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Digital Payments and Banking Access for the Cannabis Industry

Jul 13, 2021

In this episode of CannaCast, Partner and leader of EisnerAmper’s Cannabis and Hemp Group, speaks with Ashley Elsner, Co-Founder and COO of Artery Pay about required banking compliance and digital payments for cannabis transaction.


EisnerAmper: Thanks for tuning into this episode of CannaCast. I'm your host, EisnerAmper's national cannabis and hemp practice leader. Today we're going to discuss ArteryPay with the COO and founder, Ashley Elsner. ArteryPay unifies payments and required banking compliance into a single system, so that cannabis businesses and banks are able to work together easily, efficiently, and transparently. Ashley has a BA from Yale and an MBA in her law degree from Northwestern. Thanks for joining me here today, Ashley.
Ashley Elsner: Hi, thank you so much for having me

EA: Ashley, tell us a little bit more about ArteryPay, what it is and what it can do.
AE: So ArteryPay functions very similarly to Venmo. We do payment processing for cannabis, as well as cash digitization, and we have cannabis banking compliance built directly into our transaction platform. So everything is clean, everybody knows what's going on, and it's very, very easy to use for consumers.
EA: How did you first get involved in the cannabis space?
AE:Well, I'm actually a cannabis patient. A number of years ago, I received an injury that was very bad, and ended up with complications that included a very severe and permanent pain disorder. As a result of that pain disorder, I suffered for a number of years. And then my father, who was a neurologist, had taken a look at the studies and that it conclusively does in fact work for my particular pain condition.

And so I tried it, and I was pain-free for the first time in 11 years, something that I wasn't able to obtain from pharmaceutical intervention. So I was absolutely sold based on that. And as a result of that, I'm incredibly passionate about making sure that cannabis does not have legalization derailed from things that they can't see coming.

For example, financial providers who are providing products in a fraudulent way, or causing them to money launder. And unfortunately, with my background in financial law and financial operations, I was able to tell that a lot of the systems that were being provided in the cannabis space were not legitimate. And so I felt compelled to actually enter the space, and make sure that they were going to have access to legitimate financial services.
EA: Ashley, currently, what are banks required to do, to be able to participate in the industry?
AE:There's a much higher burden on banks that want to work with the industry. So one of the added burdens that you have to take care of when you are dealing with cannabis businesses is the Cole Memo priorities. This is a list of priorities that was actually incorporated into the FinCEN guidance, that's the Financial Crimes Enforcement Network for the Department of the Treasury that all financial institutions are required to report to regarding suspicious activities.

So Cole Memo amplified the types of suspicious activities that you're supposed to be looking for. And in addition to that, there's also substantial added reporting burdens. Because every single transaction in the cannabis space is required to reported to FinCEN. Those are known as a limited MRB suspicious activity report. And those suspicious activity reports are required for everything that is frankly, not actually suspicious, but it comes from the cannabis industry.

So that impacts basically everything that comes into the industry, as well as goes out. And that's something that people don't quite recognize. It's a substantial reporting burden. It amplifies that reporting burden on a financial institution. One of our friends who's a credit union actually, out of Boston, even gave the numbers. Saying that of their 55 cannabis accounts and 30,000 normal, non-cannabis accounts, that 90% of their suspicious activity reports are for those 55 accounts.

So you can understand how they would have to add a ton of people to the back office on the compliance team, have them specially trained to work in cannabis because the Cole Memo priorities are a more aggressive version of anti-money laundering, and have very specific law enforcement goals. And that's why it's very difficult for banks to engage in the industry.

One other thing that they have to add in are controls that actually prevent the crossing of state borders. And that's something that, from a technology perspective, almost none of the banks and credit unions that work with the cannabis industry, or that could work with the cannabis industry, have in place. Because most of the financial systems are based on a national model, versus a state-based model.

So even the federal reserve board does not have places to get cash from the state-based industries in every single state. They've only got 12 places for you to deposit your cash. So these are things that you have to think about as a bank, and what you're willing to look at from a risk perspective, and what you're you're comfortable dealing with.
EA: So when a bank says they're precluded from working in the industry, that's just not right, that's not true. They just decide not to get involved in the industry?
AE:Correct. It's a cost benefit analysis. It is not a legal preclusion, it is a cost benefit analysis. You can absolutely do it with adequate policies, procedures, and controls, but they are very specialized to cannabis. And the fact is, they don't really apply to any other industry because you don't have other industries that have that federal prohibition that gets triggered when you cross state lines versus state legal industries. So you can understand how their position would be.

But also in addition to that, the policies and procedures that are really required, you have to make sure that everybody in your institution is following them. And it can be very, very challenging for a bank to actually be able to completely control what's going on, particularly on the sales side of their teams.

There's a lot of autonomy on the relationship management side. And unfortunately, in the very early stages of cannabis legalization, think, think back to like '96, when California did their first version of legalization with medical legalization. There were retail relationship managers who convinced cannabis businesses that, as long as they hid what they were doing, it was okay for them to come in and bank.

And actually, no, that's not true. You cannot misrepresent yourself to a financial institution because that's fraud. And that's the thing, the compliance people did end up catching it. It ends up also going on the record of these particular cannabis businesses, that they were engaged in trying to defraud a bank. That's now on your record, and that ends up being on the terminated merchant file.

Which is, it's something that's shared within financial institutions so that they can make sure that fraudulent activity is kept to a minimum. So it's some very, very salty stuff going on there. It's very difficult to manage compliance in a bank. And it's true that it's very easy to get out of compliance in a bank.
EA: It does seem that there are more and more banks that are backing the industry of late. What kind of banks are currently backing cannabis companies?
AE: It's primarily state banks and credit unions. They are usually state chartered. That's usually a better bet. I am not really aware of any regional banks, certainly not any national banks, really, working with the space. And that, again, has to do with the cost to implement systems that would actually be able to stop transactions from crossing state borders.

Your best bet when you're looking for cannabis banking is to go into your local bank, and be honest and open about the fact that you need a cannabis-compliant bank account and see if they will work with you. If they don't have the program, you should not actually be keeping your business with them. They need to have a compliant, open, legitimate cannabis banking practice.
EA: Ashley, I know somebody who bought cannabis in a legal state using his American Express card. Is this legal?
AE:No, it's not. American Express, as well as pretty much every single other branded credit card, or branded debit cards, or branded store cards, anything that has a Visa, American Express, MasterCard, Discover logo on it. You cannot use those for cannabis because these companies have said they will not work with the cannabis industry.

So any time somebody is processing a credit card, they're doing so illegally. Now, they typically do so through various forms of miscoding. The most recent variation in that is to be coding those as cash when it is not. But you can basically guarantee that if they are currently processing branded credit cards that are already in your consumer's wallet, that they're doing so illegally.
EA: Ultimately, is credit card processing very important to the industry?
AE:No, actually, it's not. The way that we do processing is via ACH. ACH is the Automated Clearing House. It is basically the bank's system. So it's not an outsourced credit product that requires financial underwriting. It is literally a direct access to your bank account. And what that does is, it is legal. The bank knows that we work with cannabis and also has their own cannabis-compliant banking program. So everything is kosher from there.

There's an agreement between us to actually provide these services in the states that we're licensed to provide it in, and are legally allowed to provide it in. FinTech, financial technology, provides much easier and potentially better access, and in a lot of countries has already replaced the credit card system.

And, in fact, cards themselves are less secure than using something like your phone, that has incredible privacy settings, and actually has better protection than somebody potentially lifting your wallet, or you accidentally leaving it at a bar, or dropping it out of your pocket when you were at a store, or something like that.

So credit card processing, in terms of the product itself, is not important. That's consumer credit. It doesn't matter. And in terms of the processing itself, when it's legally available I'm sure that it will be very exciting for people. Because from a consumer perspective, it's nice not to pay things up front. But realistically, credit card processing itself, and even card processing is not necessary for business, even in the go forward. Not just for cannabis.
EA: The two big pieces of legislation that are often discussed tend to be the MORE Act and the SAFE Banking Act, which one is a real possibility of taking place, and which do you think is a real possibility of taking place?
AE:That's a great question. In all honesty, I don't know how much of a priority cannabis legalization is for the Biden administration during this two year period where the Democrats have control over both houses. It's an important window. I'm also a political science major, so generally speaking the trends in political science show that midterm elections for a president tend to have an impact of driving towards the other party. That's just a statistical expectation, is that they'll probably lose seats in one or both houses. And obviously, we've got some razor thin margins in the Senate. And so the expectation is that the Senate will probably go back to the Republicans.

And once that happens, this two year period where Biden can get a lot of his priorities green-lighted through Congress goes away, right? So they have a focus on trying to get a lot of things that have to do with social justice, and to do with equalizing disparities among different groups, and trying to normalize behaviors, and get everybody back to understanding that rule of law still applies, and things like that.

There's a lot of priorities right now that are getting pushed through. And the question is whether MORE Act and SAFE Act will be on the priority for Biden to actually try to get Congress to green light and push through. I don't know that these are priorities that are as important to as other ones. I think that the MORE Act may have a better chance than the SAFE Banking Act because I don't think that the Biden administration understands the importance of safe banking to allowing financial infrastructure to flourish for the cannabis space.

And then I also think that the MORE Act may have a chance, because there are discussions of social equity and intentions around social equity that have been incorporated into the bill. That does not mean that it will pass during the next two years. I think both of them have a limited chance of actually going all the way in the next two years.
EA: Ashley, how important was the Jim Patterson, former CEO of Eaze, How important was that case?
AE:That's an incredibly important case. And I want to add something to that because the federal prosecutors are recommending to the co-conspirators a $156 million judgment. That is huge. That will wipe out anything that they might have gotten from this scam.

But you have to understand, this case was a shot across the bow at the cannabis industry regarding their financial practices and corporate governance practices. And it is something where they should expect additional enforcement to come down, not just enforcement actions, but this is criminal prosecution of criminal behavior. Messing around in the financial space, when it comes to cannabis, is a horrible idea. It's a horrible idea.

You want people who are providing something super clean, that they can prove that everybody knows what's going on, and everything is clean. And not these in quotation marks "work arounds." Now I'm a financial lawyer and I'm just going to state on the record for the facts, there's no such thing as a workaround in the financial industry. There is no such thing.

The financial industry has been around for thousands of years. The American government, the US Federal government, is actually very, very good about catching bad actors in the financial space. They take it very seriously, and the Biden administration is beefing up the regulatory regime that was sidelined during the Trump administration. I would expect that to continue.

And as legalization approaches, the cannabis industry should expect that their corporate governance and their financial practices will come under heavy, heavy scrutiny. And particularly the multi-state operators who need to be very, very careful about how they conduct themselves. Some of them are even listed companies, and have even higher governance obligations than private companies.

So they need to be very, very careful. Because this was literally a warning shot at the industry, clean up your act or you're going to prison.
EA: Ashley, my last question is, what trends do you see coming to the industry in the coming year or two?
AE: I would say in the coming year or two, I think that you're going to see a more delivery. While dispensaries, of course, you can now go to them unobstructed, things are opening back up with COVID. Consumer trends tend to favor delivery right now in terms of their consumption habits. I think there are other things that are exciting about the delivery space. For example, if you're a patient and you don't want people to know that you're going to a dispensary, delivery provides a little bit more anonymity and distance, especially if you take the Amazon strategy and use your own box, that does not show what is in the box. That's kind of nice.

I think that you're also going to see some interesting trends actually circling the healthcare front on this. We're aware of a number of providers who are trying to put together something similar to an HSA account, that's like health benefits management. And looking to try to get cannabis covered by formularies.

We've even actually seen some judicial action coming out of New Jersey. Of course, always very good about their employment law there. In particular what New Jersey has done is they have made it mandatory, and this is the courts that have done this, they have made it mandatory that employment benefits providers in cases that involve injuries on the job. So they're going to be required to actually cover cannabis as a form of pain management. That's very interesting developments that I think should continue in the next couple of years.

My personal hope is that over the next couple of years, the cannabis industry will move out of cash and into forms of digital payment. Of course, my preference is that they use legal forms of digital payment and actually learn how to due diligence their financial providers.

I think that you will see that they will start coming around to using legitimate forms of tender. I think that that's going to favor the folks in the ACH payments space, and hopefully more legalization. I think we're seeing a lot of movements from states towards full, adult-use legalization.

Certainly for the tax benefits that it provides, but also for the health benefits that it provides to their communities, as well as stopping, clogging the justice system, the law enforcement and penal system with a lot of unnecessary drug crimes that were really just private use situations.
EA: Well, thanks for joining me here today, Ashley, I really appreciate it. And thanks for listening to CannaCast, as part of the EisnerAmper podcast series visit for more information and podcasts. And please join us for our next CannaCast Podcast, where we'll discuss other budding issues.

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