While the marijuana industry in the United States is booming due to the decriminalization of cannabis use in certain states, often Marijuana startups and dispensaries, find it difficult to gain access to the fundamental financial products and services needed for a growing business. With many big banks turning their backs on the young cannabis industry, a wave of new startups are attempting to fill the void and provide services such as banking to a growing number of marijuana startups.(To learn more, see: The Business Outlook for the Marijuana Industry.)
The Root of the Issue
Marijuana was first legalized in 2014 in Colorado, later spreading around the country to states and districts with more liberal policies. Now, 23 states have legalized medical marijuana, while four states and D.C. have legalized recreational use. Gradually, many believe that it’s only a matter of time before cannabis is legalized nationwide. In Colorado alone, marijuana legalization accounted for over $1 billion in revenues —it’s an exciting time to be a “potrepreneur.”
Despite the unfaltering demand and overnight profits, the marijuana industry struggles with the stigma and regulatory hurdles that come with being federally listed as a Schedule 1 drug (such as heroin and LSD). Although the Department of Justice (DOJ) has left enforcement up to the States, and the Treasury Department has provided guidelines for banks working with marijuana businesses, most big banks and credit card providers simply don’t want to risk sorting through the red tape.
Since big banks do not want to take on the risk of muddying the regulatory waters with providing loans and bank accounts to weed startups, many dispensaries and small businesses around the U.S. have resorted to dealing with large sums of cash. This, in turn, puts the companies at risk of being robbed and limits their opportunity to move funds as efficiently as possible. Ultimately, not having access to banking makes transactions quite difficult for marijuana businesses and puts significant roadblocks into the already challenging path of startup development. When big names such as Visa and MasterCard refuse to process cannabis industry transactions, it creates a void that entrepreneurs will rush in to fill.
A Budding Relationship: Tech Startups and Marijuana Businesses
When there’s a systematic problem facing consumers or businesses, innovators often jump on the opportunity to penetrate the undeserved market. Tech startups have done just that, from on-demand marijuana delivery services to community network platforms. Startups now offer banking services to the marijuana industry that has been mostly shunned by traditional banks.(For related reading, see: Funding Platforms Emerging for Marijuana Startups,)
Tokken is just one of many recently-launched marijuana-banking startups of 2016. CEO Lamine Zarrad founded the company after working with the Marine Corps, as a Merrill Lynch financial advisor, and finally as a federal regulator. Working with the Office of the Comptroller of the Currency (OCC) he spotted inefficiencies in which regulators would crack down on banks that were not taking proper steps to track marijuana business transactions and prevent money laundering. Tokken is an electronic blockchain payment system, like Venmo or PayPal, which allows costumers to make purchases through their smartphones, completely eliminating cash from the equation. (To learn more, see: Blockchain Boom Next Big Thing for Tech Startups.)
Startups Hypur and Kind Financial both help marijuana companies smoothly move away from all cash processes by facilitating the tracking and monitoring of all transactions. By ensuring thorough record keeping, startups hope to make it easier for marijuana businesses to appeal to banks worried about anti-money laundering laws. Hypur, launched out of Arizona, provides GPS software that geo-locates transactions and proves that they were made legally in an authorized dispensary. Hypur scored $2.18 million in a venture funding round held in May of 2015.
Kind Financial also assists marijuana companies by offering “seed to sale software” for cannabis tracking, compliance and operation management, along with cash-free payments processing and banking services.
The Bottom Line
Potrepreneurs continue to successfully launch marijuana-related startups and small businesses across the country. However, this growth is hindered by a traditional banking industry unwilling to welcome the newcomers. Therefore, we see a new relationship forming between marijuana businesses and new technology startups offering financial products and services that they need to grow safely. As long as the federal law continues to make it difficult for traditional financial institutions to work with weed businesses, we’ll see a boom in the number of technology startups tailored specifically to the marijuana industry.