Dutchie’s payments play faces headwinds

By Alex Halperin
Jul 21, 2022
Dutchie co-founder and Chief Product Officer Zach Lipson (Courtesy: Dutchie)

Correction: This story originally misstated Lipson’s title and the nature of Dutchie’s e-commerce offering.

Cannatech unicorn Dutchie has a new payments offering designed to secure its place at the center of dispensary tech stacks, and help it reach profitability. For that to happen, Dutchie will have to overcome hurdles on several fronts, from operations to marketing.

After raising $550M in 2021, Dutchie announced that it had landed a $3.75B valuation, making it the most valuable cannatech company. Like many tech companies, Dutchie prioritized market share over profitability, and now says it’s in 5,000 shops across North America. But this year’s tech stock collapse has punished that strategy.

  • Dutchie investors are reportedly getting skittish. In June, the company laid off around 65 employees, roughly 10% of its workforce.
  • New York magazine named one of Dutchie’s main investors, Tiger Global the “poster child” of the recent tech meltdown.

The “Third Puzzle Piece”

Dutchie provides dispensaries with e-commerce and point of sale software. Co-founder and CPO Zach Lipson describes payments as the “third puzzle piece.” Competing payment providers typically plug-in to dispensaries’ software, including Dutchie. Dutchie Pay is fully integrated with its current offering.

There’s a significant opportunity here. While various payment solutions abound, a 2020 report estimated 90% of dispensary transactions were still in cash.

Dutchie Pay uses ACH (Automated Clearing House), a popular mainstream payment mechanism which handles trillions in transactions every year.

How it works

To begin, consumers connect their bank account to Dutchie Pay through a quick registration. When they’re ready to make a purchase, Dutchie enables a “one tap” payment that initiates the deduction from their account.

Dutchie Pay is available for U.S. online payments immediately, with brick and mortar rolling out in the fall.

  • ACH transactions require an originating bank but since they do not traverse Visa, Mastercard or another network that bans cannabis payments, they are considered compliant.
  • This varies from another common dispensary option, “cashless ATMs,” where customers pay with a credit or debit card and the dispensary receives the cash. Visa has warned about the practice.

In addition to creating a new revenue stream for Dutchie, operating on ACH holds out the promise of a partnership with mainstream delivery services. (DoorDash started delivering weed in Canada earlier this year.)

  • Dutchie Pay could also give the company an edge once credit card payments become possible.

Based on seven months of alpha and beta testing this year, Dutchie touts several benefits of its new platform for shops: Bigger order sizes, fewer abandoned carts and more repeat purchases.

  • Of course it also carries all the safety and convenience benefits of not doing most transactions in cash.

An array of challenges

Despite Dutchie’s reach into thousands of U.S. dispensaries, observers say Dutchie Pay will face an array of challenges. Notably, it doesn’t yet have a track record of running an ACH payment network.

  • One operational challenge is that ACH payments aren’t instantaneous: Customers can sometimes make a cannabis purchase, then drain their account on another debit purchase before the first one gets deducted.

Dutchie also has to convert buyers to its new system. The experience of ACH player CanPay suggests this is a long game. Over six years of accepting payments, CanPay CEO Dustin Eide said the company has grown into the largest ACH network for dispensaries, serving nearly 900 shops across 30 states.

  • Over that time it has handled a total of $600M+ in transactions, a tiny amount compared to the industry’s billions in annual sales.
  • CanPay charges dispensaries less than 2% per transaction. Dutchie doesn’t disclose its rates.

Based on numbers from about two months ago, a former Dutchie employee told WeedWeek that Dutchie Pay “underperformed” in alpha and beta.

  • “Fewer people have used it than expected and overall revenue has been way lower than estimates,” the employee wrote. At one point the program had signed up 30 to 40 dispensaries, below the projection of 125. The former employee said revenue was roughly 90% below expectations.
  • The former employee blamed “operational and sales issues, then lack of consumer trust…[consumers] have no idea what Dutchie is.”

“We have huge demand for the product and a long waiting list of customers eager to adopt Dutchie Pay,” a company spokesperson wrote. “Dutchie Pay exceeded our expectations during alpha and beta with consumers, our customers, and the industry at large.”

  • The company declined to disclose how much money has moved through the system.

A balancing act

The former employee described payments as essential to Dutchie’s plan to reach profitability in about two years. To make that happen, Dutchie’s network needs to execute in the complex world of payments, while also supporting its existing customers.

A few weeks ago on LinkedIn, Benjamin Ballinger, COO of Michigan operator Left Coast Holdings, publicly broke up with Dutchie’s LeafLogix point of sale system.

  • In a message to WeedWeek, Ballinger said it seemed like the company was disorganized and that leadership is more concerned with building market share than “making a solid offering for existing customers.”

“Our customers are our number one focus,” a Dutchie spokesperson wrote. “We’re in communication with this customer and working closely with them to ensure they are set up for success when using our products.”

Asked Thursday if he planned to stick with Dutchie, Ballinger said he didn’t plan on it.