We are providing a series of fintech related presidential election discussions leading up to November 5th. This week we are following up on recent comments made by both presidential candidates regarding the prospect of decriminalizing the cannabis industry at the federal level. One way or the other change is in the air and consequently we are opining on the potential differences under the respective administrations to the fintech sector serving cannabis businesses.
High-level thoughts
Opposite Day. Per our previous newsletters, a second Trump administration is likely to continue a regulation light, pro big business approach, consistent with its previous term. On the other hand, a Harris administration would likely impose a more restrictive interpretation to current and future regulation (including fintech). However, on the topic of cannabis, Trump is potentially leaning towards a regulatory switch to allow universal medicinal use in every state and in his words to pass “common sense laws” (we don’t know what that means). A Harris administration would most likely support the least restrictive cannabis laws (hence opposite day).
Let us explain.
Vice President Harris has listed “legalize recreational marijuana” on her top priorities to-do list she recently mentioned on social media….“Congress to ensure that the safe cultivation, distribution and possession of recreational marijuana is the law of the land,” according to her agenda.
Cannabis Business Times stated “These 2024 campaign promises come amid President Joe Biden’s administration’s current rescheduling effort to reclassify cannabis as a Schedule III drug under the Controlled Substances Act (CSA). That effort hinges on the Drug Enforcement Administration’s (DEA) administrative law judge hearing scheduled for after the election. Until then, the issuance of the DEA’s final rule to potentially align with the Department of Justice’s proposal for a Schedule III listing remains grounded.
Still, both presidential candidates have embraced federal cannabis reform as part of their campaign platforms for the first time in a U.S. race for the White House. Republican candidate Donald Trump said on Truth Social, ‘As president, we will continue to focus on research to unlock the medical uses of marijuana to a Schedule 3 drug, and work with Congress to pass common-sense laws.’
According to Truth Social “Trump confirmed that he will be voting in support of Amendment 3 this November in Florida—to legalize adult-use cannabis in the Sunshine State—and that he plans to work with Congress to provide state-licensed cannabis businesses access to traditional banking services if he’s elected to a second term as president.
‘Reclassifying cannabis is smart science, smart policy, and smart politics,’ he said in a public statement. “With last night’s announcement by former President Trump, both major party candidates support moving cannabis down to Schedule III. There should be no further delay.
‘As I have previously stated, I believe it is time to end needless arrests and incarcerations of adults for small amounts of marijuana for personal use,’ Trump wrote on Truth.”
Impact on Business
Cannabis is legal in 38 of 50 states for medical purposes and 24 states for recreational use. These domestic state authorized dispensaries are generating annual revenue of $43 billion and expanding at a 3% CAGR.
None the less, dispensaries have relatively few choices for processing electronic cannabis payments. Until the regulatory framework clears up, payment processors have largely opted out of that greenfield opportunity. Processing credit cards for and accepting cash deposits from cannabis dispensaries is not permitted under federal law because cannabis is still classified as a controlled substance. The card brands and federally regulated banks do not participate in this sector. Some dispensaries have resorted to placing an on-premise ATM and have hired an armored car service to deposit cash in a secure facility. On premise safes are also common.Technically speaking community banks may be allowed to accept cash deposits in the same states which have passed regulation to allow dispensaries. But fear of violating KYC/AML statutes and the possibility of a sudden shift in regulators sentiment has limited financial institution participation to date. That may be changing.
Specially built third party service providers do enable debit card and cash transactions which include know your customer/anti money laundering (KYC/AML) capabilities. If more favorable laws are passed, which now seems likely, the variety of payment options should expand which may lead to purchase lift of 30% according to industry participants. Currently if we assume a 2.5% merchant discount rate (MDR) that could equate to a $1 billion credit card processing service revenue opportunity. That baseline number would rise if more states participated and the average ticket price also expanded.
