One of the most recognizable card brands in the world, Mastercard Inc., recently joined the crusade against the cannabis industry, ordering its partners to “terminate the activity” with debit cards touching marijuana-related business. 

But some large players in the retail cannabis scene remain blunt in their stance, essentially saying, “We’re still accepting cards.”

“There was an announcement, but not a whole lot of action,” said Kyle Kazan, co-founder and chief executive of Long Beach-based Glass House Brands Inc. 

Kazan said he is unfazed by Mastercard’s statement, and his 10 retail outlets, including The Pottery dispensary located in Brentwood, will continue using bank cards.

Glass House Brands joins several Los Angeles chains, including Erba Inc. and Sweet Flower IP Holdings LLC, openly allowing debit – and in some cases credit – cards despite warnings from card networks. 

Stores have used handheld ATMs for years, allowing staff to round up transactions to the nearest $10 and give back a purchase’s difference in cash. When customers see their bank accounts later, the purchase will show up as a withdrawal.

According to Kazan, it’s the larger cannabis retailers’ strong relationships with major financial institutions that allow these kinds of payments to continue. 

“It’s the smaller players that banks don’t want to take the risk of money-laundering regulations from the feds,” Kazan said. “But big companies like mine, we bank with large banks.”

Dance with risk

Premium cannabis dispensaries across Los Angeles now imitate the high-end designer storefronts that define the city’s upscale shopping districts. Clean concrete exteriors with sans-serif signs lead into spaces displaying marijuana strains as if they were works of art.

The industry’s transition to luxurious, photogenic storefronts from its back-alley entrances of steel doors signified companies vying for legitimacy with a consumer base.

While the Field of Dreams wisdom “if you build it, they will come” initially rung true for the industry, keeping customers coming back was the second step, and that’s where card-payment convenience came in.

After California legalized recreational marijuana in 2018, the only throughline from marijuana’s historic underground operations was the cash-only caveat. This payment-method restriction reminded customers that the weed displayed under bright lights and sleek driftwood framing was still federally illegal, and many patrons did not regularly carry enough currency to cover, say, the eighth of an ounce of product costing $50.

Retailers couldn’t afford to discount sales to accommodate for its younger consumers’ cash shortage. 

Enter the cashless ATM: the workaround allowing debit cards to be used in cannabis stores.

The proliferation of these point-of-sale devices that allow debit cards to process weed transactions underscores the industry’s continued coziness with risk to keep consumers coming back.

Beyond keeping younger, card-reliant consumers happy, the handheld ATMs

allow retailers to remain attractive business partners with banks.

High-profile banking relations come with pressure to streamline transaction options and do away with cash-management operations, although the latter is now well established and replete with armored vehicle transport and drop-off services. 

Sources in cannabis finance say some local institutions will bank cannabis clients but are still limited when it comes to lines of credit. According to Treasury Department data, only 13% of federally insured financial institutions actively deal with marijuana-related businesses.

Still illegal

Last year, Visa Inc. sent out a memo similar to Mastercard’s ordering an end to “schemes” misrepresenting transactions, and reiterating that federally insured financial institutions cannot conduct business with companies that sell a drug that is still classified as a Schedule I illegal substance.

While it’s not at the level of the Eaze Technologies Inc. bank fraud case from 2021, in which Eaze’s chief executive officer and two consultants were jailed for misleading bankers on the nature of their business entirely, some dispensaries may change transaction trails so that pot buys appear as ATM withdrawals or business purchases on the customers’ bank or credit card accounts. The main difference between these two cases is that banks are aware of why credit and debit transactions are relabeled by their clients, and customers consent to transactions appearing differently in their account records.

“Even before legalization in 2018, many misrepresented their businesses to access card products,” said Tyler Beuerlein, chief strategic business development officer at the cannabis banker Safe Harbor Financial.

According to Beuerlein, cashless ATM operations at retailers have been subject to multiple shutdowns by card companies in recent months but continue to be a major source of income for dispensaries. 

With every transaction, the retailer takes in a small percentage through a withdrawal fee. 

On top of that, retailers know consumer behavior and how card payments unlock greater spending. A customer with a $20 bill may be limited to a gram of weed, but using a card they could be the hero of the party and buy an ounce to share with everyone.

Headaches and headwinds

Dispensaries’ reluctance to heed card companies’ warnings echo the industry’s broader fight for survival against lackluster legal change and a resilient illicit market.

On Thursday, Bloomberg reported that the Health and Human Services Department sent a letter to the Drug Enforcement Agency calling for marijuana to be reclassified as a Schedule III drug under the Controlled Substances Act.

If this recommendation results in reclassification, it would be a monumental change for the drug’s status as a Schedule I substance, which puts it in the same category as heroin, LSD and ecstasy. Marijuana’s Schedule I label has been a major headache for an industry striving for credibility among investor and financial institution sponsorship. Private equity, pension funds and hedge funds have avoided the industry because of its legal state. 

Century City-based investment bank Houlihan Lokey Inc. was one of the first to transact in the space. Sam Scanlan, the senior vice president of the firm’s consumer and retail group overseeing cannabis clients, said card companies’ warnings were “annoying” for companies struggling to gain a solid financial footing.

“You’re not just competing against the legal market; you’ve got to compete against the illicit one, too,” Scanlan said. “Anything that increases the convenience, access and just overall purchase is just going to be helpful to the regulated market.” 

There is a prospective financial safety net for the industry currently held up in the U.S. Senate. Known as the SAFE Banking Act, this legislation, if made law, would protect Federal Deposit Insurance Corp. status for banks offering services to cannabis companies and snuff out money-laundering risk for proceeds from state-licensed marijuana-sale deposits. 

While sources in the industry believe the bill does address pain points for the businesses’ money flow, it does not wield the legal power to force Mastercard or Visa to allow cannabis transactions on their products.

“You’ve got this major chasm between what the industry and consumer base thinks and what the reality is on the other side, and it concerns me,” said Beuerlein of Safe Harbor.

Beuerlein joined other sources saying the endgame remains the advent of federal legalization. Until then, local brands sometimes believe they can’t afford to heed the warnings of card companies. 

“If the feds would just back off, you would see this industry flourish,” Kazan said.