As it turns out, cash isn’t king
Surprising findings in a retail payments study
Conventional wisdom holds that the cannabis industry is unbanked – that it’s nearly impossible to get a bank account and other traditional financial services for cannabis operators.
The data show about five percent of U.S. banks report having cannabis customers. But likely no more than 100 banks and credit unions are servicing the majority of the $10-billion industry.
Yet, according to the 2019 Marijuana Business Factbook, 90% of marijuana-related businesses and 76% of plant-touching companies report they do have access to financial services.
What gives? For those with boots on the ground, the problem may lie in what one means by “access to financial services.” Many banks offer only cash services. Admittedly, it’s a step in the right direction, but it furthers the industry’s dependence on cash and creates a compliance headache and makes it difficult to do business.
The cannabis industry isn’t unbanked; it’s underbanked and underserviced. Case in point – retail payments. In cannabis, payment options remain slim. The majority of cannabis retail transactions remain cash, even though nearly every retail study shows that consumers prefer to pay cashless and that they spend more when they have the option.
The data speaks: a meta-analysis of 15,000 cannabis transactions. In order to develop data and insight into the phenomenon, Abaca recently conducted a meta-analysis of nearly 15,000 transactions that occurred over a one-month period in June 2020. These transactions were in multiple Midwestern medical cannabis dispensaries that had recently added AbacaPay – a cashless debit retail payment solution – to its previously cash-only business.
We wanted to see if any conclusions could be drawn regarding customers’ preferences for and adoption of cashless payment options, any revenue or expense impacts, and other potential implications of the added offering.
In the study, we anonymized data for 14,942 retail transactions and compared cash and AbacaPay cashless transactions. The results were significant, and they surprised even us.
Based on consumers’ avowed preferences for card-based payments, we expected to see data supporting cashless, but the actual results beat our initial expectations.
Key findings: higher tickets, greater revenue
The average ticket was 25% higher for customers paying cashless. When presented with the option, about one-third of this dispensary’s customers opted for cashless payments: just shy of 10,000 transactions were cash and almost 5,000 were cashless.
That’s a lower number than what consumer preference studies might have predicted; the surprising finding is how much more money the cashless customers laid out. Cashless tickets averaged $136.35 versus $109.06 for cash.
What’s the explanation? We hazard an informed guess: When customers pay in cash, most of them make their spending decision at the ATM and not the point of sale with the budtender.
Customers who are offered a frictionless cashless payment option are not limited to the cash they have on hand and, therefore, are able to spend more.
What’s the overall revenue impact for the dispensary – that is, how much did sales increase simply by adding a cashless option?
Total revenues were 8.3% higher due to offering cashless. Total retail revenue recorded during the study period was $1,764,500.78, between cash and cashless. But if we multiply the cash spending average ($109.06) across all 14,942 transactions, total revenue comes in at just $1,629,574.52. Adding the cashless payment option increased the dispensary’s total sales during the study period by $134,926.26, or 8.3%.
Clearly, the increased revenue potential of offering cashless options will be compelling to retail dispensaries. Furthermore, cashless payments can help dispensaries pursue COVID-safe contactless payment, curbside pickup and delivery options. But are there benefits on the expense side of the ledger? Related studies demonstrate there are.
Dispensaries offering AbacaPay reduced the amount of cash handled by 38%. Evaluating their banking fees, we found that these dispensaries had overall costs of financial services 20% lower than their peers not utilizing cashless payments. This aligns well with research published by IHL Group in its 2018 Cash Multipliers study, demonstrating that electronic payments reduce the risk and cost of handling cash, cash shrinkage, and other expenses that range from 4.7% to 15.3% in total cash sales value, depending on the category of retailer.
Bundling payments to capture synergies
Cannabis banking isn’t an easy problem to solve, but that’s just what Abaca is doing. Whether its banking, payments or lending, businesses can bundle services for an end-to-end tailored solution – and that can boost revenues while reducing operational costs.
Bundling payments with banking can yield faster settlement for the merchant. In most cases, businesses get bank account liquidity in three business days, creating predictable bank account cash flow for the business that uses it vs. cash alone.
Abaca is bringing compliant bank accounts, electronic payments, lending, and other financial services to Missouri’s cannabis industry through a tech-powered cannabis banking platform.
The company’s fintech platform also offers access to FDIC-insured commercial bank accounts, lending, and merchant services to ancillary cannabis and hemp/CBD businesses nationwide.
Brian Bauer is cofounder and chief strategy officer of Abaca, a fintech company exclusively serving the cannabis industry. Previously, he was the director of two industry-recognized financial technology accelerator programs. Brian was named to the 2020 AMP Future 50, the leaders who are shaping the future in his home state. Prior to entering financial services Bauer served in the U.S. Navy as a helicopter aircrewman and was awarded the Air Medal seven times during his deployments to Iraq.
