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Weed’s Workaround to the Banking System Is Getting Shut Down (1)

Dec. 5, 2022, 7:31 PM

Marijuana shops across the US are rushing to find alternative ways for customers to pay after networks that supported a popular workaround to the banking system began to shut down last week.

Cashless ATMs, also called “point of banking” systems, allowed cannabis buyers to use a bank card instead of cash. The method had evolved to get around the fact that credit-card companies and banks don’t want to be involved in marijuana transactions because the drug is federally illegal.

But such technology made pot purchases look like ATM withdrawals coming from different addresses, such as a neighboring McDonald’s, as Bloomberg reported in April. At that time, such transactions looked likely to move about $7 billion past the usual money-laundering controls of the banking system this year -- or about a quarter of all US cannabis sales.

Read more: How cashless ATMs get around banking controls, and who provides them

Now the system is faltering because some of the largest processors of ATM transactions, such as NCR Corp.’s Columbus Data Services, have turned off the ability of processors to use their service, according to three people familiar with the issue, who asked not to be named discussing private information. NCR declined to comment.

Small dispensaries in Arizona, California and Massachusetts have all experienced outages, according to employees who were recommending that customers use cash. Large dispensary chains of multistate operators were also said to be affected.

Curaleaf Holdings Inc., which had said last April that it processes around a third of its transactions through cashless ATMs, was telling customers at some locations that it was unable to accept bank cards. Curaleaf declined to comment.

Important Time

It’s an important time for the cannabis industry, where stocks have fallen sharply in the past year over a lack of political momentum and ongoing concerns about competition from the black market and questions about the health risks of THC. The industry has been hoping that this month, the legislation known as SAFE Banking could pass, giving it more access to the banking system.

“This is a pivotal point in cannabis banking,” Ryan Hamlin, chief executive officer of payment-technology provider Posabit Systems Corp., said of the shutdowns. There were signs of the networks going down at the end of November, but the outages intensified by late last week, he said, estimating that by the end of the weekend only about a fifth of the cannabis industry could use cashless-ATM-style payments.

Posabit, based in Kirkland, Washington, had been migrating away from such transactions to a different form of payment processing for more than a year, and finally got rid of the last of its cashless-ATM solutions on Sunday, Hamlin said.

“It’s left merchants in the lurch because it happened overnight, but the writing has been on the wall for a while now,” said Peter Su, a senior vice president at Green Check Verified, a consulting and software company that specializes in cannabis and banking.

Visa’s Move

The crackdown on cashless ATMs comes exactly a year after Visa Inc. had said it was “aware of a scheme” involving cashless ATMs and that such transactions are prohibited on its network. While there are alternative payment technologies that are more compliant, some dispensaries see them as clunky for customers and burdensome. Visa didn’t return a message seeking comment.

Customers’ preference for the convenience of cashless-ATM-style systems had generated hundreds of millions of dollars in fees for little-known payment processors — and also got customers reimbursed by their banks for the fees.

“Everyone knew it was kind of a gray area, and over the last 12 to 18 months there’s been more of a microscope on the issue,” Hamlin said. The increasing concerns about such systems were what prompted Posabit to stop selling them and start migrating customers away from them over a year ago, he said.

Read more: A private equity firm backing cashless ATMs was named in a Trump probe

Some of the largest payment processors in the industry were affected by outages, according to dispensary employees and companies that provide competing payment solutions. They named West Palm Beach, Florida-based Paybotic, Sherwood, Oregon-based Jory Payments and Salt Money.

Paybotic, Jory and Salt Money didn’t return calls for comment.

A Dec. 2 message from Paybotic, viewed by Bloomberg News, said that the company was “experiencing a system outage which is affecting some of our merchants” and that “the entire Paybotic support team is working diligently to fix this issue.”

So-called point-of-sale software that integrates with such payments was also said to be affected.

Competitors Pounce

Dutchie, the Bend, Oregon-based maker of one of the industry’s most popular point-of-sale products, has software that works with Jory’s payment-processing technology. Bloomberg News viewed a note that Dutchie sent late in the weekend to merchants that used its systems.

“Over the weekend it became clear, industrywide, that cashless ATM may not be sustainable for the industry and does not live up to our high standards for service,” Dutchie said in the note, which bore the company’s logo and was signed by its payments team. Dutchie said it was “prepared with a PIN debit solution” and cautioned dispensaries against signing up for other cashless-ATM-style systems. Such PIN debit systems would also allow customers to pay for marijuana with debit cards.

Competitors were seeking to draw new customers as a result of the outage. MJstack, a cannabis consulting firm, posted on LinkedIn recently offering dispensary owners calls with its consultants, urging them not to make any “rash decisions” about switching to alternatives.

Eli Rubin, a founder of Greenway Payments, said he’d gotten a few calls already on the afternoon of Dec. 2. “We are receiving calls from other contending providers in the industry that are now in search of stability and reliable service,” Rubin said.

(Updates with details on Dutchie in 18th and 19th paragraphs.)

To contact the reporter on this story:
Tiffany Kary in New York at tkary@bloomberg.net

To contact the editors responsible for this story:
John J. Edwards III at jedwardsiii1@bloomberg.net

Crayton Harrison

© 2022 Bloomberg L.P. All rights reserved. Used with permission.