This exposes these SMBs to all types of risks, from security to cash flow management, and is the direct result of banks and credit unions (CUs) being unwilling or unable to provide financial services to these companies.

But this may be an over-simplification of cannabis firms’ struggle to access adequate banking services, according to Hypur Chief Revenue Officer Tyler Beuerlein.

“This is not a payments problem for the cannabis space,” he told PYMNTS in a recent interview when discussing the market’s notoriety for being cash intensive. “This is a banking problem.”

At the same time, however, Beuerlein said the banking problem has largely been solved.

“The majority of the industry, despite what’s been published in the media, is banked,” he said.

The reality of marijuana businesses’ struggle to access the financial services they need is a complicated one, particularly considering the fluctuating regulatory climate at both the state and federal levels. Legalization at the national level is coming eventually, said Beuerlein, but that doesn’t mean banks’ willingness to service firms in this market is an inevitability.

A Gradual Comfort Level

In previous years, Beuerlein said, financial institutions (FIs) weren’t interested in exploring how they could work with RegTechs like Hypur and other third-party players to step into the cannabis banking sector.

“Financial institutions didn’t necessarily want to acknowledge whether or not they were banking the state-legal cannabis space,” he said. “That appetite was not there in the beginning.”

Over time, however, banks and CUs have begun to explore how technology and collaboration can position these institutions in a competitive space and fill the banking gap that had plagued the market for so long. This has led to the ability for legal cannabis businesses to secure certain key financial services and products — most notably, the ability to accept electronic payments from consumers, while digitizing their wholesale and B2B payment processes through direct bank transfers.

Cash continues to play a vital role in the space, however, even with rising bankability.

High-Risk Reputation

According to Beuerlein, the stickiness of cash has more to do with the industry’s reputation than it does with its ability to get banked.

“We’ve done extensive studies on consumer behavior, and there’s still a bit of a stigma with cannabis,” he said. “There’s always going to be a cash-intensive nature with that, and that’s going to create issues in the long-term for these businesses.”

This categorization of the marijuana market as high risk is also likely to continue to act as a barrier for companies in the space that seek financial services and products beyond the basics, even if and when federal legalization occurs.

“We’re still years off, but when it becomes federally legal, this will still remain a high-risk industry for banks and credit unions,” said Beuerlein, who pointed to the heavy regulatory compliance burden that FIs must carry if they’re going to expand their offerings to this market.

The current struggle for SMBs of all markets to secure federal relief in the form of grants and federal loans is just one of the latest examples of the ongoing challenges for SMBs in the segment, including those that have a bank.

The first Paycheck Protection Program (PPP) funding under the CARES Act excluded legal cannabis companies from securing funding. Lawmakers are currently debating whether to allow marijuana SMBs to obtain funding in the next relief package, according to reports.

An Evolving Market

Federal legalization is likely to open up some financial services doors for the cannabis market, with Beuerlein noting it would open up the branded CUs, FIs will continue to struggle to provide services beyond holding deposits and facilitating payments.

Beuerlein said it will be imperative for these FIs to collaborate with RegTechs, particularly as interest among these financial service providers to introduce factoring and other financing products for cannabis firms grows.

“There are some institutions that have been banking this industry for years, and they have started to get comfortable with lending to the industry,” he noted. “These institutions are few and far between.”

As a result, as the regulatory landscape continues to develop, non-bank alternatives will also see an opportunity to step in and fill the gaps for financing and other services cannabis businesses continue to need.

And while the coronavirus pandemic has inflated the struggle for many of these firms to access loans, it has also accelerated the adoption of contactless and mobile payment technologies that could move the needle on marijuana’s cash dependency. As demand for electronic payment services, loans and other financial products deepens, FIs will have to decide how to balance the compliance burden with the revenue opportunity of addressing an underserved market.