In most cases, you can’t rely on a debit or credit card to facilitate a transaction at a dispensary. The reason? Cannabis is a schedule-one drug. It’s thus a federal offense for banks to do business with entities involved in the trafficking of schedule one drugs. As a result, the cannabis industry is solely cash-based, which poses major risks to those in the business and the general public. It’s also made the “legalization” effort in California—the sixth largest economy in the world—incomprehensibly messy. Buzz about a state-owned bank to serve cannabis businesses has surfaced over the last few weeks, evoking equal parts praise and criticism. But the issue around banking is only one facet of the overall financial nightmare that plagues the cannabis industry.
Derek Peterson is the CEO of Terra Tech, a vertically integrated cannabis-focused agriculture company based in Irvine. Along with cultivating conventional, organic herbs under the brand name Edible Garden, Terra Tech also grows cannabis and crafts clean concentrates, which is sold in their chain dispensary: Blüm. With four locations in Nevada, another in Oakland, one in Santa Ana and a location set to open in San Leandro this April, Blüm is becoming one of the top tier cannabis retail chains on the West Coast. Achieving that status has been a frustrating journey at best.
Leading up to 2017, Terra Tech used Insperity HR, a full-service human resources company that manages and offers benefits, workers’ compensation, and payroll and tax administration for small to medium-sized businesses. With over 150 employees, Terra Tech provided them with structured pay schedules and workplace perks, such as insurance and family benefits—a rarity in the dispensary world. Then, two weeks before Christmas, Insperity dropped Terra Tech without warning, leaving employees without life insurance, health care, and dental coverage. Insperity also facilitated payroll checks for Terra Tech, so when the HR group dumped Peterson’s company, there was no way for employees to get paid.
“The situation with Insperity last year was a disaster,” says Peterson, a former Wall Street executive. “But it’s the lack of financial services for the cannabis industry that’s at the root of the problem. We are transparent with everyone about all aspects of our business, as we were with Insperity. But the transparency doesn’t mean they will continue to work with us if they get internal pressure to switch course, which is what happened back in December of 2016.”
We contacted Insperity last year to see why they let go of Terra Tech—one of the top publicly traded cannabis companies in the world. They responded via email saying, “[Insperity] is a publicly traded company providing services across the U.S., and we work hard to follow all federal and state laws. When we initially entered into an agreement with Terra Tech, we were unaware that they were engaged in cannabis-related activities that could be in violation of federal law…”
So, apparently, being a publicly traded canna-business means nothing when it comes to using financial services; although one would think it’d be the opposite. Peterson told the Weekly in an interview post-termination that members of the Insperity team traveled to Terra Tech’s Irvine headquarters and were aware of Terra Tech’s involvement in the cannabis industry. After a period of intense negotiation, Insperity granted Peterson’s companny a transition period between 30-45 days to make alternative plans.
These problems aren’t just happening in California, either. Payroll, insurance, 401k investment and other workplace assistance are a part of the overarching financial horror the nation’s marijuana industry regularly endures. Banking– or lack thereof– is another collective industry battle.
When purchasing products at Blüm OC, patients and customers have the option of using debit or credit cards to complete a transaction—a luxury 99 percent of dispensaries don’t offer. According to Peterson, cards are accepted across all Blüm stores—at least for the moment. “We’re able to take cards because we happen to have a banking relationship right now,” Peterson says. “But that doesn’t mean we will 30 days from now.”
Terra Tech’s gone through at least six banks over the last four years. A week before the official purchase of Blüm’s Santa Ana store (which was formerly the Reserve OC) Peterson tried to wire a few million dollars to the sellers to put the building into escrow, but the transaction didn’t go through. When he logged into the account, the available balance showed $0.00. Frantic, Peterson and his team spent the next 30 minutes wondering what happened and if their assets had been seized. No one at the Citigroup bank branch level knew what was wrong. After being transferred from person to person nearly 10 times over, it was finally determined that Citigroup closed Terra Tech’s account. Citigroup mailed—without a tracking number and through the standard mail—a cashier’s check of $11 million, which took three weeks for Peterson to get.
Peterson laughs, calling the story a “quasi-funny experience.” But marijuana businesses are burdened with these types of disasters daily, he explains. “We go through that on a relative repetitive basis. We’re constantly scrambling to find relationships that we can do business with in this space, and even when we do it’s not always for long.”
There are several pocket credit unions and banks willing to work with dispensaries, Peterson says. But they don’t advertise. The only way to get in is through a referral network. Peterson wouldn’t reveal with whom he’s currently banking, joking that by the time this story is published, the financial relationship will have likely been severed.
So how can other dispensaries get in with banks? According to Peterson, finding the right one is a bit like speed dating. “You just have to get out there and meet as many people as you can,” he says. “Eventually you’ll start to find people who’ll provide the services you need. I’ve found that the industry associations are good places to network and figure out who’s got financial services, insurance providers, payroll providers and those types of things. But it requires time, and that time comes at missed opportunity costs for business. It’s a necessary evil, though, unfortunately.”
On Jan. 30, the LA Times reported that California’s Treasurer John Chiang (who’s also a candidate for governor) and state Attorney General Xavier Becerra are assessing the possibility of opening a state-owned bank to service cannabis businesses. Considering the entire industry—which is estimated at $7 billion in its first year—is an all-cash world, it’s hard not to blindly support such an endeavor. But according to Yaël Ossowski, the deputy director for the Consumer Choice Center (CCC), a global consumer rights organization, opening a government-owned and operated bank in California will only invite more (massive) problems.
“California should be applauded for thinking creatively, especially in the face of Attorney General Jeff Sessions’ worrying statements on cannabis policy,” Ossowski said in a statement, referring to the Cole Memo reversal. “But a taxpayer-funded and politician-led bank with total control over the cannabis industry is inviting trouble. A state-controlled bank will only invite scandal and mismanagement, and significantly limit growth for the industry in the long term. The best approach for providing banking services for the cannabis industry in California is to open up regulations at the federal and state level to give entrepreneurs some clear guidelines.”
Peterson supports the idea of opening a public bank. But the real issue, in his opinion, isn’t necessarily the lack of banking as it is the cash management. “It’s literally one of our largest operating hurdles across the board from trying to audit all cash transactions, keeping the cash safe, the transportation of the cash, the storage, the safety issues and the additional burden it puts on our staff.”
Peterson estimates that it probably costs his company about 10 to 15 cents to manage each dollar that comes in because of the extra security associated with it. The hand counting, binding, storage, and transportation adds a significant layer of cost to the corporate infrastructure and erodes profits; especially when combined with all the taxes and no write-offs thanks to 280-E.
Frustrations abound. Peterson hypothesizes that we’ll see shifts in banking happen within the next 12 to 18 months. But it won’t necessarily be because the new industry needs financial support. Rather, now that massive entities (think the Board Of Equalization and other tax collecting and auditing authorities) are staples in the cannabis supply chain, they’ll also be forced to deal with gigantic sums of cash.
“These problems used to be isolated issues for the cannabis industry operator,” says Peterson. “Now that the business is becoming regulated, those auditing and taxing entities are going to have to accept payments in cash. So, the problem has made its way up the food chain. But when you have the power and support of agencies, like the Board of Equalization, behind you that’s when paradigm shifts begin to take place.”
The next year-and-a-half is going to be transformative for everyone in the canna-world as legalization begins to tighten up. But the industry’s current state of disarray won’t mend without the support of financial services, nor will it operate at its fullest potential. “Banking interruptions, managing cash and all these types of problems are steps backwards for trajectory,” says Peterson. “Everyone is inviting some semblance of a solution.”