by Dwain Hebda
Back in the good old days, – like, six years ago – all you needed to thrive in the cannabis business was a remote patch of ground, a little farming know-how and the instincts for staying one step ahead of the law.
Legalization changed all that, and in states where medical or recreational marijuana is allowed, cultivators and dispensaries live under a tsunami of regulations and paperwork to stay in business. Not to mention the rudimentary elements of running a business that other firms don’t give a second thought to.
In the weed world, just opening a bank account is next to impossible without substantial cost, let alone providing customers the opportunity to pay in ways other than cash. That is until Brian Bauer took notice.
“This is a problem that costs the industry so much money,” he says. “Out in Colorado today, it’s $3,000 to $5,000 a month for a bank account. That’s what these businesses are paying.
“We also started to discover that there were public safety concerns involved with it as well. Once it becomes live and transactions are occurring, the mature market here in Arkansas is going to be about $150 million in annual sales. If there’s not a banking solution for that and banks are turning people away, then people have to find alternative solutions.”
He adds, “In other states, oftentimes that involves storing it at their residence or their business in these big safes. So there’s often crime that’s associated with that. That’s not because of the product they’re dealing in, but because criminals know that they have large, lightly-secured cash reserves.”
Bauer launched MediPays in 2017 to provide a more accessible, cost-effective means for the cannabis industry to handle its business. Joined by a corps of professionals with backgrounds in banking, technology or both, the company has crafted solutions to help solve the industry’s banking problems.
“As Brian and I sat down, we started to really look at this problem of how do we get around the cash, and why is there cash,” says Greg Ellis, MediPays chief technology officer. “What we saw was an industry that had created a lot of innovative ways to deal with the cash, but nobody had come up with any solutions to make the cash just not be in there to start with. Our approach was let’s don’t try to treat the symptoms; let’s try to cure the disease. The disease is the cash.”
Fortunately, Little Rock is a hub for financial services innovation, and the entrepreneurs had no trouble finding expertise to help build its software product or even sources of funding and development. The result was a technology platform that satisfied the demands of both regulatory and market audiences.
“We used Arizona as a proxy for Arkansas because we felt like it was a pretty good representation of Arkansas,” Ellis says. “We did a lot of idea formation and then destruction. The biggest thing we realized was that electronic payments are practically all done via Visa and MasterCard payment rails. Since we weren’t allowed to use those rails, we just decided to come up with our payment rail solution which evolved into our own proprietary mobile wallet system.
The compliance piece was particularly complicated for several reasons. One, no matter what states decide, marijuana is still classified as an illegal substance by the federal government. Unable to swat down states’ decision to legalize the substance, the feds do the next best thing, which is flexing their regulatory muscle on banks who would otherwise love to service an industry generating hundreds of millions of dollars annually.
“All banks at some level are federally regulated,” Bauer says. “At some level, they have at least an FDIC regulator or somebody from the federal level coming in and making sure that they’re meeting compliance obligations, even if they’re state-chartered.
“In 2014, the Treasury Department issued some guidance which said if you know the source and destination of every dollar as a financial institution you can accept deposits (from dispensaries). It wasn’t a safe harbor, but they could meet their bank’s secrecy act obligations by meeting this compliance standard.”
Providing a compliance solution proved a lynchpin for the company’s growth, landing it a bank partner in February and leading it to clients in Arkansas, Oklahoma and Illinois. These milestones continue to open doors for MediPays.
“Once we built a compliance engine to make that work and then we had a bank willing to work with us, all of a sudden, we’re able to talk to debit card processors,” Ellis says. “Now they’re like ‘We would sign you guys up to sub-debit.’ Now we can bring a debit solution, mobile wallet, full-service banking solution.”
Like all success stories, MediPay’s includes more than a pinch of good fortunate over the past 14 months, even if the founders didn’t always recognize it as such. When Arkansas’ permitting process ran into its current snarl of delays, company leadership didn’t see it as the blessing in disguise it ultimately proved to be.
“Our initial plan solely relied on Arkansas first and only, then once we solved that, expand to state number two, then state number three to prove that we’ve got scalability,” Ellis says. “We were very disappointed when the permitting process took so long to get the first five cultivator licenses issued. But in hindsight, that did give us more time to refine the platform and solve everything the way it really needed to be solved. It also gave us the impetus to go ahead and start pushing out in other states.
“So now we’re in three states at once, and I get the feeling sometimes it literally is exploding in front of our faces,” he adds. “It’s exciting and scary, but mostly exciting. It is really flourishing beyond what we expected.”