The US legal cannabis industry is finding new legitimacy with each passing year, but cannabis is still far from federally legal in the US.
From a consumer’s perspective in legal jurisdictions like Colorado and California, it’s easy to forget that cannabis is not yet legal as far as the federal government is concerned. However, for cannabis businesses and the ancillary services they rely on, cannabis’ complex legal status can be problematic. Ever since the first legal medical cannabis shops opened in California in the 1990s, cannabis businesses have had difficulties accessing many of the basic financial services that other businesses take for granted.
As the US cannabis industry continues to grow, federal lawmakers are beginning to enact changes that will allow these businesses to operate safely. Legislative breakthroughs could create new opportunities for money handling services built specifically for cannabis retail.
According to New Frontier Data, the US legal cannabis market is expanding at a compound annual growth rate of 14 percent and is expected to be worth US$30 billion by 2025. The retail cannabis space is growing by leaps as new jurisdictions legalize every year. With major markets like New York and New Jersey likely to legalize recreational sales in the near future, cannabis retailers should see significant opportunities to gain first-mover advantage in these large, affluent markets.
Cannabis industry breakthroughs
Throughout the history of the legal cannabis industry, financial institutions have been understandably hesitant to work with cannabis businesses. Banks that do work with cannabis companies risk being accused of money laundering or other illegal activities by the federal government. Despite this, a small but growing number of US banks and credit unions are beginning to see that the benefits of the cannabis industry outweigh the risks. According to federal data, there were 715 banks and credit unions in the US actively serving cannabis businesses as of the third quarter of 2019. These institutions represent a small fraction of the US financial industry, and most of them are smaller, single-state institutions operating exclusively in legal cannabis states. Financial institutions that do work with cannabis companies tend to be audited frequently and their transactions are monitored under close scrutiny. As a result, cannabis businesses are often subject to significantly higher fees than other businesses.
Historically, cannabis retailers have been forced to operate on a cash-only basis, a situation that has been far from ideal for all involved. Operating as a cash-only business can become a pain point in the cannabis retail experience, limiting what would otherwise be a service advantage for the legal industry over the black market. More importantly, businesses dealing exclusively in cash are at risk of robbery, putting retail employees and customers at risk. Cash-only retailers need to arrange for secure transport and storage of large amounts of cash, which usually involves hiring armored trucks and armed security personnel at significant expense. A lack of federally recognized guidelines for the handling of cannabis industry finances has become a major expense and a very real safety concern for industry stakeholders.
Lawmakers on both sides of the aisle have recognized the importance of ensuring safety for cannabis employees and consumers. In late 2019, the House of Representatives proposed two pieces of legislation meant to rectify the situation, both with bipartisan support. The Secure And Fair Enforcement (SAFE) Banking Act would prevent federal regulators from penalizing financial institutions for working with cannabis-related businesses, allowing cannabis companies to access financial services unimpeded. The Marijuana Opportunity Reinvestment and Expungement Act would go even further by removing cannabis from the controlled substances act and expunging prior federal cannabis convictions. The SAFE Banking Act was passed by the House on September 25, 2019, and the Marijuana Opportunity Reinvestment and Expungement Act was approved by the House Judiciary Committee two months later on November 20 and will go to the floor for a full House vote in the near future. Both acts will need to clear the Senate.
Cannabis industry moving past cash only
These legislative breakthroughs could lead to a surge in cannabis retail development, creating opportunities for companies providing point-of-sale (PoS) services for the cannabis space. In the meantime, the list of financial institutions willing to work with the cannabis industry is rising despite the lack of guidelines. As the cannabis retail space continues to grow, an increasing number of retailers are gaining the ability to conduct non-cash transitions. PoS platform builders have an opportunity to foster adoption now with retailers making the early switch away from cash-only, positioning themselves for rapid expansion as more financial institutions begin to do business with cannabis companies.
“The point of sale industry for cannabis is growing rapidly as more and more states require full compliance and integration into the state’s seed-to-sale tracking systems,” said Ryan Hamlin, POSaBIT Systems (CSE:PBIT,OTC Pink:POSAF) co-founder and CEO. “These state systems require that all sales be registered and all product inventory changes submitted in near real-time. The majority of traditional retail point of sale systems lack this significant compliance feature.”
PoS services not only facilitate debit and credit transactions, but also help retailers track useful product and customer data that could help cannabis companies stay compliant and competitive in the evolving regulatory landscape. Cannabis businesses that face intense regulatory pressure to keep track of their products have an opportunity to improve transparency and regulatory standards using PoS systems. Cannabis retail PoS platforms can be easily configured to ensure customers are legally allowed to buy cannabis, whether through recreational or medical licenses.
Legal cannabis jurisdictions such as California have imposed daily sales limits that can be difficult to enforce. PoS systems have the ability to track how much product a particular consumer has bought on a given day, ensuring only legal sales are finalized. PoS systems can also be configured to maintain a detailed record of a store’s inventory, helping retailers to manage stock, respond to recalls or evaluate which products are most popular. Detailed product descriptions housed on PoS databases could help retailers make recommendations for specific customer needs.
“The cannabis industry has evolved over the last several years and so too has the software required to support it,” Hamlin stated. “The cannabis point of sale system needs to not only register sales but track inventory, provide customer loyalty programs, run online and offline menus and even manage pickup or delivery services.”
Few customer service businesses these days rely on analog cash-only transactions when they have a choice. A number of developers are looking to become first-movers in the cannabis PoS space as more of the cannabis industry switches over from cash-only. Companies like POSaBIT, Green Bits and IndicaOnline have developed full-service systems specifically for the needs of cannabis retailers. POSaBIT has deployed its full-service platform for more than 120 cannabis retailers in well-established legal states as well as new medical markets like Arizona and Oklahoma. By the time national legalization does occur, the company hopes to have established the platform as a standard for cannabis retail PoS. In addition to payment processing, POSaBIT’s system includes a range of features like customer profiles and purchase history, loyalty, inventory management and product education services.
The cannabis retail landscape is changing fast, and many of the limitations faced by cannabis businesses are beginning to fade away. As more cannabis retailers gain access to the full suite of financial services, more retailers could be incentivized to move away from cash and into the 21st century. PoS service providers have an opportunity to establish themselves early with full-service platforms that cater to the unique needs of the cannabis industry.
This article was originally published by the Investing News Network in January 2020.
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