Banking Law News

Pot Fintechs Hope House Bill Helps Make Banking Easier

April 4, 2019, 9:31 AM

Green Bits bills itself as the Square Inc. of the pot industry, providing payment software and hardware to track cannabis products from “seed to sale” and ensuring cash deposits are tied to lawful purchases.

The San Jose, Calif., company wanted to help legal cannabis dispensaries find a workaround for being shut of mainstream banking and payment systems. Then Green Bits found itself cut out of banking services just like its customers.

“Even though we don’t touch the plant, just because we provide software for the industry, we have trouble here as well,” said Green Bits CEO Ben Curren.

The experience isn’t unusual for service providers, including real estate companies, accountants and lawyers who work with the pot industry. Many of them, particularly in the 10 states and the District of Columbia where recreational pot is legal, are looking for relief from legislation approved March 28 by the House Financial Services Committee.

The SAFE Banking Act (H.R. 1595) is intended to protect banks offering services to lawful cannabis companies from being targeted by federal regulators. Services providers could benefit, too, because the legislation could transform the way the industry does business or just make sure their accounts stay open.

Banks, credit unions and major payments processing networks generally won’t work with cannabis companies—even those lawful at a state level—so long as marijuana remains illegal under federal law.

To reduce their regulatory risk, financial institutions often cut off services to cannabis dispensaries or growers. The same “derisking” can happens to service providers.

Green Bits lost its merchant account more than a year after launching in 2014, Curren said, even though the company had been transparent about its business model from the beginning. Green Bits needs the account to accept payment from clients for its compliance software, hardware and services.

Then, it lost out on a 12,000-square-foot office space it had tried to lease from a real estate investment trust after the REIT’s New York-based compliance team shut down the deal, Curren said.

Later, the company’s second merchant account was shut down. In the end, Green Bits had to apply for five different merchant accounts, with four being denied.

“Other technology companies that serve this industry have similar problems,” Curren said.

First Milestone Passed

The SAFE Banking Act passed the first of several hurdles when the House Financial Services Committee approved the bill by a 45-15 bipartisan margin. Its primary co-sponsors, Reps. Ed Perlmutter (D-Colo.) and Denny Heck (D-Wash.), previously told Bloomberg Law they hope the bill will get to the House floor by summer.

Sen. Jeff Merkley (D-Ore.), who is expected to introduce a Senate companion bill in the coming weeks, tweeted a day after the vote: “No legal business should need to resort to carrying around cash in gym bags. And now we’re one step closer to banking for cannabis businesses!”

The bill is likely to get through the House but faces hurdles in the Republican-controlled Senate. One potential political minefield is interest from conservatives in attaching language to the bill to make sure banking regulators can’t lean on financial institutions to not do business with certain lawful but politically disfavored industries, such as firearms manufacturers or payday lenders. Such language could repel Democrats.

For now, the bill’s Senate prospects are still in play. The bill could have a chance if some Republican senators up for reelection in 2020, including Maine’s Susan Collins and Colorado’s Cory Gardner, decide to back the bill. Both their states have legalized recreational cannabis use.

The cannabis industry has also brought on a high-profile hired gun in recent months: Former House Speaker John Boehner helped launch the National Cannabis Roundtable, a lobbying coalition, in February to advocate for legalization.

Cash to Digital

Most cannabis transactions are in cash. The same is true of payroll, tax payment and purchasing.

If enacted, the SAFE Banking Act would allow cannabis companies to switch their payment processing to electronic payments via credit and debit cards, with direct deposits into bank accounts. That could be achieved with a simple hardware attachment to a point-of-sale machine, Curren said.

He projects a significant chunk of cash could shift to electronic payments if the bill were enacted. His estimate is based on consumer trends in traditional retail payments, where more than 60 percent of transactions occur via credit or debit cards.

“By enabling that, you can imagine like 60 percent of that $3 billion dollars will now move to something electronic and then move into bank accounts rather than cash on the street,” Curren said.

Increased Interest

Many financial institutions and companies that want to do business with the cannabis industry are waiting and watching the bill’s progress.

In the last six to eight months, Hypur, another fintech payments and compliance platform for helping financial institutions work with dispensaries, has seen “a real uptick in terms of interest from financial institutions that are very eager to enter this market,” said John Vardaman, Hypur’s general counsel.

“Obviously everybody’s watching what happens on the Hill,” he said.

Vardaman, a former Justice Department attorney, helped write 2014 guidance to federal prosecutors on limiting cannabis-related money-laundering cases against financial institutions in states where the drug is legal.

Former Attorney General Jeff Sessions rescinded the memo in January 2018, raising additional regulatory concerns for companies engaging the cannabis sector.

The SAFE Banking act won’t address every issue for the financial services industry, but it would resolve “the most fundamental issue” of legal jeopardy financial institutions can find themselves in just for trying to bank the cannabis industry, Vardaman said.

“There are a lot of details that need to be filled out in terms of implementation, but that would constitute a significant improvement on what we have now,” he said.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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