Cannabis is a nearly $34 billion industry, though it’s still only legal on a state-by-state basis and mostly unbanked — giving rise to an entire industry dedicated to providing financial services until national regulation finally emerges.
One firm, Dama Financial, is accelerating a strategy designed to bring mainstream banks into the cannabis business, offering the enticement of deposit and payment revenue while contending it can take the complicated compliance burden off of banks’ hands. It faces competition, both from other weed fintechs and the reluctance of its target market.
Envisioning itself as the “weed department” for banks, Dama’s strategy is to operate within the banking industry, tracking changes in state laws to ensure banks are operating legally and not inadvertently violating card network rules.
“The risk tolerance of banks is on a spectrum just like everything else,” said Pat O’Boyle, CEO of Dama Financial. “You have banks that are really conservative, [and] banks that are more progressive or more fintech-oriented.”
O’Boyle became chief executive of the four-year-old Dama earlier this year, charged with boosting the company’s presence among banks. O’Boyle was the owner of payments firm MSP, which was founded in 2003 and sold to Talue Pay in 2021, where O’Boyle stayed on staff until joining Dama. He also worked at Accenture as a partner and consultant for about 12 years.
“It always feels like this industry is operating in a gray area,” O’Boyle said of cannabis dispensaries. “We’re trying to make that more tolerable.”
Dama, which has processed about $3 billion in cannabis payments in the past four years, works with four banks that O’Boyle would not name. Dama has set a goal to grow that network to 30 in the next 18 months.
Dama offers payment processing, payroll and merchant credit to cannabis dispensaries, among other services. Dama also sells banking as a service, positioning itself as a compliance, technology, payment processing and support organization for banks, taking a fee out of the bank’s transaction volume. Compliance risk is the main challenge that is keeping mainstream financial institutions out of the weed business, O’Boyle said.
“There’s no lack of interest in cannabis, just a lack of understanding,” O’Boyle said. “How do you deal with Know Your Customer and anti-money laundering? How do you make sure you’re following the Bank Secrecy Act and FinCen guidelines?”
The opportunity for Dama comes from slow progress on the SAFE Act, which has been in Congress for years but has not passed. The legislation, which would legalize weed nationally, is still moving slowly.
“What’s interesting here is how little has changed in the last few years despite shifting public attitudes and political interest from all sides in terms of regulatory changes,” said Gilles Ubaghs, strategic advisor for commercial banking and payments at Datos Insights. “Until the SAFE Banking Act passes, which as a reminder was first introduced a decade ago and passed by the House four years ago, things are at a stalemate.”
Despite its inconsistent legal status, cannabis is big business in the U.S.
The nation’s legal cannabis sales are on pace to reach $34 billion in 2023, up from $30 billion in 2022, according to the MJBiz FactBook. MJBiz estimates there is a 1:2 ratio of dollars spent on cannabis and the broader economy, as workers in the cannabis industry spend on other products and services.
“Banks are looking for deposits and cannabis is an area that is rife with potential deposits,” O’Boyle said. “It’s a huge and growing market. So how can banks benefit from that while insulating the cannabis business [and] not taking on extra workload?”
The potential revenue has sparked early interest from a few banks, and a partnership market for fintechs that can mitigate compliance and other risks on the banks’ behalf. Dama is competing in a market of cannabis-oriented fintechs that attempt to offer digital payment alternatives to a cash-heavy business in the uncertain legal environment. Instabill, for example, offers a variety of merchant services in high-risk categories, including legal weed. RiskScout partners with banks to onboard merchants and set up payments and compliance, including clients in the cannabis business.
There is a chance for smaller banks to take advantage, according to Ubaghs.
“The tricky spot here is the rules on interstate cannabis means regional and community banks [that are] active exclusively within limited geographies, actually have the most opportunity to service this market,” Ubaghs said.
But being smaller, these banks have the least resources to manage the heavy regulatory and compliance considerations of banking cannabis. “That need for constant reporting in particular means it’s an ongoing burden and not something that’s easily automated,” Ubaghs said.
The challenge in getting banks to support cannabis payments stems from the general risk-averse nature of banks in all areas, according to Yuri Vanetik, general counsel of Golden Ark, a firm that uses blockchain to create a virtual currency to support legal cannabis purchases.
“Banks are highly risk-averse and would rather lose clients and potential relationships to avoid penalties and bad press,” Vanetik said. “The notion of compliance has become less driven by implementation of protocols established by legislation. It has become more of a liability mitigation strategy.”