Luckily for the burgeoning marijuana industry, we can’t all be as upstanding as Jeff Sessions, the author of this quote.
Thirty-eight states, Washington D. C., Puerto Rico, and Guam have all legalized marijuana to at least an extent. A large majority of Americans support legalization. And, by some estimates, legal sales (medical and recreational combined) will exceed $30 billion in the U.S. in 2022.
But dispensaries and other cannabis-related businesses are operating in a grey area because, while federal regulators have mostly taken a hands-off approach to enforcement in states that have legalized it, marijuana is still illegal at the federal level. This leads many banks to avoid doing business with marijuana dispensaries, fearing that involvement with the industry could lead to charges of aiding and abetting a federal crime and money laundering. As a result, legitimate, tax-paying businesses are operating with limited access to banking services like loans and the ability to accept credit cards.
One solution would be for Congress to pass, and the President to sign, the Safe and Fair Enforcement (SAFE) Banking Act. It would allow banks to give legal cannabis companies loans or other support without risking penalties at a federal level. The Credit Union National Association (CUNA), Independent Community Bankers of America (ICBA), National Association of Federally-Insured Credit Unions (NAFCU), and the American Bankers Association (ABA) have all called for its enactment.
Kore Compliance offers dispensaries and their customers an alternative to cash or cashless ATMs for payment. Or rather, it offers multiple payment alternatives (excluding credit cards). Consumers can make payment by linking Kore’s Budtendur app to their checking, savings, money market, investment, or other accounts. Money is transferred to the Budtendur app and used to make payment seamlessly and electronically at checkout via secure QR code.
Founded in 2019 and based in Rhode Island, Kore Compliance has half a dozen employees. The company raised a $525,000 seed round in May. Ray Jorgensen is CEO and Principal.
Q. Ray, how would you describe what you’re trying to do at Kore Compliance?
A. We are trying to modernize retail cannabis. We’re certainly offering alternative, app-based payment options but we’re also creating a client engagement tool. We’re coming from the world of healthcare, where every EMR has its own patient portal, and we’re trying to be like Starbucks, which was so successful with its mobile app — to the point where they held more cash than many banks — because it’s easy to use.
Right now, in our market there are so many different companies involved. One that does your client interface (Dutchie, I Heart Jane), a whole host of payment processors which are really following a 1950s model, and so many different sales organizations (ISOs) that are reselling down the line. The actual bank at the end is an unknown entity. No one wants to tell you who it is.
Our product is starting out by helping you manage this payment world, which is so vexing, but we are really focused on getting to a place where your frequent flyers, your VIPs, are going to embrace the app.
Q. How big is the market opportunity?
A. From our perspective, the market is enormous, with billions of dollars flowing through.
Q. Are you focused initially on the larger, muti-state operators, mom-and-pop shops, or will you work with both?
A. We will work with anybody. But our best opportunities right now are with the smaller mom-and-pop shops, because their decision-making process is pretty clear. Having said that, we are having early conversations with a couple of large MSOs that are in the ten-figure range as far as what they’re running through their systems.
We think we’re one of the only payment aggregators in the Northeast. Massachusetts, Rhode Island, New York as it develops — that’s where we’re located. There’s just tremendous opportunity here.
Q. What made you select QR codes as the right option for the Budtendur app?
A. Part of our vision is that anyone could show up at any dispensary and just bring their phone and their ID. The QR code provides a secure means of transaction execution. We have a rotating QR code — it morphs every 20 seconds — so it can’t be stolen or copied. To some degree we mimic what they do with the Walmart checkout system.
So you open the app, scan that QR code, choose if you want payment to come from your checking account, from your debit card, or if you want a crypto transaction. We didn’t intend to do anything new or crazy, but people tell us this is very avant-garde. QR codes already exist, of course, but they’re not used broadly in this space.
Q. How do consumers connect their financial accounts to the app?
A. The same way you’d do it with anybody else. You need an account number and a routing number. Then we do a test with a couple of cents, back and forth, and you’re connected.
Q. How do you handle KYC and AML?
A. All of the transactions occur with the client present, with the card present, as opposed to the way transactions happen online. When you visit a dispensary, the first thing they’re going to do is check your ID. That’s part of their physical security protocol.
Then, when you’re meeting with the actual budtender at that shop, before starting the conversation, they’re going to double check your age. Then at check-out, the system will ask them if they’ve verified your identification. It’s happening in person.
Now on our end, we have the ability to scan an ID and do some different authentication. We can do a facial ID or a thumb print, and sort of with the biometric authentication that you can do via your phone… we can apply that functionality to the app.
We built our product to exceed HIPAA standards (Health Insurance Portability and Accountability Act standards) because we intend to work with medical dispensaries and would have an obligation to meet those standards, and because we do think that at some point there will be healthcare claims adjudication, and that’s something we know how to do based on our healthcare experience. We’re going to want to be in that space.
We’d like to work with companies that can not only identify who the person is but say how much money they have in order to make the transaction less risky. Some companies make a good bit of their margin on chargebacks, so they want some of these transactions to fail. We don’t. That’s not our MO. We make a percentage of our payment partners payment, and if the dispensary is okay with it, by charging a very small convenience fee. We may actually turn that into a monthly subscription fee on a per user basis. Something very small, like a quarter. It scales pretty quickly and our expenses are pretty reasonable.
Q. You’ve got a two-sided marketplace. You have to persuade both consumers and dispensaries to adopt your technology. What are your approaches to recruiting each side of the transaction?
A. The budtender would have to use the app to check people in and out, but customers don’t have to use the app. Some dispensaries are in areas that attract vacationers. Those folks are probably not going to download our app. They’re going to visit that dispensary once. They’ll pay cash or use a debit card because they’re just visiting.
But the budtenders and dispensary owners will see that this is a better tool to use. Some states prohibit Dispensaries
can’t from offering rebates or reward points, but we can. We’re allowed to offer rebates and reward points to their VIP and high-volume clients to give them credit for using our product, just like American Express or any other company does.
We can also help with pre-ordering and with contactless transactions.
Q. Debit cards are okay?
A. Debit cards are permissible if they’re running on a debit card network. We run on the NYCE and Cirrus networks as opposed to running on the Mastercard or Visa networks. The credit card companies have been very clear. They don’t even like the cashless ATM if the cashless ATM is run on their network.
Q. How many dispensaries are you working with currently?
A. We are pre-revenue, working with two beta clients to ensure bullet proof entrance in this market.
Q. What competitors do you have? Debit cards (which I didn’t know), cash, and cashless ATMs?
A. There are some national players in this space. CanPay and Hypur are two. But we’re really competing against so many other priorities that dispensaries are dealing with.
One of the things we’re providing within our app is stored value. Those dollars that are loaded onto the app are being held in an escrow account with our partner bank. But it’s not an omnibus account for all our clients. Each dispensary has its own escrow account.
Q. I would think that’s a benefit.
A. It is. That’s our competitive advantage in that regard. And the stored value means that we don’t need to do chargebacks, which are a bookkeeping nightmare. It allows those dollars to be there ahead of time. When the transaction happens, we can move the money quickly, and it’s also the most cost-effective way to move the money. That means larger rebates for the client and lower expenses for the dispensary.
Q. Budtendur is a payment aggregator. Is the redundancy built into your model important to your clients?
A. Yes. And we won’t charge them any more money than what they pay right now for a single processor, and they have the option to have several. If they like their current payment processor, we can just put them in the app.
We’re adding a client engagement piece, we’ll add inventory, we’ll add a basket where products can be “loaded” before checkout, and for what they’re paying that processor, they’ll also get what they’ve been paying for from Dutchie or I Heart Jane, but all from a single product. And it can be white labeled, so it’s theirs.
We are modernizing retail cannabis by getting very contemporary technology into the hands of a business that’s been running pretty much straight cash.
Q. Dispensaries have unmet needs for financial services beyond the ability to accept non-cash payment from consumers. Payroll, for instance, and insurance. Or paying landlords and service providers like accounting firms and ad agencies. Is your thinking that you will begin, in time, to offer those services?
A. As a serial entrepreneur, I’m always thinking about the 12 different things we can do. But we want to do one thing well before we expand.
In the healthcare sector, when you hear the term MSO, it’s not a multi-state operator, it’s a management services organization. But what you’re suggesting is essentially what an MSO does. It offers accounting, bookkeeping, payroll, group insurance. Even patient call centers for after hours.
So, to answer your question, yes. We’re talking to people about partnerships so we can build a trusted network. I think we’re close to creating that umbrella of services. You’ll be able to buy a la carte or all together.
Helping them move money to pay other folks? We can do that right now.
Q. You’ll have, as you grow, data that give you unique insights into the health of each of these businesses and you could create a virtuous circle by using that insight to offer additional financial services earlier and at better prices than competitors. Do you consider that an opportunity for Kore? You’ll also have a tremendous amount of data on a fast growing vertical that no one else will have. That data itself will be very valuable.
A. I’m a big believer in following KPIs. In this space, we’ll know not just product sales, and units of sales, but units of sales by budtender by time of day. What we can do with geofencing and transactional analytics will be very helpful to our clients.
There’s a misperception that, when you open a cannabis business, you’ll be a millionaire tomorrow. You still have to run the business. You still have to manage income and expenses and payroll and staff — nothing about it is easy. That lack of (federal) regulation, which one might think makes it easier, can make it hard to get stuff done. If we can help by partnering with lenders, we’ll do that.
All those things you mentioned, we’re interested in. But we’re going to do one thing well first.
Q. Given your business, has Kore had any trouble accessing banking services?
A. It’s been difficult, and COVID really slowed us down. It took us two and a half years.
I’d like to think that it’s changing. There are certainly more banks that talk about getting involved. A bank has to have an appetite and a board that is willing to support it. I’ve seen banks that were in the space get out, and others that are in the space pretty broadly but don’t advertise it. Some banks are still worried that there are a lot of people out there who aren’t okay with it, despite the fact that 70+% of Americans want it to be legal.
Q. Is your business at risk from eventual legalization at the federal level?
A. No. Not at all. In fact, things will be easier. There will be standardization. They’ll roll out consistent rules. These businesses will grow faster.
Right now, it’s a sprint to take market share. You want to get as many clients as you can. I’m not afraid of the competition. You shouldn’t be if you have a great product and provide a great service.
Q. How quickly could you add credit cards to your roster of payment options?
A. We could do it tomorrow.
Q. What’s next on your product roadmap?
A. It depends on what our clients want. One of the things we’re looking at is digital tipping and trying to hook into Zelle and Venmo as a way to send money. It’d be no different than the way restaurants handle tips. Some add them to paychecks. Some pool tips, some let each individual keep them. We’re trying to create those options.
Messaging is one of the things we want to get out quickly, the ability to communicate specials and with VIPs in compliance with each state’s rules.
Q. Why Rhode Island?
A. We’re a virtual company. I have a partner in California and another in Rhode Island. We have one developer in Colorado and a couple overseas. I’m speaking with you from my home office, but my wife and I are selling our house. I can work from anywhere.
But building culture is hard, and it’s a critical piece of being successful. So, bringing people together still must happen, but as far as our ability to find talent goes, I don’t need anybody to relocate.
Maybe a benefit of COVID (if I can say such a thing) is that people recognize they don’t have to go to an office in order to be successful.
Q. Are you hiring?
A. Not actively, but if someone is interested, they should reach out to email@example.com. We’re building this along the ISO model, so we’ll be looking for regional reps to help us grow.
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