An Ohio state Senator recently made some noise by proposing a closed loop payment system for marijuana businesses. The story gained some traction and has been reported on as a potential solution to the marijuana industry’s banking woes. The proposed system would involve a stored value account that various marijuana businesses and consumers would have with the state of Ohio. Customers would transfer money into the account and pay with a card or app, similar to Paypal or Google Wallet. All payments among cannabis retailers, producers, and testing labs would take place within the closed loop stored value payment model. To make payments outside of that small group, for example to pay employees or the cable bill, the state of Ohio would write checks directly and deduct the balance from the online account. While this system sounds promising, and it definitely brings some benefits, it also has a number of drawbacks and doesn’t resolve most of the problems that lack of banking access brings to the cannabis industry.
Having a business bank account provides two main services in any industry: secure storage of capital and access to standard payment systems. These really are two separate and distinct issues. Secure storage of capital is nice to have, especially for businesses that have high working capital needs. Maintaining large amounts of cash is difficult, risky, and expensive. Bank accounts come with federal deposit insurance, but insuring the safety of large stores of cash is incredibly expensive.
It’s worth noting that the banking problem is not the same in every state. Washington and Colorado have a growing number of banks and credit unions that are willing to serve the industry, so much that the vast majority of marijuana businesses in both states have standard bank accounts. Even marijuana businesses in California tend to have bank accounts, even though the state’s cannabis laws may not rise to the regulatory level that the Department of Justice wants.
The payment issues, however, are the primary problems where solutions are needed in those states that have cannabis business regulations but don’t have broad access to banking. Businesses need a way to pay their employees, pay their state and federal income and payroll taxes, and pay their bills to all the standard service providers. Attempting any of those payments using cash is logistically challenging at best and downright impossible at worst.
Back to the Ohio proposal. The benefit is that it solves the payment among industry members that are in the closed loop system entirely. It even partially solves the problem for those outside the industry, as employees and other outsiders would receive checks issued by the state.
On the other hand, there are big drawbacks. First, it will be expensive for the state to set up. Efficient stored payment systems come with real up-front costs to the system manager. The likely way that the state will be able to pay for the system would be to mandate its use across the industry and charge subscription fees or transaction fees. Even if banking became more broadly available in Ohio, the state would want to maintain the model long enough to receive sufficient fees to pay the on-boarding expenses. Timing of payments made to those outside of the closed loop is an issue too. The state of Ohio would not simply cut a check in any amount to anyone that a member of the closed loop system demanded. There would have to be some level of vetting at the state level. And that vetting would be a massive slowdown in how quickly payments are processed. The potential payment lag would make it tougher to do actual business with those outside of the industry.
For outsiders to the industry, though, the transparency of it all would also be off-putting. Private marijuana businesses are getting used to a level of transparency that other industries would be shocked by. It is easy to find broken down sales data for businesses throughout the marijuana industry, whereas that same information would be highly proprietary in other industries. But even in Colorado and Washington, it is possible to maintain some secrecy on how much money you are paying to your landlord, business consultant, and other outside payees. Those same payees may not be so willing to participate if they knew that the state of Ohio would know exactly how much they are getting and on what schedule. Depending on the state’s public records laws, there may be no way to keep all of that information from going fully public.
And the fact that the outside payments are made from the state of Ohio still wouldn’t make it fully legal for those outside the industry to receive the payments. They would still know that the source of funds is sales of cannabis. The calculus under federal anti-money laundering laws wouldn’t change.
So yes, we applaud creative solutions to the challenges brought by cannabis’s federal illegality, and the proposal in Ohio does solve some issues that lack of access to banking brings to the industry, but it brings a whole host of issues as well. A better solution is probably for Ohio’s Division of Financial Institutions, within the state Department of Commerce, to make clear to the various state-chartered banks and credit unions that it will work with them to provide services to marijuana businesses. Even though the larger institutions aren’t willing to risk providing services to the industry, the smaller institutions probably will be willing to take that risk, as long as they feel that the state is backing them up.