In line with the US Federal Government‘s view on the drug, Mastercard, the global payments processor, has banned the sales of cannabis on its debit cards in the US.
With cannabis merchants seeking ways to complete transactions digitally, does this move by Mastercard open the door for fintechs to fill the void? We reached out to the industry to find out.
The legal marijuana market was worth $13.2billion in 2022. According to research from Grand View Research, between 2023 and 2030 the market will have an annual growth rate (CAGR) of 14.2 per cent and be worth $40.1billion by the end of the decade. However, despite this opportunity, many banks and financial institutions across the US do not serve cannabis merchants, where the drug is allowed, due to federal law still marking it as illegal.
In fact, only 10 per cent of banks serve cannabis organisations, while only five per cent of all credit unions do so.
Rallying the masses
However, this figure is not due to attitude but rather necessity. Brian Sinclair, director of revenue operations for payments risk firm G2 points out: “Most card networks tend to be aligned on their approach to federal guidelines. Compliance drives their moves, not attitudes.”
Sinclair further explains: “The legality of cannabis/marijuana has become a murky grey area for payments acquirers. There is an opportunity for the US federal government to provide greater clarity around the rules and regulations for cannabis transactions.”
Though the ban is inherently bad for the cannabis market, the uproar it will cause could have a long-term positive change. Mastercard’s move could light a fire under the pro-cannabis constituents to put pressure on the government to make a federal change.
When speaking to The Fintech Times, paytech Stronghold‘s head of compliance, Hazen Baron echoed this view: “It [Mastercard’s move] signals a move by the large, publicly-traded corporations, like Visa and Mastercard, that they are no longer willing to tolerate circumvention of their terms of use.
“This may be in an effort to put pressure on Congress, via their constituents, to finally enact meaningful legislation regarding cannabis payment. It also might be reflective of their desire to avoid large fines which have continued to increase and become more punitive every year.”
Market frustration
Various members of the legal cannabis market expressed their dissatisfaction with the news. However, fewer complaints were directed at the payment processor and more at the government and its laws.
Matt Darin, CEO of Curaleaf, the cannabis company expresses: “The news illustrates once again the urgent need for the federal government to recognise the cannabis industry as the tax-paying, job-providing sector that it is.
“Our industry is one of the fastest growing sectors in the US, generating more than $3.7billion in state tax revenue in 2022 and employing over 428,000 Americans. Furthermore, cannabis is legal for medical purposes in 40 states, and for recreational purposes in 23 states. An overwhelming 88 per cent of Americans say that cannabis should be legalised across the country. When will the laws catch up?
“Current prohibitions on banking in cannabis are unfair to communities, law enforcement, cannabis workers and business owners. To create a thriving, and above all, safe, legal cannabis industry, the passage of SAFE and continued fight against the cannabis stigma are critical.”
Artie Minson, CEO of LeafLink, a cannabis wholesale platform, echoes these views saying: “It’s frustrating that there are inadequate and expensive banking solutions available for regulated cannabis businesses. Despite the cannabis industry contributing billions of dollars to the economy, it is difficult to find a bank that is both friendly and cost-effective for these businesses to use. As one of the fastest-growing industries in the US, we desperately need federal reform and reliable, cost-effective banking solutions, which LeafLink and our peers are actively pursuing.”
Stepping up
In the meantime, Mastercard’s actions will likely have a ripple effect on the industry. Andrew Boyd, founder and financial advisor, Finty, the financial comparison website, notes: “Mastercard’s decision could indeed influence other payment processors. As a leading player, its policies may be viewed as a standard to follow. Especially if companies are wary about potential legal repercussions at the federal level.”
As a result, fintechs have a golden opportunity to step up and facilitate digital payments. Roughly a fifth of the global market’s value comes from the US, meaning there is now a big gap in the market. Uldis Tēraudkalns, CEO of Nexpay, the banking infrastructure provider, tells The Fintech Times about the impact crypto can play in facilitating payments.
“The global marijuana market, which is projected to reach $51.27billion in 2023, may face short-term challenges due to Mastercard’s prominent role. While fintech solutions are valuable, they may not entirely resolve the issue of using cards for marijuana purchases, as these transactions still rely on Mastercard or VISA for processing,” said Tēraudkalns.
“Given the continued growth of the marijuana market and strong demand, it is likely that alternative payment methods will emerge. Possibilities include cash transactions, open banking, cryptocurrencies, and other innovative payment systems. Fintech companies might also play a crucial role in facilitating conversions from crypto to fiat currency for legal marijuana businesses. This is one of the advantages of using cryptocurrencies compared to traditional systems, as they are not subject to the influence of a single actor.”
Creating opportunities for competitors
“The move by Mastercard opens up an opportunity for fintechs to offer a solution that provides better security for cannabis business operators, and collects valuable data on the financial transactions of a rapidly growing market,” said Brandon Dorsky CEO of Fruit Slabs, the healthy edible.
Fintechs aren’t the only ones able to replace Mastercard though. “Hopefully at least one payment processor will recognise the valuable opportunity created by Mastercard’s exit and pioneer a path forward for payment processors to provide better services and offerings to cannabis business operators,” adds Dorsky.
