Cannabis Watch: Here’s how startup KindTap works around credit card ban for cannabis payments

Cathy Corby Iannuzzelli, co-founder and chief payments officer of KindTap, said the company has built a “closed loop network” through direct relationships with merchants and consumers for its debit card and line of credit products. The company either lends consumers the money for credit purchases, or it helps move money to the merchant through its network.

“It’s really very straightforward,” Iannuzzelli told MarketWatch. “Everybody in our network has to have a bank account. A merchant has to have a bank account and the consumer has to have a bank account. We’re moving money between the merchant’s bank and the consumer bank.”

KindTap already offered a debit card product but is now adding in credit lines for customers ranging from $250 up to $1,500, to help consumers smooth the process of buying cannabis around payday.

The line of credit payback periods are shorter, similar to a buy-now-pay later model, with interest rates in the high teens percentages, not in the 20s or 30s like with a traditional credit card. The credit line interest rates will vary by state.

“We knit together solutions that look like a credit card or a debit card that run through the National Automated Clearing House Association (ACH) on our own rails,” Iannuzzelli said. “It’s a new model with similarities to Venmo or Amex, but it’s really its own model serving the very unique situation of cannabis payments.”

KindTap works with FDIC insured financial institutions to move money. Citing privacy requirements, Iannuzzelli declined to name any regulated banking partners.

More cannabis dispensaries have been able to line up business accounts with credit unions and some local banks. KindTap said it would introduce cannabis merchants to banks serving the cannabis market, when asked.

Iannuzzelli has been in the payments business for the last 15 years, and decided to help launch KindTap to fill a need in the cannabis business.

“I saw the opportunity to do something that could significantly change the lives of people — especially for medical patients where cannabis is the medicine that they need and want, and payments were holding the industry back,” she said.

Investors have also held back from the sector this year, as the Cannabis exchange-traded fund
THCX,
-0.80%
has shed 1.7% year to date through afternoon trading Friday and the AdvisorShares Pure U.S. Cannabis ETF
MSOS,
-1.69%
has tumbled 17.2%, while the S&P 500 index
SPX,
-0.19%
has climbed 17.15.

KindTap remains a unit of Kreditforce Ltd., a private merchant bank. The company also has also drawn backing from fintech companies and venture-capital firms, but no further details have been disclosed.

“We plan to be in every state where cannabis is legal,” she said.

KindTap now employs 15 people, most of whom were hired in 2021. It’s hiring customer service merchant service people as it moves into more states.

For the most part, the industry remains subject to payment solutions with higher fees. In some cases, transactions may appear to be made on a credit card but the payments end up getting billed to customers as cash advances, which contain high fees. Some dispensaries offer cashless ATM payments, but those transaction types include layers of fees from ATM owners and banks.

“The Wild West is a good way to describe the cannabis payments business,” Iannuzzelli said. “Several solutions operate in gray areas like a cannabis merchant whose merchant processor has coded them as a dental office. In some cases, it’s downright fraudulent.”

Along with KindTap, other companies in the cannabis payments space include CanPay, eMerchant Broker (EMB), Nature Pay, Sky High Moly, GreenLeaf Pay and others.

All told, the U.S. legal cannabis business is expected to reach $43 billion by 2025, according to estimates from New Frontier Data.