods and services. Tokens may be redeemed for cash at any time.18 The company has been approved by the Arizona State Attorney General, and one of the first members they hope to enlist is the Arizona Department of Revenue (ADOR). Enlisting ADOR into the program would allow dispensary members to pay state taxes digitally rather than hauling large amounts of cash to ADOR offices.

Similarly, Nevada recently contracted with Multichain Ventures to supply a digital currency solution to the Nevada cannabis industry. Nevada Assembly Bill 466 requires the state create a pilot program to design a “closed loop” system like Venmo in an effort to reduce cash transactions in the cannabis sector. Like ALTA, Nevada’s proposed system will convert cash to tokens which can then be transacted between system participants.19

While both proposals are promising for Arizona and Nevada CRBs, the timeline as to when, or if, these offerings will come online is unknown. Action on cannabis reform at the federal level may render these options moot.

Looking to the Future

Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier to accessing the financial services market for CRBs. While most banks are still reluctant to offer services to this rapidly growing industry, there are more banks than ever before willing to participate in the cannabis industry. Recent changes in leadership in Washington DC offer a positive outlook for cannabis reform at the federal level.

As the “green rush” continues to envelop the country, financial services options available to CRBs are slowly growing. Many new options are now available to help CRBs find a bank, develop compliance programs, and manage the cash related problems encountered by most CRBs. However, these solutions may be out of reach for the budget-conscious small operator. Also, there are a number of cryptocurrency solutions designed specifically for CRBs; however, when, or if, these solutions will gain significant traction is still unknown.


References

  1. Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812.
  2. “State Marijuana Laws”; National Conference of State Legislatures, February 19, 2021.
  3. “Exclusive: US Retail Marijuana Sales On Pace to Rise 40% in 2020, near $37B by 2024”. Marijuana Business Daily, June 30, 2020.
  4. Kaufman, Irving. “The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering”. Interim Report to the President, October 1984.
  5. S. Code § 1956 – Laundering of Monetary Instruments.
  6. Rowe, Robert. “Compliance and the Cannabis Conundrum.” ABA Banking Journal, September 11, 2016.
  7. “History of Marijuana as a Medicine – 2900 BC to Present”. ProCon.org, December 4, 2020.
  8. Truble, Sarah and Kasai, Nathan. “The Past – and Future – of Federal Marijuana Enforcement”. org, May 12, 2017.
  9. FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
  10. Cannabis Banking Coalition Statement.
  11. Sessions, Jefferson B. “Memorandum for All United States Attorneys”. January 4, 2018.
  12. “Attorney General Nominee Garland Signals Friendlier Marijuana Stance”. Marijuana Business Daily, February 22, 2021.
  13. Stern, Ray. “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The Phoenix New Times, April 11, 2017.
  14. FinCen Marijuana Banking Update, June 30, 2020.
  15. Mandelbaum, Robb. “Where Pot Entrepreneurs Go When the Banks Just Say No.” The New York Times, January 4, 2018.
  16. Rosic, Ameer. “What is Blockchain Technology? A Step-by-Step Guide for Beginners.” com, 2016.
  17. Emem, Mark. “Marijuana Stablecoin Asked to Play in Arizona Fintech Sandbox.” CCN.com, October 25, 2019.
  18. http:\\Whatisalta.com\
  19. Wagner, Michael, CFA. “Multichain Ventures Secures Public Sector Contract with Nevada to Supply Tokenized Financial Ecosystem for the Legal Cannabis Industry”, January 26, 2021.

What Cannabis Businesses Need to Do to Adapt to COVID-19

By Arthur Gulumian
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How COVID-19 Impacted Cannabis Businesses

Before jumping into what cannabis businesses can do amid this pandemic, it is crucial to explore the specifics behind how the virus impacted the industry as a whole. From a surface level, it seems obvious what happened: dispensaries had to implement social distancing protocols, require both customers and employees to wear masks and limited the number of customers that can be present on the point-of-sale floor room. But COVID-19 did not merely make shopping experiences a tab bit inconvenient.

Cannabis producers, and especially those involved in manufacturing cannabis goods, experienced an apparent disruption in their production schedules. If the metals and plastics were sourced from Wuhan, Shenzhen or any other dense industrial area in China, supplies suddenly stopped coming, and producers were left with limited production options. Businesses did not consider the value of having various vendors and instead put all their stock in one source. A disruption in production inherently impacts dispensaries.

COVID-19 impacted more than just supply chains, however. For instance, investors are now less likely than before the pandemic to invest in early-stage cannabis companies. Competition for capital now far outweighs the supply for cannabis companies, and we have seen (and will continue to see) a drop in company valuations. Indeed, COVID-19 is affecting more than just currently existing operators but those yet struggling to create cannabis businesses of their own.

Vendors & Supplies

A broad survey conducted by the Institute for Supply Management (ISM) between February 22, 2020 and March 5, 2020 found that 75% of U.S. companies had experienced supply chain disruption as a result of the COVID-19 outbreak. An estimated 90-95% of all components utilized in cannabis vaporizer pens were sourced from manufacturers in Shenzhen, China. In contrast, very few companies used domestic manufacturers. While this is just one example, it is equally important to note that cannabis-specific equipment and supply shortages were not the only factors that disrupted cannabis businesses. Shortages of personal protective equipment (PPE) presented challenges for cannabis dispensaries, producers and manufacturers that continued to operate during the “shelter in place” orders.

Operators must establish a resilient supply chain. Do not simply limit your options to one specific region, as this can be a costly mistake. Operators must cultivate an in-depth understanding of their supply chain beyond critical suppliers and their stress points; they need to develop and follow a systematic supply process that takes potential disruptions and stress points into account. When vetting potential vendors, always ask detailed questions that elicit evidence-backed responses. Ask vendors where they source their materials from, whether they have any history of experiencing disruptions in their supply chain and what kind of setbacks they have suffered as a result of COVID-19.

Investing in Your Core Business

In light of COVID-19, operators must invest in solutions that increase efficiency and improve the customer’s experience. This entails ensuring your customer safely enters and leaves your dispensary with a product they are satisfied with—the essence of any retail operation. Your operation should focus on enhancing customer flow as opposed to encouraging aimless roaming. Having an open-space, Apple store style dispensaries might have been a popular option before, but times have changed, and dispensaries must adapt.

Guided purchases offer not just more efficient transactions, but also serve to ensure that your waiting room isn’t backed up with an endless stream of unmanageable customers. Depending on your locally-mandated COVID-19 protocols, your dispensary will likely not be permitted to hold a high number of customers in the store, nor should it during this pandemic. Each customer service representative must be active as opposed to passive, directly asking customers what they are interested in, offering product or strain choices when customers seem unsure and answering questions as thoroughly as possible to avoid confusion and inherently delays. Be sure to emphasize the value of guided purchases to your employees and how they can promote the safety of both themselves and their customers.

Maintaining Urgency

The uncertainty of COVID-19 and its impact on the general economy has left many individuals “clocked out.” Simply put, many people feel that they should wait until things go back to normal before making any critical decisions. As essential businesses, cannabis operators cannot afford to make this same mistake. Now is not the time to sit back, reflect and wait for the vaccine. Instead, operators must work to precisely assess how COVID-19 impacted their business and execute a clear plan of action to address foreseeable problems.

Execution is far more important than perfection; you’ll need to make changes on a dime and avoid spending excessive hours obsessing over debating specific actions rather than taking them. It is far more essential to get tasks done versus ensuring they are perfect. If something is not working in your business, it must be readdressed or removed entirely from the protocol. It is far better to make necessary changes now amid the pandemic as opposed to reactively waiting and seeing what may come next following it.

Stay nimble by cutting out any factors that may be slowing down your company’s efficiency. Is your point-of-sale system causing issues? Can you use a better payment processing tool? Are any employees underperforming? Are there any internal policies that may be hindering your employees’ ability to work as optimally as possible? These are some of the many factors that must be considered to ensure your business stays agile and adaptable. Determine what is working against you and execute a plan of action to address. Do not wait and do not take shortcuts around regulations.

Understanding the Shift in Purchasing Behavior

Regardless of whether or not a vaccine for COVID-19 is completed anytime soon, operators must know that there is no “returning to normal.” People’s habits and behaviors have changed due to this virus, whereas slow browsing of items might have been preferable for some individuals before COVID-19; this is likely not the case today. Furthermore, research groups like Accenture have found that most customers expect their shopping habits to change permanently.

Source: Accenture COVID-19 Consumer Research, conducted April 2–6. Proportion of consumers that agree or significantly agree.

In the study mentioned above, shopping more consciously is one of the two top priorities for customers during this pandemic. According to Accenture, “[c]onsumers are more mindful of what they’re buying. They are striving to limit food waste, shop more cost consciously and buy more sustainable options. Brands will need to make this a key part of their offer (e.g., by exploring new business models).” Furthermore, customers are now more likely to shop locally; this is why community engagement would be especially important to ensure you develop transparency and trust between your brand and your customers. Understanding this shift in purchasing behavior will remain one of the more crucial tasks of any cannabis operator.

Expanding Sales Avenues

More and more customers are now relying on online and curbside purchases than ever before. Dispensaries must look to their current sales avenues and determine where key focuses should be made. Use your sales data to determine where customers are making their purchases the most, be it through third-party delivery services such as Eaze, standard home delivery, online ordering or curbside pickup. Focus on identifying friction and streamlining the user experience on all customer-facing platforms and services. Equally, consider which platform your customers are using the most to make purchases; are they making more online purchases, or do most still prefer direct shopping at the store? Remember that having more products doesn’t necessarily mean more revenue. You must also identify which products are performing well and which have low margins.

These considerations can help strengthen your highest performing platform while working to fix any more inferior performing platforms. As stated before, stay nimble; if something is not working out, cut it out from your business model, and move forward. Do not be afraid to cut poor-performing platforms to hone your focus on the successful ones. Since post-COVID-19 shopping behavior is likely to stay permanent, these changes may still be applicable following a slowdown or cessation of the virus.

Delighting Your Customers

Virus or not, customer satisfaction remains one of the most crucially defining points for the future of your business. Your customers must be safe and must be happy with their purchase. To ensure this outcome, you need to maintain adequate safety policies while equally promoting streamlined purchases. Although a limited number of individuals may be annoyed with over-the-top safety precautions, most customers will enjoy the heightened security that comes alongside these types of measures.

Contactless service, such as having customers scan their identification upon entry or encouraging more credit card versus cash transactions, can increase customer satisfaction, as they will feel a stronger sense of security when shopping at your dispensary. Focus on streamlining curbside pickup. Things such as requiring vehicle descriptions (e.g., license plate numbers, color, make) for curbside pickup purchases can go a long way in helping employees quickly identify customers.

Equally, be sure there is hand sanitizer available near the entrance of your dispensary. This adds a further sense of security for your shoppers. Delivery should be consistent; delays and setbacks must be minimal to win the confidence of your customers. Take the extra steps to ensure your dispensary is clean and products hygienic. All these factors work to increase customer satisfaction while maintaining their safety, and more importantly, impact the level of trust your customers have in association with your brand.

Scaling Operations Taking Advantage of Limited Competition in Emerging Markets

As stated before, several individuals—including existing and emerging cannabis businesses—are clocked out following COVID-19. This mindset is not only detrimental for operations but can also impact how you scale your business. New markets are coming online and will continue to do so as regulators are increasingly incentivized to replenish government coffers. Riverside County in California, for instance, is now allowing for capless licenses for all cannabis business types. However, what remains the key focus for regulators is expanding the number of delivery and distribution operators. In Massachusetts, delivery endorsements for dispensaries are available without a set deadline to social equity applicants and do not have a defined cap. In Illinois, the cap for transporters was equally removed, and each applicant who scores above 75% will receive a license.

These types of licenses are now more valuable than ever before for two reasons. The first reason is that regulators are keener to award delivery and transporter licenses than other types. Secondly, customers now prefer home delivery over shopping in stores due to COVID-19. With more people clocked out during these times, you have far more opportunities and far fewer competitors during application processes. Use this time to truly develop a strategy for expansion, as the chance might not come so quickly again.

Conclusion

As a final point, be sure to expand your online presence during this time. Although you may not have the capacity to reflect your company’s personality and value through quick in-store transactions, you can use social media to encourage product reviews, social interactions, and recommendations. Invest in marketing through social media platforms. Platforms such as TikTok have helped form communities of like-minded individuals. Use platforms such as that to highlight your company’s personality and values, avoid being “salesy” and focus more on being funny, entertaining and just alive. Character adds value to your business.

People want to laugh, to feel safe and they want to live. Create social interactions and immersion and always prioritize being honest and transparent with your customers. This final point stands as equally as important as the rest of the considerations highlighted throughout this article. Stay nimble, stay active and stay alert! Do not view the chaos behind this pandemic as a pit, and instead see it as a ladder. Track down opportunities, do not be afraid of change, and, more importantly, do not wait for an answer to COVID-19, be the answer.

The Hopes of Illinois Social Equity Applicants

By Taneeshia Thomas
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It is almost impossible to turn on the tv and not find a show or news conference or even live footage of an ongoing protest over “Black Lives Matter” or “Economic Equality.” The same situation exists with social media platforms, radio broadcast, etc. All sharing the common theme of social equity. While we all seek a solution, the state of Illinois is doing their part by awarding the coveted adult use cannabis business licenses for craft growing, infusion, transportation and dispensaries to social equity applicants by using a scoring system that favors the social equity applicant. We believe in this vision at TGC Group and our dream is to pay it forward.

Taneeshia Thomas and her husband, Christopher Lacy, who did 3.5 years in prison for growing cannabis in 2009.

We see the world, especially for minorities living in poverty, quite differently because of where we come from. “Black Lives Matter” is a movement to save the lives of all people and have human life viewed equally no matter the race of an individual. Economic equality is a totally different fight. Our communities that are impoverished need cash infusions. There needs to be financial infrastructure that recirculates the dollars from the poor communities and that comes from having business owners in the affected community to put their profits back into their community. There needs to be a system of lending that is not based on credit scores and criminal background checks because most people at the bottom will never qualify. An example would be my husband, Christopher Lacy: he went to prison for 3.5 years for growing cannabis back in 2009. He is not a violent man; he never even had a fight in prison. He spent much of his time in prison teaching inmates how to read, write and most importantly, he tried to teach them economics. He is educated about cannabis because he has been intimately involved with this plant and has been growing it for just about 20 years. Yet when he tried to apply for jobs in Illinois for growing cannabis, his invisible barrier starts with the resume. Just think about it, my husband, knows more about cannabis than most people in the industry today and could manage a facility with ease. No one could see his worth because of his background and work experience? This is the same situation with so many others in our poor communities. We know for a fact that there is hidden talent in the impoverished communities and prison system, and we intend to find it and empower these individuals to rebuild what was destroyed by the war on drugs. I speak for all the ghettos when I say this: give us access to the capital and we will get the rest done on our own. Conventional banks have their hands tied with this approach because they are regulated, but private funds have more flexibility. The excess capital needed to rebuild will not come from jobs, it only comes from ownership. Luckily, J.B. Pritzker and Toi Hutchinson are aware of this and hence created the social equity fund to help the social equity applicants fund their projects if and when they are awarded a license. We must find a way to give to the bottom so that the dollars can trickle up. Trickledown economics is kind of like that movie “Platform” on Netflix. There are never enough resources to get to the bottom because the people sending the resources down have no idea how to get them to the bottom floors of society. Trickle up economics can start at the very bottom rungs of society and still will reach to this highest level of the economic system because its built in such a way that it will inevitably get there.

State Sen. Toi Hutchinson (D-Park Forest), now The Illinois Cannabis Regulation Oversight Officer

These new licenses, literally pathways to financial freedom if operated correctly and efficiently, are revenue machines capable of changing our community. This change does not come from providing jobs (although jobs do help and will be available), but by providing capital to rebuild. These funds can provide scholarships, business loans, even small infrastructure projects can get accomplished via the tax revenue generated by the local governments. We have already made a written commitment to give a portion of net margins to the village. Capital in the right hands can make dreams come true. In theory, poverty can be solved. Poverty is not a prerequisite to the American way of life. That is why we were so proud to get zoning approval by our village. They see what we see. We can change neighborhoods like Beacon Hill. The dollars must recirculate in the community. Wherever you see high poverty rates you see high crime rates. This is not a coincidence. If you can lower the poverty rate you can lower the crime rates. This raises the quality of life for everyone. We see the state is on board, the county is on board, the Village of Park Forest is on board and the citizens of the community are on board. Now all we need is the license and capital to get the resurrection started.

Unlike other applicants, we were only capable of applying for one license for a craft grow facility. Some may see this as a disadvantage because only 40 licenses will be issued for this purpose. I wish we could have applied for more to increase our odds, but resources were scarce and applying was not cheap. We decided to stick with the efficient market theory and put all our eggs in the one basket that we know we can carry and be successful with. Without the help of Justice Grown, we would’ve never completed the application so shout out to them and anyone else that helped “true” social equity applicants apply.

The wheels are in motion so all we can do is wait to see who wins. I would hate to be on the team who must decide who wins these licenses. Everyone knows large corporations found ways to apply as social equity applicants because they only needed a certain number of “social equity” employees to qualify. But if you go ask the employees, not the owners, if they have been cured of their financial burdens and see if $15 has raised their quality of life to a middle-class level. The answer is emphatically NO. You cannot give out band-aids for heart attacks. If these large corporations are awarded the licenses, it will perpetuate the cycle of poverty. We do not personally have anything against the big companies. Like Toi Hutchinson said regarding the first round of dispensary and cultivation licenses: we needed the big company dollars to fund the next round of licenses. Well, the next round is here. Let’s do right by the communities that were truly affected by the war on drugs and on a more personal level and my reason for applying: let’s do right by my husband because he lost 3.5 years of his life and was excluded from participating with his family for doing what is now legal.

SAFE Banking Act Included in COVID-19 Legislation

By Aaron G. Biros
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UPDATE: Late in the evening on May 15, the House of Representatives passed the HEROES package, voting 208-199 (with 23 abstentions). The bill now now heads to the Senate where its fate is more uncertain. 


Earlier today, Speaker Nancy Pelosi debuted the latest piece of legislation to help Americans impacted by the coronavirus pandemic. The Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) is a large bill containing emergency supplemental appropriations more than 1,800 pages long.

On page 1,066, those in the cannabis industry will find a very exciting addition: the Secure and Fair Enforcement (SAFE) Banking Act. For the uninitiated, the SAFE Banking Act would ensure access to financial services for cannabis-related businesses and service providers.

Currently, federally regulated financial institutions face penalties for dealing with cannabis companies due to the Controlled Substances Act. The bill, if passed, would eliminate the possibility of any repercussions for doing business with cannabis companies.

The impact of this bill becoming law would be widespread and immediate for both the cannabis market and banks looking to invest in the cannabis industry. With banks given the green light to conduct business with the cannabis industry, there is no doubt that many financial institutions will rush to the opportunity. Cannabis businesses will benefit greatly, no longer having to deal with massive quantities of cash and gain access to things like loans, bank accounts and credit lines. Furthermore, cannabis companies will benefit from the rush of banks getting in the game, leading to a competitive and affordable banking market.

It is no secret that cannabis businesses have had a cash problem for decades now. Given the coronavirus pandemic, CDC guidelines dictate minimizing the handling of cash and encourage payment options like credit cards. Cannabis businesses dealing with large quantities of cash puts them, their employees, their customers and even regulators at risk.

Aaron Smith, executive director of NCIA

According to Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), the cash problem is a serious, unnecessary health risk. “On behalf of the legal cannabis industry, we commend the congressional leadership for prioritizing public health and safety by including sensible cannabis banking policy in this legislation,” says Smith. “Our industry employs hundreds of thousands of Americans and has been deemed ‘essential’ in most states. It’s critically important that essential cannabis workers are not exposed to unnecessary health risks due to outdated federal banking regulations.”

In fact, it was the NCIA and a handful of other industry organizations that lobbied Congress last week to include language from the SAFE Banking Act in the HEROES Act, citing the known fact that cash can harbor coronavirus and other pathogens, along with the “personal proximity required by cash transactions as reasons for urgency in addition to the other safety and transparency concerns addressed by the legislation.”

The SAFE Banking Act was already approved by the House of Representatives. In September of 2019, the bill made a lot of progress through Congress, but stalled once it made it to the Senate Banking Committee.

The HEROES Act will be debated by the House of Representatives prior to a floor vote. If it passes the House, it moves to the Senate, which is about as far as it made it the last go around. However, because the banking reform is included in coronavirus relief legislation, there is a newborn sense of hope that the bill could be signed into law.