The legal cannabis industry is massive in the U.S., reaching $13.2 billion in 2022 and continuing to grow, according to research from Grand View Research.

Despite that fact, it is still illegal on the federal level and the industry has struggled to deliver payments options to customers.

Most recently, Mastercard officially banned dispensaries from processing debit card transactions.

"The federal government considers cannabis sales illegal, so these purchases are not allowed on our systems," Mastercard said in a statement. "In accordance with our policies, we instructed the financial institutions that offer payments services to cannabis merchants and connects them to Mastercard to terminate the activity. Our rules require our customers to conduct lawful activity where they are licensed to use our brands."

Despite the legality of cannabis dispensaries in many states, the fact that businesses like Mastercard are federally regulated makes this move obvious, Snowden Stieber, senior regulatory analyst at Simplifya, said in an email interview.

"The legality of a cannabis transaction in certain U.S. states is not relevant to major credit card networks like MasterCard, which are federally regulated businesses with federal requirements related to money laundering and anti-fraud provisions. Given that cannabis transactions are still federal crimes, networks and institutions that wish to avoid the headaches of potential actions or investigations from regulators and law enforcement will establish hardline policies to prevent such activity," Stieber said.

This is only the latest issue impacting cannabis merchants. Last year "cashless ATMs" were by and large shut down. These machines allowed customers to purchase cannabis with a debit card at an ATM, but these machines made it look like cash withdrawals were happening in different locations, which goes against money laundering regulations.

"PIN debit purchases and cashless ATMs were both attempts to create, in effect, compliant transactions on a payment network that did not identify the specifics of the transaction. The payments would be designated as an ATM disbursement or a PIN debit withdrawal, instead of a particular exchange between two known entities (the customer and the dispensary). This arrangement would fail to identify the relevant parties in the transaction, which violates particular Know Your Customer requirements imposed by federal law, and would also fail to identify that the transaction involved cannabis, which violates requirements of the Bank Secrecy Act," Stieber said.

As a result of these issues, dispensaries will have to utilize cash for its business operations, along with Automated Clearing House to allow direct debits from bank accounts.

"After the demise of cashless ATMs and (now) PIN debit solutions, the best and most assuredly-compliant options will be returning to cash and the Automated Clearing House (ACH) network. Cash remains the top choice, but obviously carries many additional costs and challenges. ACH payments are still available to dispensaries, and will likely be the primary vehicle for B2B transactions within the industry, but will hardly be an easy option for consumers," Stieber said.

However, cash brings a large amount of risk. For one, the employees will have to count, store and deposit the cash, and having that much money on the premises carries a greater risk of theft.

"Increased amounts of cash on a premises heightens the risk to the facility, staff, and transport. Without electronic options, more cash will need to be handled, counted, stored, and deposited by hand, and will have greater risk of error," Stieber said. "Dispensary employees who can only be paid in cash will face increased risk of danger and theft. For some locations, it's possible that further investments in security for storage and employees will be needed."

In order to handle this cash, dispensaries can make use of tools that can keep cash safer, such as smart safes, which can not only keep cash safe but automate counting, saving employee time.

"Cash is still king, so cannabis-related businesses will continue to need innovative solutions to make working with cash more efficient in their operations, solutions such as smart safes," Patrick O'Boyle, CEO of Dama Financial, said in an email interview.

However, even with these solutions, going cash-only comes with a cost. For one, consumes will likely have smaller basket sizes while paying in cash, O'Boyle said. In addition, limiting payment options will impact the customer experience.

"Requiring your customer base to first stop at an ATM or their institution and withdraw cash will always strike a harsh note for the cannabis customer experience," Stieber said. "That said, one hallmark of the first decade of legal cannabis has been a peculiar shopping environment for everyone — from the beginning, both customers and businesses have been forced to jump through various hoops in order to conduct compliant transactions, so another decision or adjustment in 2023 is hardly going to shock the system."

In the meantime, O'Boyle said the SAFE Banking Act should be passed. The act would provide federal protections to banks that offer financial services to cannabis businesses. However, the act has not moved forward in Congress, according to a report by The National Law Review.

"Cannabis-related businesses face some of the most stringent underwriting we have seen in any space," O'Boyle said. "From our view, CRBs have accepted, risen to the challenge of, and been measured against the most difficult standards in the economy. We believe the burden is now on the federal government to accept the responsibility of acknowledging CRBs as legitimate and allow access to financial norms."

In the meantime, cannabis dispensaries will have to continue to rely on cash, as it is the most direct payment method, compared to other available methods.

"Although cash may seem unsexy, and the costs of handling it can be great, it is currently the most reliable option for operators," Stieber said.

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