Cannabis companies in Colorado don’t have traditional bank accounts and can’t accept credit cards from customers. They also can’t use credit cards to pay their bills.

That’s because marijuana, while legal for recreational and medicinal use in Colorado and a growing number of other states, is still illegal under federal law.

As a result, licensed cannabis growers and retailers turn to a host of software and payments companies that have sprung up to allow cannabis businesses to take payments from customers and pay their vendors.

Littleton, Colorado-based CanPay is one of dozens of niche financial institutions catering to a marijuana industry shunned by big banks and credit card companies. Others include LeafLink in New York City and Paybotic Financial in West Palm Beach, Florida.

Why is it like this?

Cannabis businesses pay a hefty price for the services of such companies, which conduct extensive legal and compliance checks before they work with the marijuana industry.  

The dichotomy between state and federal marijuana laws sets up high hurdles for financial institutions to clear before they can work in the global $33.7 billion legal cannabis industry.

While marijuana is legal for either medical or recreational use, or both, in 38 states, it remains illegal under federal law. Fearing criminal liability, major banks and credit card providers won’t work with companies that sell marijuana, even in states that have legalized it.

“While FinCEN (the Financial Crimes Enforcement Network) has issued guidance that indicates banks can provide services to marijuana businesses, provided they comply with the law and comply with FinCEN guidance, there is just a lot of risk involved from a regulatory compliance perspective,” said Julia Dempewolf, an attorney at the Boston law firm Goodwin Proctor.

A peer at another law firm seconded that notion. “Regulators at the federal and the state levels expect them to have more robust diligence and monitoring programs in place,” said Andrew Bigart, a Washington attorney who works for the law firm Venable and advises financial institutions. 

Most don’t think the extra work is worth it, he said.

The workarounds 

To fill the gaping void left by big banks, small credit unions have opened accounts for marijuana companies, and a cottage industry of payments companies cater to the marijuana industry.

“There are a number of banks and other financial institutions that are providing financial services to marijuana-related businesses, but in my experience they are typically doing it under specific and tightly controlled compliance programs,” Bigart said.

That means these companies need to find a way to move money without relying on traditional banks or credit cards. 

“Some of them will accept Paypal and Square, but with those a lot of them get booted off,” said Kalle Radage, founder of Clearly Payments, a Vancouver-based payments processing company that includes marijuana sellers in the United States and Canada among its clients. “They do it for a couple of months then get kicked out.”

A representative of Paypal did not respond to messages seeking comment. In an email, a Square spokesperson said that accepting payment for marijuana violates the company’s terms of service.

Payments companies that work with the marijuana industry use a number of strategies, including cashless ATMs, or putting money on a gift card that can be used like a debit card.

“Pretty much everything in the cannabis industry is a workaround,” added Aaron Ranka, chief revenue officer for Dama Financial Solutions, a California-based company that provides banking and payments services to marijuana sellers.

It also means the payments companies that service the cannabis industry need to spend more time on legal issues.

“They have to complete significant due diligence and compliance checks,” said Aaron Smith, CEO of the National Cannabis Industry Association.

Software company LeafLink helps move money from one cannabis company to another — a dispensary, for example, needs to pay the company that grew the marijuana, and the company that processed it. The firm has a legal department, “and they are looking at a lot of things pretty rapidly,” said Rodney Holcombe, the company’s director of public policy. “This industry is evolving very quickly and the fact that it's a federally illegal substance makes it a bit more difficult to navigate.”

It also means cannabis companies have to pay more for payment services. The fees paid by the merchant on an average credit card transaction range from 1% to 3%, the bulk of which goes to the card issuer. Payments companies that cater to the marijuana industry take a much larger slice of the purchase, with some charging up to 6%, Radage said.

“You’ll find a service provider, but you’ll probably be paying significantly higher rates,” he said.

What can be done about it?

Cannabis companies are looking to Congress and the federal government for relief from the cumbersome payments processes.

The Drug Enforcement Administration considers marijuana a schedule one drug, which means it has the potential for abuse and has no medicinal value, but the agency is in the process of reclassifying marijuana as a schedule three drug, the same category as drugs like codeine, which are not available without a prescription. The change would let the FDA approve marijuana as a prescription drug, but advocates for the cannabis industry say the move would be largely symbolic, at least at first.

Major credit card providers, for example, don’t want to participate in an industry that still runs afoul of federal law, Ranka said. 

“Rescheduling, while it's very much needed, isn’t going to do anything to the regulations for Visa or Mastercard,” he said.

Medical marijuana companies will continue to run afoul of federal law until the FDA approves the drug for medical use, he said.

A Mastercard spokesperson said in an email that marijuana purchases are not allowed on the card company’s network because the drug is illegal under federal law. A representative of Visa did not respond to a message seeking comment.

The industry sees the proposed Safer Banking Act as a more comprehensive solution.

While the bill would shield financial institutions that work with licensed marijuana companies from criminal penalties, it wouldn’t compel those institutions to take on the marijuana industry.

The bill’s prospects are uncertain. 

The Senate Banking Committee approved the legislation in September and Senate Majority Leader Chuck Schumer lists the bill as a priority, but Senate Minority Leader Mitch McConnell and a handful of other Congressional Republicans are largely opposed to any bills involving marijuana. In an election year, with numerous must-pass bills on the table, it’s not clear if either the Senate or the House of Representatives will bring it to a vote.

Representatives of the House and Senate Leadership either did not respond to messages seeking comment, or wouldn’t talk on the record.

A spokesperson for Ohio Senator Sherrod Brown’s office provided a brief statement saying the lawmaker would work with the Senate leadership to bring the act to a vote in the full Senate.

In the event that the bill does pass, change won’t happen overnight, Ranka said. “The pace at which the government moves, it will take a lot of smart people a long time to figure out how to make this fair for everyone. Until all of that happens, we’re still going to operate the way that we operate.”

Smith said he is hopeful the bill will be passed some time this year. However, for relief from the financial hurdles in the industry’s path, industry advocates said they continue to urge Congress to regulate marijuana like alcohol and tobacco. Congress long ago granted those substances a special category outside of the drug scheduling system, making them legal to sell and transport.