On July 27, Mastercard (MA 0.07%) demanded payment processors and banks issuing its debit cards to stop all cannabis-related transactions. Now, U.S.-based marijuana companies like Curaleaf (CURLF 5.26%) and Trulieve Cannabis (TCNNF 3.83%) will have a much harder time accepting payments from their customers, and they'll also have a harder time paying their own bills.
Is there any hope of the industry recovering from this latest blow? Let's investigate exactly what's going on and what the long-term implications are.
Without the right set of regulations, payments are a stumbling block
In case you're not familiar, the current state of affairs in most U.S. states where recreational or medicinal marijuana is legal is for payments by customers to be either cash or via debit card. Credit cards aren't canonically allowed, and now, people won't be allowed to take money directly from their bank account using a Mastercard. Therefore, marijuana businesses need to keep lots of cash on hand in their retail locations, which implies higher physical security costs as well as some additional friction in getting the cash from sales into the corporate coffers. Both of those pain points will be exaggerated in the aftermath of Mastercard's edict.
There are a few reasons that are likely driving Mastercard's decision. The costs of processing the transactions probably aren't a factor, and the company is likely leaving money on the table by banning cannabis transactions. Instead, the issues of legal liability loom far larger. Cannabis isn't legal at the federal level in the U.S., though many states have forged ahead with legalization and decriminalization policies of their own. So helping marijuana companies transact technically leaves Mastercard exposed to federal lawsuits or drug enforcement action, both of which could result in massive legal costs. And since reforms to marijuana banking haven't yet materialized in Congress, nor has cannabis legalization, it looks like the payment processor is taking steps to reduce its liability until the laws are clarified.
But there are still ways for marijuana businesses to accept payments from customers who don't have cash on hand. Many have installed ATMs inside their retail locations to enable people to take out money on-site. As mentioned previously, workarounds like ATMs carry overhead costs that reduce the profitability of the business. They are also on legally murky ground, as using an ATM located inside of and owned by a cannabis dispensary could potentially be legally indistinguishable from debit card swipes at the point of sale. Plus, it's likely discouraging to potential customers if they know that they can't just swipe their card as normal. And that will be even more of a barrier when it comes to cannabis businesses that offer delivery services, of which there are now many.
The recovery might be a bit slower than expected
Mastercard's move will likely delay the recovery of the marijuana industry from the brutal bear market of 2022, which coincided with the collapse of marijuana retail prices in the U.S. amid regional markets becoming saturated with inexpensive cannabis. Now, many competitors are embroiled in fights over market share just as accepting payments, already a bugbear, becomes even more difficult. The impact will drag on earnings even further, and it wouldn't be too surprising if share prices struggle to regain their prior level for the next couple of years.
It's unclear which of the publicly listed U.S.-based cannabis players will be hurt the most by Mastercard's refusal, but it's clear that none will be helped. For Curaleaf as well as Trulieve, their extensive retail footprints are one more step toward being a liability rather than a pillar of their strategy. There is now also the uncomfortable risk that ATM providers may decide to follow in Mastercard's lead if they learn that their machines are effectively being used exclusively for cannabis purchasing. That might drive the industry's retail side even further toward cold hard cash and all the additional costs and risks handling a lot of it implies.
All of this news is doubtlessly discouraging for cannabis investors and businesses alike. Still, with some time and some new cannabis policies, the industry could still flourish down the line.