US consumers can’t use credit/debit cards to buy cannabis.
At least not with Visa and Mastercard policing things.
That’s because the card schemes, being the duopolies they are, pick and choose winners, and what rules they care to enforce.
And unlike utility providers, who have been legislated as monopolies, the card schemes have been immune to legislative scrutiny (by and large).
This has left the US cannabis industry in a lurch.
Sure, you could point to federal banking laws, but at the state level cannabis is legal.
Thankfully, we live in a country that still rewards innovation (though these days are shortly coming to an end).
Entrepreneurs have read the laws, dug in deep, and found permissible ways to conduct digital commerce within the cannabis industry.
Enter debit rails.
We’re going to summarize the history as best we can from some very good pieces of content; see here and here for great reads on debit.
Prior to 2011, the duopolies (Visa, Mastercard) dominated debit volume because they locked up relationships with the issuing banks. Dick Durbin said “this ain’t good” and passed legislation in 2011 that mandated that every debit card be coded to run on at least two debit rails that weren’t affiliated with Visa and Mastercard.
The result (shocker) was that merchants could decrease their debit costs by 20-30% via routing to a non-duopoly rail.
Up until recently (Regulation II in July 2023) there were limitations in routing card not present (CNP) debit transactions because users could not input PIN codes online, and the issuing banks had refused to upgrade technology that would enable PINless debit in a CNP environment. This is in the weeds, but the summary is that not every debit card issued had the ability to run on two unaffiliated networks as Durbin’s law intended, and we’re sure that this was “just a coincidence” that worked in Visa and Mastercard’s favor because they don’t have strong bank relationships at all.
Now that that’s been resolved, we should note that in the US there are 9 debit rails (we’re ignoring Signature rails which are already owned by the schemes), or pipes where you can route a transaction – see the awesome graphic below from Nikil Konduru that lays this out:
The market share of these debit rails is below.
Card Present:
- 47% – Interlink
- 25% – STAR
- 13% – Maestro
- 12% – PIN Authorized Visa Debit
- 3% – All other networks
Card not present:
- 60% – STAR
- 20% – Pulse
- 15% – NYCE
- 5% – Accel
As it relates to cannabis, there have been multiple attempts to use debit cards for US cannabis purchases.
Why debit?
Turns out that Visa and Mastercard don’t care if you process debit for cannabis so long as you don’t do it on any of their rails (see below on this logic).
In fact, it appears that this is precisely what FP Omni had structured with TSYS, a processor now owned by Global Payments. From what we gathered, TSYS had represented that they would route debit cannabis transactions through a non-duopoly debit rail.
Then, being the shit bag payment bros that they are, TSYS seemingly did precisely what they said they wouldn’t do and routed cannabis transactions over duopoly debit rails, which resulted in Visa getting pissed and shutting down FP Omni.
We hope FP Omni sticks it to TSYS and justice prevails.
This has left a gaping hole in the market, and Fiserv seems to want to fill the void.
Large companies detest risk, so the fact that Fiserv has publicly announced its efforts to stand up debit for cannabis leads us to logically conclude that Visa and Mastercard don’t care if their logos are on a card, just that the transaction goes over their rails.
Now, the wrinkle to iron out is market share. Remember, debit cards must support at least two unaffiliated rails (the average is 3, BTW).
Going back to the above graphic, it’s possible that the debit card is programmed to a rail that’s not supported by the processor. While the processor can integrate to any and all debit rails in theory, it might not have (for example, Fiserv might prevent a competitive processor like TSYS from integrating to their debit rail, or the time/cost to integrate to a debit rail might not be worth it for a processor).
However, it’s critical that the processor be integrated to all the independent debit rails to ensure a smooth customer experience (i.e. no denial at checkout).
Fiserv owns debit rails STAR and Accel. If they only route through these two rails, which will surely give Fiserv better economics, they risk ruining the entire experience for consumers who carry debit cards not coded to FISERV’s rails, which probably happens ~50% of the time conservatively.
Note that it’s estimated that only 65% of debit cards are coded to run PINlessly (i.e. work in a CNP setting), but for cannabis this won’t be a real issue since so much volume is card present.
If we ignore this customer experience issue, and assuming Fiserv can execute anything here in a reasonable amount of time (don’t hold your breath), they’ll end up with an effective monopoly, likely with payment rates that start high and only creep up.
And they’ll have this position for years most likely, as we think legal cannabis (or at least legal in the sense that the duopolies would openly bless it) is still a long way away considering the FDA approval process after rescheduling.
The market needs more competition.
Calling the entrepreneurs.
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