A CanPay Path to Payment

Easy electronic payment is always the goal for any consumer-facing industry, and it is especially needed in ones where cash has been the principal form of currency for both illicit and legal sales, like cannabis. But because it is still federally illegal, cannabis sales currently cannot use the card networks, making Visa, MasterCard, AmEx, and Discover off-limits in dispensaries. Of course, that has not stopped many retailers from trying any number of work-arounds in order to continue accepting credit cards at the point of sale, but they come with risks and expenses that can impact everyone, especially when the systems go down.

There are, however, other legitimate payment solutions available to retailers that remove the risk, reduce the cost, and offer the opportunity to create extra cost-saving benefits not available with traditional credit cards. Preeminent among these is Colorado-based CanPay, the longest-running electronic payment platform created for the state regulated cannabis industry and other emerging markets. Cannabis Business Executive spoke recently with CanPay founder and CEO Dustin Eide about the benefits CanPay offers retailers as well as consumers, and why he believes it is a solution that will continue to gain advocates and market share, even when the card companies get back in.

“June will be our eighth anniversary,” said Eide of CanPay’s origin. “We launched back in 2016 in our first dispensaries out of Colorado, and we chose the name CanPay because we wanted it to be about being able to pay. Back then – and especially between 2014 and 2016, when the states launched their first recreational programs – pretty much everything that was being offered was not allowed by the card brands and kept getting shut down. So, we wanted to come up with a way to be stable, transparent, and compliant for these operators and their customers.”

It was also uncharted territory as far as most financial institutions were concerned. “We worked with financial institutions that were banking the industry at that time, and there weren’t that many of them, not nearly as many as there are now,” recalled Eide. “They were mostly community banks and credit unions, each with a similar desire to serve their communities. We worked with them and identified the Automated Clearing House (ACH) bank-to-bank transfer network, where we could facilitate these transactions legitimately and transparently.

“What that means is we had to create a platform where the consumer could create an account with us, link us directly to their checking account, and then the money would transfer from their checking account to the business’s bank account upon settlement,” he added. “And that’s what we launched in three stores back in 2016, and now we have over 1100 operators, over 300,000 consumers accepting CanPay, and over a billion dollars transacted.”

Were there any kinks to work out? “I suppose so,” said Eide. “If we were working with a larger institution, they may have had different expectations, but what it really did was allow us to work with those institutions and the regulators to come up with a program that was going to survive the scrutiny that we would go under.”

A Strict Payments Perspective

It was essential for the CanPay team, with decades of payments experience, to stay focused on the task at hand. “We came at this from a payments perspective,” explained Eide. “We weren’t bankers. We weren’t lawyers. We weren’t technologists. We were payments experts, and we saw that this is going to be an industry that will have a lot of challenges, because it’s state legal but federally illegal. We also saw that a lot of people were trying to do workarounds for the card brands, which we believed and then later learned directly from the card brands, won’t participate in the industry until the federal law changes. We knew there was an opportunity to do something unique, but we knew that it was going to be challenging. So, we took our expertise in payments and built a payments product for the cannabis industry, which again, is different than most others because it’s essentially either lawyers or technologists or POS companies that aren’t payments experts that are trying to solve this problem.”

There is of course a long history of digital payments being used in high-risk and controversial industries. Are those the origins of today’s ACH products? “They may be historically disfavored industries,” replied Eide, “but they are legal industries, and just because some kind of card-based product works in an adult club doesn’t mean that it can be used here. Cannabis is still an illegal product from the card brand perspective, so you have to take a different approach, because it’s completely prohibited. There’s no way to create a program that can be used in the cannabis industry that uses a Visa or MasterCard debit or credit card, or their brands or their networks.

“We just came at this to build something as close to what you would find in any bookstore, any clothing store, or any e-commerce environment,” he continued. “We said, ‘Let’s build as close to that as we can, so that customers and businesses are familiar with it. That will help us get traction that will help customers be able to use it in a way that is comfortable and familiar, and then we’ll be able to build this business out of it. And I actually think that there is opportunity to improve upon what the typical credit or debit card experience is, and we get to try some of that here in the cannabis industry because the other the card brands can’t.”

What happens when Visa/MasterCard start accepting cannabis transactions again? Will ACH debit remain a viable option? “That’s what we’re making sure happens,” said Eide. “I will tell you that as soon as it’s federally legal, the card brands will be in just like they were on day one in Canada, but until that point, they will not be. I actually think there are a couple of pathways here. With CanPay’s network, our integrations, and our ability to process, we don’t really care where the money comes from right now. We’re only doing bank accounts because that’s the only way to legitimately serve this industry, but if Visa came to us tomorrow and said we will allow you to use our debit cards to fund the CanPay purchase, that’s something we could do very quickly.

“So, cards are not necessarily a threat to the CanPay model,” he added. “They’re something that we can incorporate, but I believe in the ACH network because the ACH network is significantly lower cost. We’re able to provide our service with guaranteed payment to the merchants or no chargebacks or claw backs of funds for insufficient funds. Our lower cost structure allows [cannabis retailers] to enjoy payments at rates that traditional retailers would love to have, and ecommerce businesses would really love to have. And then, since we’re mobile only and Mobile First, it also allows us to do things like provide additional rewards and benefits to consumers that are additive to what the merchant is giving them, and they can use those benefits to discount the purchases in the CanPay app that they make it at a traditional retailer. So, I think ACH continues to exist in competition with and in light of the card brand networks getting into the cannabis industry.”

Because credit cards do have a chargeback option, how does CanPay address that? “The cost of the chargeback is not borne by the merchant, so we guarantee the payment to the merchant,” said Eide. “We knew early on that if we were going to build an ACH network where you can’t put a pending hold on the funds, that we were going to have to be really creative and ensure that the merchant was going to get paid and ensure that the consumer was spending something that they had, and that the funds would be available when the debit arrived. Merchants aren’t going to accept something that’s untrusted where they may not actually receive the funds for that purchase. There have been companies that have tried ACH transactions in cannabis that didn’t guarantee the funds, and merchants rapidly realized how much money they were losing because the provider of the service was onboarding people that weren’t going to pay.”

What about people who demand a refund for whatever reason? “We can handle all of that,” said Eide. “If there’s a need for the ability to initiate a refund, we can do that for a business, so that’s not an issue. And the cannabis industry is pretty particular, because for the most part there are no refunds, there are only exchanges if there’s a product issue. Some laws don’t even allow refunds, or it’s different by state. But because we were able to build within this industry first, we could craft our services to match the regulations and help merchants de-risk their transactions. So yes, we can do anything that a traditional payment network can do, but we can also do much more, because we’re mobile only and we interact with our consumers in a much more frequent and interactive way than just a physical card.”

It still sounds as though CanPay will make a really good partner for the card companies when they transact cannabis again and can avoid having to do any heavy lifting or building. “That’s the plan,” replied Eide, “but again, I believe strongly that ACH has a place in traditional payments forever, and not just in cannabis. I anticipate this being the year when we start to move beyond cannabis and serve other businesses that want to reduce their costs around payment acceptance with our ACH product. But we certainly can and are available to the card brands as a quick entree into the cannabis industry when they’re ready.”

Beyond Cannabis

So, the plan is to expand to other industries beyond cannabis? “Absolutely,” said Eide. “I think the cannabis industry has given us a great place to test and trial and learn and grow, but the challenges of the cannabis industry – in terms of expensive payments, reliable payments, chargebacks, meeting the customer where they want to pay – are issues that traditional retailers have too, and everyone knows that there’s significant criticism from merchants about the fees that they pay and the value that they get from the traditional credit or debit cards. So, I think there’s a place for ACH-based payments outside of the cannabis industry for sure.”

Is the level of ambition for CanPay that it becomes a go-to payment method for everyday purchases, like a PayPal? “I think so,” responded Eide. “There’s no reason that a merchant, any merchant, cannot accept CanPay along with a Visa or MasterCard, especially if CanPay is less expensive than what they’re paying for those debit and credit cards. And customers love using CanPay, and one of the things they love about it is our rewards program. Every time they make a purchase, and every day, they get a free spin, but they also get a free spin on what we call our CanPay Points Spin To Win wheel, where they can win points. Right now, the jackpot is up to $1,700 or $1,800 in points that they can use to discount purchases at any merchant that accepts CanPay. So, there’s an additional benefit to them. They’re already paying with something, so why not pay with CanPay and get that additional benefit? It creates a lot of loyalty to CanPay when there’s an option like this.”

Some states want to put limits on dispensaries offering discounts. Do those restrictions extend to CanPay? “Not to us directly, because we’re an ancillary business serving the cannabis industry,” said Eide. “That’s kind of like saying, if somebody uses their credit card, and they get cash back, is that a violation of state marijuana laws? No, that’s not a cannabis company, and we’re not a cannabis company, so we’re not held to those rules in the way that a licensed cannabis business is. Where that can come into play is when we have our new program that we’re launching called Merchant Rewards, where merchants can actually facilitate some of the benefits that CanPay is doing as well inside of our app. We’ll be sensitive to the laws around that, but it’s still operated by CanPay, so we have more flexibility than a traditional licensed cannabis business, because the laws around exactly what they can do don’t apply to a payment service that isn’t a cannabis business.”

As CanPay plans for the future, it continues to incorporate new features that differentiate from not only regular debit and credit cards, but also from ACH competitors like Dutchie Pay and TreezPay, some of which appear as payment options on the same menus.

“To be an ecommerce system,” said Eide, “it benefits our merchants if we can be integrated in the POS system. If it’s an online order and you’re not integrated to the shopping cart system, historically that means you can’t facilitate a prepayment. We’re actually in the final stages of releasing a new product called Text to Pay, so that even if you take an online order and the customer hasn’t prepaid through the website, you can still have them prepay with CanPay. So, we are satisfying that need as well, but it’s still important to be integrated into the online ecommerce shopping experience.

“With the in-store experience,” he added, “you can use either use a standalone terminal to accept CanPay or one of the many integrations we have that are accepted directly into the POS. Now, the integrations are helpful for convenience, but they’re not necessarily critical. In terms of competition, there are two pathways. There are those trying to do workarounds for card brands, which are generally unstable and expensive, and they get shut down a lot because they’re not allowed by the card brands no matter how creative the workaround is. Then there are those that are doing ACH, and we are by far the largest and longest-standing ACH provider. No one else is anywhere close to a billion dollars in terms of ACH transactions for cannabis businesses.

“But we respect anybody that’s chosen that pathway,” he added. “It’s a more challenging path because you have to have the consumer sign up and link their banking rather than just pulling out a debit card. So, when you mention other competitors, not a single one is focused exclusively on their ACH platform being a consumer-to-business payment platform. They’re doing POS, they’re doing distributions from a merchant to a consumer, they’re doing insurance, they’re doing ecommerce, they’re doing all of these other things, and building a payment network is a really challenging task. You can’t do it halfheartedly and be successful. Yes, there are competitors in the ACH space, but they’re just not focused on ACH in the way the CanPay is.”

Iterating Fast

One of the features added by CanPay is Remote Pay, which changes how and when consumers can pay for orders. “Before remote pay,” explained Eide, “it was pretty much the traditional retail experience where you go into the store, you have CanPay on your phone, you pull up the CanPay app, you click pay now, it generates a single-use payment code. There’s no banking data, there’s no personal data, it’s just a QR code that presents on your screen, and when you’re ready to pay, the cashier scans that QR code, we approve the transaction, and that completes it. It was an in-person experience that could happen in the store, curbside, or via delivery, where the cashier or budtender has software either in their POS or on their device to accept CanPay from the consumer with that scan.”

The only thing missing was cash. “That’s right,” said Eide, “just like pulling out a card from your wallet. If you have a credit card terminal, you have to type in the amount of the purchase, you have to get the card out, you have to swipe the card, and you have to sign for it, and you know that there are steps to a physical interaction. But ours is completely touchless, which was really helpful during COVID, when cannabis businesses were one of the only businesses allowed to still operate, and everyone was extremely concerned about interacting physically with one another. So, businesses were able to scan the QR code through the customer’s window at the curbside pickup without even having the window down, which was a precautionary step that people were taking at the time.”

As good as that was, something was missing. “While it was touchless with a seamless and quick interaction, what that didn’t allow for was for me to make an online order and prepay like I do everywhere else,” noted Eide. “Even though I was going to pick up the product at the store, I wanted to show up, show my ID, get my product, and go. When we released Remote Pay, it was the culmination of a few years of research, because the cannabis industry is very particular in its needs. One is that it has to be transparent. Most card-based options can’t facilitate an ecommerce transaction because of how visible it is to the underwriters that the website is running a cannabis transaction, and that’s not an allowed transaction.”

There were other cannabis nuances that had to be taken into consideration. “Somewhere between 30 and 70 percent of cannabis online orders are modified after the customer creates the order, either to account for taxes at the state level, or discounts that weren’t applied or changes to the order,” added Eide. “If you can’t modify the payment amount after that fact to represent the final total, there’s no point in prepaying, because you’re always going to be canceling it. So, we came up with a model where we could facilitate prepayment, the customer checks out, clicks pay with CanPay, logs into the CanPay app on the merchants website, not in their phone, clicks pay now, and that’s the end of the transaction.

“That’s a prepayment, but on the back end, the merchant has the ability to adjust the transaction, both up and down, after the fact,” he continued. “If it’s up, the customer will give a verification through the app to make sure that we have that second authorization for the new amount. But the merchant can adjust it to account for whatever changes there are, and it will [remain pending] for up to seven days so that they can settle it when the customer actually arrives at the store rather than having it settled the day that they make the order, and then when they get to the store things have changed and that amount is no longer relevant and they have to do refunds and go through that whole hassle in the store. So, we were really deliberate about building something that would work in the cannabis industry with its additional complexities, but just like everything else, that means that we have a really robust prepayment or ecommerce method of payment for merchants that is typically 1 percent less than what they’re paying to a traditional card retailer, credit card processor.”

Remote Pay was greeted enthusiastically by consumers, as well it should have been. “Consumers love pre-pay for the same reasons that they love to preorder,” explained Eide. “It’s just another step where they can do it at home and get it taken care of, so that they can walk in and get out.”

Are there other new features people can expect to see from CanPay in the near future? “We’re iterating fast,” said Eide. “We’ve recently released a new bank linking integrations that allow us to cover 100 percent of all U.S. checking and savings accounts that are available for ACH transactions, so we can serve every consumer. We’ve always had the widest network availability, but now we can serve all of them with instant verification. You sign up for CanPay and you can spend immediately after our verification process, which is two minutes or less. That’s a big thing that we just we just released, and we’re pleased there.

“Merchant Rewards is also going to be a big deal,” he continued, “because it allows merchants within the CanPay app to essentially use incentives to increase adoption of CanPay at their stores, and those incentives can only be used at the merchants that are providing the incentive. So, it’s not a network where merchants are competing for it with each other for someone else’s customer. It’s a way for them to drive their existing customer base back into their stores using CanPay as a pathway.”

Even better, he added, “It doesn’t cost the merchant, and we don’t change our fees. We haven’t raised our rates once since we launched in 2016, and everything we do is additive for merchants so that they can participate if they want. It’s going to be a way for them to engender additional loyalty, and engender additional cashless payment adoption, because cash is still typically 50 percent or more of the transactions that these businesses see, for a number of different reasons.

“The Text-to-Pay piece is also coming out,” he said, “and we have some new integrations with benefits programs that I have to hold off on getting too detailed about. The point is that we have a network where businesses that haven’t been able to integrate directly to payments platforms in the past, because we’re digital, can now integrate to CanPay, which means the benefits they bring will be driven into the CanPay app, and merchants will benefit just by being a participating retailer, and not have to do anything else. In the past, merchants would have added independently to each of these different benefits programs, which it takes a lot of work to get integrated. Now, it’s going to be about these programs being able to work directly with consumers, and the merchant gets the benefit of that work directly.”

Merchants pay a per-transaction fee for CanPay services. “We’re less than 2 percent all-in for the typical transaction,” said Eide.

Can CanPay also develop additional revenue streams from the new features? “Our objective is to be the same in terms of cost while creating more value for our merchants, because if we drive more transactions, then we get to participate in the benefit of the value that we’ve created,” explained Eide. “We don’t need to find alternative revenue sources. We just need to keep creating more and more value for our merchants and for our consumers so that we drive additional transaction activity, and that’s enough.”

New Markets

What about targeting new markets? Is it good to get in and integrate its payment platform with newer retailers at the beginning while they’re setting everything up? “What we have found is that the more stores in an area that except CanPay, the more likely consumers are to sign up for it,” replied Eide. “Take Florida, for example. About 90 percent of the operating dispensaries there accept CanPay, and a lot of those consumers shop at multiple dispensaries, so the fact that they can use CanPay at every single store that they shop at is a huge benefit to them, and they will sign up and use it.

“So, every market is available to us, and every market is good,” he added. “I would add that the more dispensary adoption we get in a particular area, the more likely it is that consumer adoption will increase. And we are the only ones with participating retailer maps in our app, because we publicize everything; all of our merchants are all visible. We’re not concerned about a merchant getting shut down because they get discovered accepting CanPay, because it’s allowed for them to do so. So, if you look at our participating retailer map, there are hundreds of dispensaries in the Northeast that accept CanPay, and as these markets have gone adult use, we have consumers that maybe shop at their medical store in one market, but drive somewhere else on vacation, and they will pull up the CanPay app and find out which merchants accept CanPay and they’ll go to that store.”

To that end, CanPay is adding new stores rather quickly. “It’s dozens a month,” Eide estimated. “And there’s a limited market in terms of how many dispensaries there actually are. We’re in about 1100 stores, and that number varies. It’s hard to tell exactly how many dispensaries are operating at any time, but that puts us in probably 10 to 15 percent of the dispensaries operating right now, so there’s plenty of growth opportunity for CanPay. And one of the things that’s usually a driver in CanPay’s growth at the merchant level is when their debit or credit card system goes down. We see a lot of people that add CanPay at that point, because they’re looking for a stable, legitimate, low-cost option that still allows their customers to pay electronically.”

What about fraud? CanPay obviously does everything it can to mitigate fraud, but has it been a problem? “There are always people out there that try to take advantage of a system or process,” said Eide. “We have the responsibility for onboarding merchants and onboarding consumers, and so we built that all into our risk profile and our risk policies. Are there pockets of things that happen here and there? Yes. Does that allow us to address what’s creating that pocket and move beyond it? Yes. And I would say that’s another benefit of working with CanPay as a merchant.

“Our competitors don’t have the transaction history that we have, or the experience over eight years, mitigating risk and fraud,” he added, “So, we’ve been able to maintain our guarantee that entire time never having to increase our fees, and we’ve gotten very, very good at mitigating the risk of loss to CanPay while also onboarding and approving the highest limits in the industry. You can have anywhere up to a $5,000 limit with CanPay that would be guaranteed to the merchant if that customer were to use it. That covers way more than both the average and probably any cannabis transaction, but we wanted merchants to feel comfortable that CanPay could be the payment option for every transaction, not just the low dollar transaction.”

That kind of begs the question whether CanPay could also be used for wholesale transactions within this industry. “We’ve been approached a number of times to launch a wholesale product,” responded Eide. “What we haven’t been able to justify was charging the fee that we would need to charge in order to facilitate that transaction, because every one of those businesses that works with CanPay has to be banking inside of a compliant cannabis banking program, where they have access to checks, to direct ACH, to even domestic wire transfers for $25 or $35.

“But if you’re doing a $50,000 wholesale purchase,” he continued, “what fee would you be willing to pay to CanPay that would overcome the cost of a check, and what benefit would CanPay offer? So, we’ve found that our sweet spot is really homing in on the consumer-to-business purchase, because the consumers and the businesses don’t have any kind of direct relationship, and consumers aren’t going to want to go around giving every single business their checking account number and signing up for different programs. We’re open to [wholesale] if we ever find the right opportunity where we bring enough value to be able to charge what we know we need to charge in order to facilitate that large a transaction, but we haven’t identified it yet and have chosen not to launch that product as a distraction to our core business.”

Wholesale may be a ways off, but expanding beyond cannabis is certainly not. “Our goal is 2024 to be the year that we bring the CanPay network outside of cannabis,” added Eide. “I can’t really discuss where we are in conversations around that at this point, but I think that’s a reasonable and a conservative timeline for us.”

It sounded like a very exciting prospect, whatever it is specifically. “Hitting a billion dollars in transactions was a huge accomplishment,” Eide said of the milestone reached in April. “When we look back over the last eight years, it was extremely challenging because it was not easy. It was very expensive both in terms of lessons learned and in cost and building the platform. We bootstrapped the company, and operate out of our revenues, and part of that was so that we could make sure that we were doing everything the right way, that we could make hard decisions that maybe cost us more in the short term, but had longer-term benefit, without having the driving force of having to produce some outcome for investors that maybe were short term benefits, but didn’t result in the long-term value to our merchants and consumers.

“So, it’s been a real challenge,” he added, “but hitting that number just helps us kind of take a step back and realize what it means to have 300 consumers in the network and what it means to have so many merchants reliant on what we’re doing and appreciative for what we’re doing. And it gives us hope that we can deliver a lot of that same value to businesses in traditional retail that maybe feel stuck in some of these other card processing systems, and not everybody can sue Visa and MasterCard. There are class action lawsuits, but most businesses don’t really have any alternative, and we think they’re going to be very, very happy to have a viable alternative that already has a built-in consumer base.”

Can we expect to see a CanPay IPO anytime soon? “We get asked all the time where we’re at with that,” responded Eide.

“That’s because companies like yours always go public,” I said.

“If it’s the right thing to do, we’ll do it,” assured Eide. “If it’s not the right thing to do, it’s not something we have to do. We have a very small group, we really love what we’re doing, and we think that there’s a lot more to do in terms of building value and bringing that value to a number of different participants in the payments echo system. So, if [going public] helps further that cause, sure, we’re open to it, but if it hinders that cause at all, there’s not a need to do it.”