Cannabis Payment Processing Solutions: What’s Legal?

The cannabis industry in the United States continues to grow despite remaining a federally illegal substance. Several states have recently legalized recreational and medical marijuana. Many of those markets aren’t yet fully operational, which means future growth is extremely likely.

In 2020, legal marijuana sales in the United States reached $17.5 billion, an increase of almost 50% on the previous year. Furthermore, research from New Frontier Data suggests that the legal market could reach $30 billion in 2025.

Yet despite this ‘green rush,’ cannabis dispensaries continue to face roadblocks. The main one being their inability to accept credit cards from customers. It is a problem that’s holding the industry back, and we explain the reason for this situation in this article. We also look at the available payment options and some crucial facts about cannabis payment processing solutions.

Why Are There Problems with Cannabis Credit Card Processing?

Although the number of cannabis payment services available to businesses is increasing, they still can’t benefit from the biggest one: Credit card payments. It is a situation that is badly hurting dispensaries in particular. Data from the U.S. Census Bureau estimates that almost 200 million American adults have a credit card, a charge card, or both.

Also, data from the Federal Reserve of Boston found that the average credit or debit card purchase is $112 across all industries, compared to just $22 for cash transactions!

Unfortunately, federal law clearly states that credit card payments are illegal in the marijuana industry. This means the likes of Visa, American Express, or Mastercard have placed bans on conducting business with entities in the marijuana sphere.

Looking for Help with Dispensary Credit Card Processing? Banks Probably Won’t Help Either

While you can forget about cannabis credit card processing with ‘traditional’ credit card companies, it is something of a myth that you can’t work with a bank. The assumption is that because marijuana remains a Schedule I drug under the Controlled Substances Act (CSA), it is illegal for banks to get involved in the industry.

Financial institutions, worried about losing their licenses and being penalized with heavy fines, naturally steer clear of cannabis companies. However, the 2013 Cole Memo, written by the Department of Justice (DOJ), opened the door a little. The memo laid out the DOJ’s eight marijuana enforcement objectives. Anything not included in the department’s priorities was left to state and local law enforcement.

A year later, a second Cole Memo addressed money laundering and other laws as part of the Bank Secrecy Act (BSA). This included filing Suspicious Activity Reports (SAR). This memo said that any financial institution or person that offered cannabis banking services would be prosecuted if the business was engaged in any of the eight DOJ marijuana priorities.

The DOJ also clearly pointed out that financial institutions had to comply with Financial Crimes Enforcement Network (FinCEN) guidance issued along with the second Cole Memo. A financial institution is obligated to file a SAR if it knows, suspects, or has reason to suspect that a conducted or attempted transaction involves funds derived from illegal activity.

Banks Might Help, but Few Are Getting Involved

Initially, it seemed as if the financial industry might come around to the notion of working with cannabis businesses. In the aftermath of the second Cole Memo, financial institutions started providing banking services to marijuana-related businesses. By the beginning of 2019, over 720 entities (around 560 banks and 160 credit unions) served cannabis companies. However, there was hardly any movement in the following few quarters.

In January 2018, Jeff Sessions, the Attorney General at the time, rescinded the Cole Memo. This made things awkward for cannabis businesses and banks as there was the threat of federal involvement once again. Yet a review of DOJ cases in the following two years found that the Trump Administration mainly adhered to the cannabis enforcement policies of the Obama Administration.

There are currently few banks willing to take the risk of dealing with cannabis businesses, especially since the Cole Memo was rescinded.

Nonetheless, there are relatively few banks willing to take the risk. Also, please note that even if a cannabis business has a bank account, it still can’t accept debit or credit card transactions from credit card companies like Visa.

Yet, some businesses take the risk. However, after a while, the credit card company finds out and closes down the cannabis company’s merchant account. The credit card organization can also freeze payments processed the previous day and place the marijuana enterprise on a blacklist called the Terminated Merchants File (TMF). Individuals or companies added to the TMF can’t access credit card services for five years.

What Recreational and Medical Cannabis Payment Solutions Are There?

When debit and credit cards from well-known providers are taken out of the equation, cannabis companies have to get creative. There is a possibility that you can benefit from dispensary credit card processing, and we look at that later. However, first, let’s look at some alternatives.

Cash

Estimates vary, but it is believed that up to 70% of marijuana businesses are forced to operate solely in cash. The misconception is that cash is a low-cost method of running a dispensary. In reality, it is a lot more expensive than you think!

Remember, credit and debit card purchases are up to five times larger than their cash equivalent on average, which means lower customer spending.

As employees have to count the cash, there is a high risk of human error. Managers have to spend extra time at the end of a workday figuring out any discrepancies.

Then, of course, there is a greater risk of being a robbery target. Law enforcement officials from different states have reported a rise in dispensary crime. In Los Angeles, there was a 10% increase in marijuana dispensary crimes in the first nine months of 2019 compared to 2018, for example. Carrying cash on the site significantly increases the risk to the business and its employees.

However, an incredible 90% of all financial and product loss in the marijuana industry is attributed to employee theft! Therefore, dispensaries must spend money on security to monitor staff as well as external thieves. Also, as cash is untraceable, providing banks with details of where the cash originated for FinCEN purposes is almost impossible.

Banks charge large fees for transporting, depositing, handling, and cleaning cash from cannabis companies. Finally, there are hygiene concerns over touching paper money in the wake of the global pandemic. Overall, there are huge disadvantages to using cash in the marijuana industry, but it is the #1 option for most businesses.

While there are better alternatives, few of them are fully legal.

Automated Clearing House (ACH)

This is the process of transferring money between banks without cards, checks, or wire transfers. These electronic transfers allow businesses to verify that funds exist instantly, and the money goes from a customer account to the dispensary’s business account. These are legal transactions with companies such as CanPay and Hypur Pay, among the best-known options.

Customers have to register through the third-party system and download the app. Then they can check into the dispensary through the app. If the company’s Point of Sale is integrated, the customer enters their PIN code to check out.

Electronic Checks (eChecks)

Electronic checks, as the name suggests, are digital versions of paper checks. eChecks are best used in B2B transactions involving growers, processors, and dispensaries. In general, customers making small purchases are unlikely to use an eCheck.

Cashless ATMs

Also known as Point of Banking Systems, cashless ATMs are widely regarded as the future of marijuana payments. They operate similarly to regular ATMs as the customer inserts their debit card and enters the PIN. The cashless ATM is electronic and doesn’t produce any cash.

Instead, it provides proof that the cash was debited from the customer’s bank account and deposited in the dispensary’s account. Let’s say a customer purchases $83 of marijuana products. They give their debit card to the cashier, who charges $90 plus the transaction fee. Then the cashier gives $7 in change to the customer.

These debit transactions cost less to process than their credit card equivalent. This is because they charge flat fees rather than a percentage of the transaction. Cashless ATMs are becoming popular because they offer familiarity to customers while ensuring the dispensary doesn’t need to keep huge sums of money on site.

Yet you should realize that it is technically illegal to accept this form of payment. Your business is still obscuring the true nature of the transaction. The bank thinks it is an ATM transaction rather than one involving marijuana. There is a good chance that eventually, the credit card network will figure out what’s happening and shut the ATM down.

While major credit card companies won’t touch a marijuana business, there is a way around this problem. Once again, though, it is, at best, a legal gray area.

What Marijuana Credit Card Processing Options Are There?

Apart from the limited number of banks and credit unions offering services to cannabis companies, other payment processors are willing to do business. However, these entities are specialists in the high-risk field, which means they charge exceedingly high fees. Moreover, they only tend to work with high-volume retail-only dispensaries with a lengthy track record.

What dispensary credit card processing entails is the use of a marijuana merchant account. This merchant account enables you to accept credit card payments and is approved by your provider for selling cannabis products. Organizations such as Shift Processing claim they enable you to accept major credit cards.

These companies use something called P2P (Point to Point) technology. It works similarly to Venmo or PayPal insofar as it keeps the transaction off the credit card rails. P2P is legal in the United States, so this represents a solution of sorts for marijuana businesses. Other recognized companies in the sphere include:

• Durango
• eMerchantBroker
• Instabill
• PaymentCloud
• SMB Global

However, please bear in mind that the fees are extremely high. At present, the average rate for cannabis processing is 5.95% plus $0.30 per transaction. Then there are monthly and annual fees, not to mention other fees. Remember, it is a practice that involves failing to disclose the nature of transactions fully, so bear this in mind before proceeding.

Things to Consider When Looking for a Marijuana Payment Solution

Generally speaking, looking for a high-quality cannabis payment processor involves many of the same processes as seeking a regular provider. The main difference is finding a cannabis credit card processing company that offers a combination of reasonable fees, good customer service, and fair contract terms is FAR more difficult!

Here are a few things to look for when analyzing marijuana credit card processing companies.

Legitimacy

The trouble with many cannabis merchant service providers is that they don’t mind skirting legal issues. Some of them make blatantly illegal offers to customers. Fully compliant payment processing means complete transactional transparency. Leaving any entity out of the loop during a credit card transaction is effectively money laundering.

As things stand, the major credit card companies don’t allow cannabis transactions, so accepting credit cards in your business means you’re technically breaking the law.

Some companies try to rout payments via offshore processing accounts. Others miscategorize marijuana businesses by using the merchant category code of a legitimate sector.

The case of Eaze Technologies should serve as a warning. It offered customers in Oregon and California the chance to buy cannabis via debit or credit cards. Two consultants who helped Eaze create a detailed scheme to avoid detection by credit card companies were convicted of conspiracy to commit bank fraud in April 2021.

Please note that if your cannabis credit card processor gets prosecuted, you could as well. Take this into consideration before getting involved with marijuana credit card processors.

Fees, Pricing & Contracts

Whether you like it or not, high-risk providers charge extremely high prices. While the average is close to 6% and $0.30 per transaction, some go into the double digits. You can also expect extremely high monthly and annual fees that eat into your company’s profits, along with set-up costs.

One expense that many dispensaries fail to account for is the ‘rolling reserve.’ This is when the processor holds a certain percentage of a cannabis company’s funds every month until the reserve is reached. The business eventually gets its money back, but it could create cash-flow issues for new companies in particular.

It is also best to stick with providers that allow month-to-month arrangements rather than forcing you to sign a long-term contract. Unfortunately, you will likely get locked into a three-year contract with some providers, not to mention a hefty early termination fee should you look to break the contract. Finally, please note that practically all contracts have an automatic renewal clause that forces you to stay for another year.

Acceptance

Even high-risk specialists often say ‘no’ to marijuana companies due to possible legal issues. It is also true that even if an entity accepts cannabis businesses, it may not say ‘yes’ to you. Furthermore, some providers don’t explicitly advertise the fact that they serve the weed industry.

If you see a provider you like, call them to get a definitive answer on whether they will accept your business. Finally, some companies accept medical marijuana dispensaries but not recreational stores and vice versa.

Once you get this far, you still have to go through the underwriting process. We advise you to get this done before processing credit card sales. Otherwise, your account could quickly get shut down when you start using it prematurely. Steer clear of providers that claim to offer immediate approval. They usually kick the can down the road until you’re already locked into the contract.

Customer Service

As is the case with providers covering any level of risk, customer service separates the good from the bad from the downright ugly. As a high-risk company, you can expect to require customer support more often than normal. If a provider has a bad reputation in this field, you’re better off swerving them.

Processing Equipment

Since you sell marijuana from a retail location, you need a mobile processing system or a physical credit card machine. The terminal must accept EMV payments as a minimum, and realistically, you need to take contactless payments. We also recommend buying your equipment instead of leasing it; you’ll save money in the long term.

For the record, brands such as Clover, Square, and Ingenico are renowned for providing high-quality credit card machines.

Will This Situation Ever Change?

Unfortunately, marijuana companies are stuck in this vicious circle until something drastic changes. The reclassification of cannabis as a Schedule I substance would change everything. If weed was no longer illegal on a federal level, the financial sector could become more open to doing business with the marijuana sector.

However, despite growing support for the legalization of medical marijuana in the United States, there is enough political opposition to prevent it from happening at present. The legalization of cannabis in Canada has put more pressure on American lawmakers, while the imminent legalization of the substance in Mexico will give them further food for thought.

As it happens, the MORE Act aims to deschedule marijuana from the CSA. This particular piece of legislation passed the House in December 2020. It was reintroduced in May 2021 with a few changes. Amazon announced its support for the bill in June 2021, so it remains to be seen whether Congress will pass it into law.

The SAFE Banking Act is a more likely solution. It would permit major financial institutions to get involved in the cannabis industry without worrying about legal penalties. It passed in the House in March 2019 but died in Committee the following month. It once again passed in the House in March 2021 and was referred to the Committees of Jurisdiction five days later.

However, even if the SAFE Banking Act is voted on in the Senate, there’s a strong chance that it won’t pass into law.

Final Thoughts About Cannabis Payment Processing Solutions

At present, slightly more than 700 banks and credit unions are willing to provide services to cannabis businesses. Most of these institutions are located in states such as California with a relatively liberal attitude towards marijuana.

As such, cannabis businesses must find alternative payment processing solutions. A huge percentage of them continue using cash, but this comes with a wide range of issues. Credit card processing is available, but its legality is dubious. Since the likes of Visa and Mastercard have outright bans on marijuana transactions, merchants must rely on deception. Weed companies that get caught could have their accounts terminated and funds frozen.

There is proposed legislation such as the SAFE Banking Act and the MORE Act that would change everything. However, political opposition remains strong, and until this changes, marijuana companies must continue to operate with one hand tied behind their collective backs.