Banking is one of the thorniest problems for the cannabis industry in the US. Here to tell us how he’s creating a solution to this problem is Dan Roda of Abaca.
Learn more at https://www.goabaca.com
- Dan’s background in law and how he came to start Abaca
- An inside look at Abaca and how it’s providing a safe banking platform for US cannabis businesses
- What dispensaries can expect when using Abaca
- The current state of merchant processing in cannabis and how Dan believes that will evolve over the next few years
- The most common questions clients ask Dan
- States that Abaca is currently operating in and where Dan sees the company expanding
- Abaca’s capital-raising process
- Where Dan sees the cannabis financial services market heading in the next 3-5 years and some emerging trends to keep an eye on
Matthew: Hi, I'm Matthew Kind. Every Monday look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider dot com. Now, here's your program.
Banking is one of the thorniest problems for the cannabis industry in the United States. Here to tell us how he's creating a solution to this problem for cannabis businesses is Dan Roda of Abaca. Dan, welcome to CannaInsider.
Dan: Hey, great to be here.
Matthew: Give us a sense of geography. Where are you in the world today?
Dan: I am currently working from home. My house is in downtown Little Rock, Arkansas which might not necessarily sound like a hot spot for tech and cannabis but that's what we're here to talk about today.
Matthew: What is it like to live in Little Rock? I think most people just don't know.
Dan: It's a great community. I've been here for about 10 years which means I'm one of the folks that actually moved here by choice. Which might surprise some but I came from the northeast where we had a lot of traffic and other things and it's been really great. Quality of life is very high, cost of living is low and we passed a medical cannabis measure a few years ago. As a card-carrying patient I'm here to tell you that things in Arkansas are pretty well complete now that we have that going.
Matthew: You feel like you can get out and enjoy nature and do some things that you just couldn't do in the northeast?
Dan: Absolutely, and I spend a whole lot less time sitting in traffic.
Matthew: Tell us what is Abaca on a high level?
Dan: Sure. We are a Fintech company that enables banks to serve the cannabis industry.
Matthew: Can you share a bit about your background and journey and how you got into the cannabis space and started Abaca?
Dan: Don't hold it against me but I'm an attorney by trade. I was in solo practice in 2016 when Arkansas passed its medical marijuana measure. At the time I realized that this was an area that had always interested me both on an intellectual basis and on a personal basis. It was an area of law I endeavored to learn as much about as possible very, very quickly. I was privileged to represent several groups of people who were looking to get into the industry in some form of fashion.
Arkansas, like a lot of states where there is a limited license cannabis market you have this rush to get into the market during the open application period. That was a very busy time here in Arkansas. It seemed like everybody you knew was working on some proposal, some application to hopefully get into the industry. Like I said, I had the opportunity to assist folks on several. At the point in that business planning process where we would come to banking and cash management and finance, everybody drew a blank. Most people were unaware that there was potentially even going to be a problem with banking. Those that knew about it just said they intended to operate all in cash.
I realized very quickly there was this banking problem in cannabis that it was also very misunderstood but that it was, in fact, a solvable problem. Here in Arkansas we were the 23rd or 24th state to pass some legal cannabis measures, so obviously we could look to what other states were doing before us. We found out about some of the pioneer and credit unions in Colorado and elsewhere that had begun serving the cannabis space. We looked at their approach and applied some technology to certain aspects of it and Abaca was born.
Matthew: There's still dispensaries that are doing everything in cash, that don't have a bank account. What's going on there? Do they not know or do they just choose to stay in cash? Because I feel like there's maybe some knowledge deficits in terms of what people think they're able to do in that space or maybe they just want to stay in cash. I'm not sure what are your thoughts there?
Dan: I would say in most cases in our experience that that is a business decision. There is a very common misconception and you certainly see it reported in media a lot, especially in new states after they pass some form of legal cannabis. That narrative goes something like the industry is entirely unbanked and you'll have to do business in cash. Most people in the industry, however, realize that that is not reality. That what is the case is in fact that there are a handful of banking options available in just about every legal cannabis jurisdiction but that it is a high compliance endeavor that comes with a cost.
It comes with a cost in terms of a time commitment and often comes with a monetary cost as well for these businesses. In most of these places where people are electing to operate in cash anyway it's purely a business decision. It's not what I would necessarily advocate obviously, but at the end of the day people can operate their business how they see fit.
Matthew: Just so we're clear Abaca is not a chartered bank but more of a technical bridge. What do you mean by that? What does that mean?
Dan: What they would call us is a Fintech bank or a neobank or a bank enabler. In that we are a tech company that sits between charter financial institutions and the niche customer base that they serve. This is not a new concept. People all across the country the last several years have been getting bombarded with commercials for things like Chime and Simple, which are both Fintech banking products that target primarily millennials. Millennials who don't want to go into a traditional bank branch but still need things like a deposit account to have their paycheck direct deposited into and a debit card so that they can transact online.
Much like how those Fintech companies are simply empowering banks to speak to that market in the language that it understands, we empower banks to speak to the cannabis industry in a language it understands and more importantly we enable the cannabis industry to speak to banks in the language that banks understand. We are a technical company that bridges the gap but we always are very clear with our customers. Your bank accounts are with our chartered financial institution partners, you get a signature card that shows your account number, that the account is titled to your business. Here's the address of the bank if you ever do need to go there for any reason.
However, everything you need to do as a practical matter, as a business owner can be done through our tech, through our web banking or by calling our people. We replace that contact. We are almost your concierge cannabis banking service within the banks that we work in. What it all comes down to is our ability to perform the compliance tasks that are required by the regulatory guidance in a more efficient manner than you could with just having people on the task, just by hiring a bunch of compliance officers. That was maybe a long-winded response but that is how we do it.
Matthew: All the touchpoints are through Abaca and not through the banking partner. I'm familiar with Chime and there's a few in the UK too, like Monzo and now Revolut that have really taken off. People don't even realize that they're not the bank but they do such a good job, I think because man, let's be honest, these are brick and mortar institutions that have been doing everything the same for decades just resist evolving, creating good user interfaces and banking the way people want to bank. They still say, "Do it this way, do it our way, do it the slow way, do it the painful way." A lot of unnecessary steps and so forth.
I can see why this is something cannabis businesses want. Pretty much every touchpoint is through Abaca though. You open the account through you, you log in to see your debits and credits through Abaca. You really only have the chartered bank to go to in event that you want something that Abaca couldn't provide for. Is that what it's for?
Dan: Yes, you've nailed it. I'll use the Chime analogy again because of their advertising. I think a lot of people are familiar with their product now. If you scroll down to the fine print on Chime's webpage you will find out the name of the bank that is actually holding your account but all of your interactions are through the Chime app. Likewise, all of your interactions with your Abaca account are through our web banking and our people.
Matthew: If someone's just curious like, "Hey, is this going to feel just like a bank website I'm familiar with when you log into your Abaca account?" If I was looking over your shoulder what would I see?
Dan: It is a pretty normal web banking interface. The first thing you might notice depending on where you do your normal everyday banking is that our web banking perhaps has fewer features. However, this is by design. Our web banking only allows you to do certain things that are authorized within the bank's compliance protocols and forces you to follow certain procedures.
We call this proactive compliance. It is intended to let's say guide the business owner to help us help them remain in compliance and keep their account open and also do this at a lower cost than some of the original pioneers in this field who use what I'll call the manual approach and have a lot of human compliance interaction.
We try to let our technology guide the way. Really the goal at the end of the day for us and for our customers is to keep their account open. The last thing we ever want to see is any reason why a bank would have to close a customer's account but there's regulatory guidance that spells out a number of situations in which they would. By being proactive, we are able to help keep our customers in good standing and keep their financial services operational.
Matthew: Okay, and how many clients are you working with now?
Dan: We've got about 60 different operators who are on the platform now. However, we're privileged to work with a number of MSO's. Some of those were working with in multiple states and through a number of locations.
Matthew: How does Abaca make money then in this relationship? How does that work?
Dan: Typically, if you're a bank that wants to serve the cannabis industry, what you would do would be to hire a tech company. Pay them a monthly compliance fee, consulting fee, software or service fee, whatever it is. Then the bank would turn around and charge money to the customers. As is normal in the cannabis industry there is typically a fee to hold an account. A monthly fee, like a subscription.
There are also typically fees upon deposits. We operate similarly but we switch the paradigm a little bit. For the banks that we work with, we come in and we do all the compliance work. Instead of the bank going out and charging the customer, ultimately, we are the ones who go out and find the customers and the monthly fee that they pay is to us which we then share with the banks.
We sit in the middle. At the end of the day, for the customers, the pricing is typically comparable. We try to be mindful and we certainly don't want to be an impediment to our customer's businesses but there are of course a lot of compliance tasks to be completed. There's a lot of work to be done and so there is, of course, a fee associated with this service.
Matthew: If I'm a dispensary or a cannabis business listening right now, and I'm just trying to get my head around, what the cost might be to get on board, is there any way you can orient me so I could understand what those costs might be?
Dan: Sure. Typically, we take an upfront application fee. That can range between $1,000 and $1,500 typically depending on a number of owners to the business. We need to do individual vetting on each owner of the business in great detail. In some states, especially limited license markets, you end up with very complex ownership groups. Well, that requires more homework on our part on the front end in order to get you approved.
Then there is also a monthly fee for having the service, which ranges for ancillary cannabis businesses as well as hemp and CBD businesses on the low end can expect to pay $250 a month for the account. A dispensary that does a good amount of volume can expect to be paying more like $1,500 a month.
Matthew: What's the state of merchant processing and banking? I mean like accepting credit cards, accepting debit cards. I see ATMs a lot in dispensaries but then there's also these standalone solutions so you can use your credit card occasionally here and there. I really don't know what the full landscape is of possibilities in terms of merchant processing and using credit cards. Can you talk a little bit about that?
Dan: Sure. It's wild and it changes pretty rapidly, but there are a number of different options that you'll encounter out in the marketplace today. I'll preface this by saying most people that you talk to will generally agree on one thing and that is that the four major card brands, Visa, Mastercard, Amex, and Discover. Generally speaking, in what they call the card brand rules, the rules documents that each of those brands push down the chain to those that process transactions with their branded cards.
The card brand rules generally are construed at least in the United States to prohibit direct cannabis transactions. Most people will agree on that. However, beyond that, a lot of people in this space have trouble finding other common ground. There are some that will tell you that the only legitimate method for electronically transferring funds at cannabis businesses is to do so via an app base to direct bank transfer method.
There are others who have launched since ATMs as you've noted are commonly seen in dispensaries and are in most cases viewed as permissible. Although, sometimes banks will want to vet the owner of the ATM and who's servicing it, that sort of thing. We have seen some technology like the cashless ATM come about and be used in dispensaries. That's a workaround that has had some stability over the years. Cannabis consumers are probably familiar with this.
They use their debit card at the point of purchase and enter in a pin but the transaction is actually rounded up to an even dollar amount that shows up on their statement as an ATM transaction. We see those.
We also see often dispensaries using credit cards. If they're doing that they're doing one of two things. One is what they would call in the payments industry masking. Although, a more common word for it would simply be lying. That is where you claim that your business is a pet shop or a bakery and it's really a dispensary. Well, that'll work for a little while and then one day, the credit card company will do some due diligence and realize that is not what's going on here and shut you down.
You see that a lot especially in very big recreational markets where a store especially that does a bunch of tourist traffic, their customers aren't going to notice if one day there's a payment card method and the next day, there isn't.
In a smaller market, where your customer base is more regular, that thing would be noticed and you've got some reputational risks there as well. The other thing that we see every once in a while is a workaround method where a gift card or an E-Wallet is loaded using a credit card transaction. Sometimes the funds are held like a gift card balance. Sometimes the funds are held in some obscure cryptocurrency and this somehow settles for the merchant
[unintelligible 00:16:17] card was a popular method that worked like this for a while. It worked until it didn't work. If you were one of their big customers like Planet 13 or reef dispensaries in Vegas, I suppose you'd still be fighting it out in court because that is what's happening right now. When that solution stopped working, it ended up being a big interruption for all who were using it.
There's an interesting court case going on in the Southern District of New York right now where those parties are fighting it out over some proceeds. Some other proceeds appear to be missing. Those workaround methods can be tempting but that they can have problems.
Right now, at Abaca we are not directly doing any of these payment processing methods, but if our customers want to use one of them, we do our due diligence on it. We vet it to see to make sure that no masking has occurred and that it appears to be permissible. The business risk of the stability of the system is ultimately going to be the merchant's choice whether they want to take that on or whether they want to operate all in cash.
It's wild. It's rapidly changing. There's a feeling out there that if the SAFE Banking Act, for example, were to pass that, this would immediately change overnight. Based on our conversations with large payment processors and with the card brands directly, we don't actually think that's the case either. This hodgepodge, wild west scenario on the payment side likely to persist for a little while.
Matthew: What questions do you get asked the most by clients and potential clients?
Dan: The cost is obviously going to be the first thing to come up. I think people recognize there is a cost associated with cannabis banking or really any financial service in cannabis that might be above market compared to what you could expect to pay for that financial service if you, you know manufactured widgets. Certainly, that's something that comes up. We need to make sure to educate the customer on why, what you are actually paying for there. Why there is a cost associated with this.
After that, depending on the market, in new markets, we often just get asked, "Well, how do you do this? How is this even legal?" Which is fun for me as a lawyer. I get to go nerd out about the little bit of regulatory guidance that exists and how a handful of [unintelligible 00:18:39] around the country have begun to follow it and how our tech helps them follow it as well. It's one of those things where there are varying degrees of education and so it's always been my mission to set the story straight.
Matthew: Okay. In what states are you currently operating in now and where do you see yourself expanding to?
Dan: Sure. We formed the company in Arkansas after our medical cannabis measure passed here several years ago. We're banking the vast majority of the operators here. We're also in Oklahoma. We're in Illinois. We're in North Dakota, thanks to some of the MSO's that we work with. We are in Missouri actively pursuing with a new Parker bank. The business of the several hundred new licensees there that's going to be a very active market, we think.
Those are the five states we currently operate in. We are looking at expanding into more into the Upper Midwest from Illinois East into Michigan, Ohio and maybe into the Northeast. The current situation with Coronavirus is having some interesting impacts and some legalization measures. On one hand you've got a conversation that is advancing more rapidly as marijuana businesses are deemed essential in many states. Certainly, that only enhances public perception of the utility and benefit of this industry.
At the same time, in a state where there was a ballot measure and you had people planning on spending the summer gathering signatures, like they were planning to do for the adult-use measure here in Arkansas, well, there probably aren't going to be big events and music festivals and things you could go to, to gather those signatures.
If you look at states like New York that were going to advance recreational cannabis measure legislatively, well, they've got other legislative priorities now. Governor Cuomo has his hands full and has said that that's off the table for the budget for now. We're still heavily looking at the Northeast especially, but some of that might be driven by the timing of when legalization, especially adult-use legalization happens in these markets.
Matthew: Okay. Dan, where do you see the cannabis financial services market going in the next three to five years? Are there any kind of emerging trends you think we should have our eyes on?
Dan: It really depends what the federal government does or does not do. Like I said, in response to the previous question, we've seen some interesting behavior where states have deemed the cannabis industry essential in the event of a shutdown. That would certainly seem to advance the conversation nationally and point us towards some federal relief. The different types of federal relief that have been contemplated, in my view, have different effects. If something like the SAFE Banking Act or the STATES Act were to pass, we believe those are half measures.
They're good. They represent progress. You will see a few more banks come in, especially on the depository side. I think you'll see a few more banks coming in on the lending side as well. The major credit card brands are still going to stay out because you'll still have a situation where cannabis is legal in one state and illegal in another, and technically, illegal under the federal law as well. That'll probably be enough to keep Wall Street and high finance out as well, which is becoming an increasing problem for the larger operators, especially now as we go into what could potentially be a prolonged recession.
We believe that it will take something more wholesale, like a complete de-scheduling of cannabis, in order to see a complete democratization in financial services available to this industry. I'm not the kind of person who places bets on what the government will or will not do, but those who do a lot predict that that's the kind of change that wouldn't come until after the next presidential election. Of course, others reasonably theorize that our president could wake up on any day and decide to de-schedule cannabis on a whim. It really remains to be seen and depends largely on what happens in Washington.
Matthew: Okay. Where are you in the capital-raising process?
Dan: We raised a seed round early last year. We had participated in the CanopyBoulder accelerator, which is a great program, and CanopyBoulder invested in our company. We were also invested in by Welkin Capital out of New York and AFI Partners out of Seattle, both great groups that invest in emerging cannabis tech. They invested in our seed round last year. Like any company, we will probably be, again, looking to raise capital in the future, but happy to say we're not raising capital right this second.
Matthew: What was your experience like at CanopyBoulder? Could you just talk about that a little bit?
Dan: It was awesome. That's a great organization with just an incredible network. For our company, we were forming a cannabis tech solution in a state that heretofore had not had a cannabis market. We're basing a lot of assumptions on what we think the market is going to do, while being able to go and spend some time in the country's most mature cannabis market and get in and have conversations at a high level with operators and investors and others and really refine our approach and our solution was very, very beneficial.
This was the fall of '18 that we did that program, and spending the fall and winter in Boulder didn't hurt either. It's just beautiful. My wife came out just about every weekend while I was doing that program and we would go out into the mountains. One of my dogs came with me. We had a good time.
Matthew: Great. Well, Dan, I'd like to ask a few personal development questions to help listeners get a better sense of who you are. With that, is there a book that's had a big impact on your life or way of thinking that you'd like to share?
Dan: I've always been a big Hunter S. Thompson fan. It's hard to narrow it down to one book. There's a mantra that I abide by. This was my mantra when I was a lawyer in private practice and it is still my mantra in advising cannabis businesses. That is, as Hunter S. Thompson would say, "Never give the bastards a reason." That's always stuck with me.
Matthew: Okay. What's the most interesting thing going on in the cannabis world or the financial world, besides what you're doing?
Dan: To me, the most interesting thing going on in the cannabis financial world is maybe what is not going on, and that is with respect to the massive federal stimulus program that was just passed, the CARES Act, in response to all of the economic damage being done by the necessary shutdowns going on across the country, in states and cities.
Yet, this is a massive, unprecedented is the word we hear thrown around a lot, massive, massive appropriation of capital to small businesses and medium businesses across the country, and yet this emerging sector that did 15 billion in legal revenue last year, and again, as we discussed earlier, was declared essential in a number of states across the country, even during their shutdown, this industry is getting left out. It is not only just as susceptible to economic swings as any other industry but, in fact, it's an industry that needs to be supported more than ever right now because of its essential status.
We've got people in communities risking their health to go out and participate in these cannabis businesses, and the government tells them, "Yes, go ahead and do that and put your life on the line, but will we extend you a favorable small business loan like we would if you were in any other kind of small business? No, we won't."
That's been a challenging thing. The paycheck protection program and these other programs are applicable to hemp and CBD businesses in some cases. That's nice, but for the vast majority of cannabis businesses, especially the plant-touching ones, they're getting left out of the stimulus conversation there, which is really disappointing.
Matthew: What's the one thought you have that most people would disagree with you on?
Dan: I touched on this a little at the beginning, but I would disagree with the notion that there is, in fact, a cannabis banking problem. Not only is the industry banked, and in every legal market, there are at least a handful of institutions, whether dealing direct with that institution or through a Fintech intermediary like us. There are a number of options for operators and there is, as we discussed, a cost associated with this.
I think there are some out there that believe that if the SAFE Banking Act were to pass, for example, that this cost would go away and Bank of America and Chase and Wells Fargo would be taking their deposits, no problem. I'm here to tell you that that is not the case. You don't need to look any further than the gaming industry, whether we're talking about casino gaming or these new sportsbooks that have been authorized by state law and a bunch of states in the northeast.
Those industries also have a very difficult time finding banking because they're high compliance and they're cash-intensive, and those that do, often are faced with monthly fees and fees for depositing all that cash, just like cannabis businesses are. I object to the notion that there's a problem because the private sector, some enterprising banks, as well as companies like ours, have solved the problem, and I object to the notion that much is really going to change if something like the SAFE Banking Act were to pass.
Matthew: Any epiphanies about yourself or society as we move through the tail end of the coronavirus here?
Dan: The thing that I keep wondering is which of these changes in behavior that we're undergoing right now are going to be temporary and which are going to become permanent. I can't help but think that we are going to see a permanent shift towards e-commerce, towards delivery, towards contactless payment, towards also running businesses out of your home. I think any ordinary person, even if society is 'reopened' here in a month and these stay-home orders are lifted and these travel bans go away, I think most average people are still going to be at least a little bit agoraphobic.
I like the fact that I get my groceries delivered now. I used to enjoy going to the grocery store and picking some good steaks out of the butcher counter and things like that. You know what I think, I'm probably just going to get them delivered and let the butcher use his judgment on which steaks to send me. That seems safer. What does that mean in terms of shifts for the cannabis industry? We're already seeing a shift towards delivery and an increased demand for cashless payment options, despite the risks that we discussed earlier. I think that persists. I think that remains.
I think you see delivery and other things like that take root, and I think you see more homebound businesses. I think you're going to see people looking to operate things like online CBD stores out of their house in a greater rate this year than even last year where there were a number of people across the country who got into that business.
Yes, it'll be interesting, but that's my prediction. That's what I'm seeing in consumer behavior now. Just from my own personal feeling, I've had my groceries and my cannabis delivered this week, and I don't expect to stop.
Matthew: [laughs] Okay. Dan, as we close, how can listeners both accredited investors, maybe that are interested in investing in Abaca and also potential clients who need banking solutions, how can they reach out to you and learn more?
Dan: Sure. Anybody can go to our web page, goabaca.com, G-O-A-B-A-C-A.com. If you'd like to find me personally, connect with me on LinkedIn. My username on LinkedIn is Daniel J. Roda.
Matthew: Got it. Well, thanks so much for coming on the show. This is really, as I mentioned, into a thorny problem in most people's minds, but it sounds like you have an elegant solution here. I wish you all the best.
Dan: Thank you. I appreciate you having me on. I hope my dogs weren't too much of a distraction for everybody.
Matthew: No problem. Thanks, Dan.
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