Comprehensive Guide to Cannabis Payment Services
What you need to know.
Spend a little time (and we know you do!) looking around the internet for cannabis payment services or dispensary merchant accounts for payment processing. You will be served with pages of content looking to capture your business. Buzz words like “fully compliant”, “legal”, and “transparent” abound (and some actually believe it). We all know the state of the cannabis industry as one of the fastest growing industries in the country. We also know how competitive it is and that any edge on the competition is welcome. But let us jump right to the point, accepting credit cards for cannabis is simply illegal.
That is until there is change and guidelines at a federal level….
Let’s look at the truth behind credit card payment services for cannabis. Then we will overview the options that are available to you. And finally, we'll discover the best solutions that are available today so that your business can operate safely, efficiently, and get an edge on the competition.
In order to discover the best path to accepting cashless payments for your business it is necessary to have a general understanding of the payment services environment.
Why is Dispensary Credit Card Processing Illegal? … The short version.
Everybody else is doing it. Why can't I?
Yes, your dispensary is perfectly legal in your state so why can’t you get an account for credit card processing? Simple, the process of accepting a credit card requires federally regulated entities and “rails” (or communication lines) to be involved which include:
- Card Brands (Visa, MC, etc.)
- Acquiring Banks - the bank, sometimes also the payment processor, that actually settles and funds the credit card transaction.
- Card Issuing Bank - the bank that gave your customer a credit card who authorizes the transaction and then funds the acquiring bank. This process essentially means that the card issuing bank is providing a micro loan for the purchase. Furthermore, they stand to benefit not only from transaction fees but interest fees if the customer does not pay off the card in a timely manner.
- Interchange - the communication network created by the card brands and issuing banks through which all credit card transactions are routed, and which is overseen by the Fed.
Since all of these entities are federally regulated, they MUST obey the federal law and guidelines. Yes, there are guidelines for state sponsored banks to provide compliant cannabis bank accounts. However, to establish compliant cannabis credit card processing ALL of the entities involved must have compliant programs in place or the entire system breaks down. Of course, cannabis is still illegal at a federal level, therefor these entities cannot comply.
Until one or both of two things happen, the passage of the SAFE Banking Act or federal legalization of cannabis, accepting credit cards is simply not possible.
What about the Cole Memo?
The Cole Memo was a set of priorities put forth by the Department of Justice that was to be followed by the cannabis industry. These priorities were rescinded by Jeff Sessions when he was in office. However, he and the rest of the DOJ continued to follow the guidance as does the current administration.
Current FinCEN guidance is for depository services only and does not address merchant services/credit card processing. This FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.
In general, the decision to open, close, or refuse any account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its business objectives, evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.
This guidance is for depository accounts of all accounts related to OR deriving funds from the cannabis industry. Yes, both plant touching businesses and ancillary service providers’ bank accounts must meet these expectations. Here is an excerpt from the FinCEN guidelines:
The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose.5 Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, a financial institution is required to file a SAR on activity involving a marijuana-related business (including those duly licensed under state law), in accordance with this guidance and FinCEN’s suspicious activity reporting requirements and related thresholds.
These expectations and requirements are related to all banks.
As you can see, it is clear that federally overseen or insured traditional money rails are off limits to cannabis payments or funds. To further the evidence let's take a look at a couple definitions.
Money Laundering - Money laundering is a complex subject with a simple definition. It is simply the concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses. The fact that cannabis is federally illegal, any funds derived from the sale of cannabis is considered illicit funds. Therefore, any bank that chooses to accept the cash derived from the sale of marijuana, is in fact knowingly laundering the money on behalf of the cannabis business.
Bank Fraud - In general, bank fraud may involve any deliberate action aimed at defrauding a financial institution. It may involve an intentional action aimed at receiving assets, money, securities, credits, or property from a financial institution through the use of pretense or false information.
For example, using a credit card to purchase a gift card, blockchain, stable coin, or crypto currency that is redeemed instantly or intended for the purchase of cannabis is considered a fraudulent, because you’re masking the true nature of the transaction. All of these types of transactions require at least one acquiring bank and interchange to authorize and fund the transaction. Do some of those work-arounds sound familiar?
How do you know if a cannabis payment service is legitimate?
There is a simple way to discover how “above board” any payment solution is. Ask them, who is the bank and who is the processor? Then call the bank and the processor to ask if they support payments for the industry. Sometimes, even that is not enough.
In order to provide fully compliant payment processing there MUST be full transactional transparency. Meaning:
- The Sponsor Bank that funds the transaction must work within BSA/AML guidelines
- The Acquirer must work in full transparency regarding the source of a transaction.
- The business’ depository bank must have a BSA/AML compliant cannabis program in place.
- The card brands must be notified that the Sponsor Bank is supporting the industry.
What about all those “transparent” cannabis merchant service offers to accept credit cards?
So how do ISOs (independent sales office) get away with the emboldened statements you will find online and in your inbox?
While we have been informed that cases are being built against some of the larger ISOs who were offering credit card services to plant touching businesses, the small providers don’t seem to warrant the attention. As soon as a small provider starts to actually do some volume in transactions it almost always triggers an account review or audit by the acquirer. In these cases, most times, the operation is simply shut down and dismantled (often freezing all funds processed). That means that delivery and dispensary businesses using those payment services may never see their funds.
As an example of a blatantly illegal offer let's take a look at this statement from an unnamed “cannabis merchant service provider” website:
“.... the cannabis industry’s only fully-compliant merchant services solution to accept credit and debit cards. To learn more about our proprietary payment rail which eliminates the need to process transactions on the credit card networks...”
Now refer to the definition of money laundering and the entities that MUST be involved in all credit card transactions. This is money laundering. It is also highly likely bank fraud. The worst part for you is that if this processor is indicted - you could be too. They claim to be able to process credit cards without using the card brand networks. This is blatantly untrue and masks the true nature of the transaction.
What they are doing is simply allowing their “members” to load or link a virtual bank account with a credit card. When a transaction is made at the dispensary the credit card is charged to “load” the bank account (or purchase a digital currency) and the funds are transmitted directly to the merchant for the purchase of cannabis. Neither the card brands or the acquiring bank know this is really a purchase for cannabis without launching an investigation. Therefore, the nature of the transaction has been masked and ALL parties involved could be held accountable.
Why accept card payments at all?
A lot of businesses think it would be a dream to accept piles of cash and never look at another credit card. After all, isn’t cash the king? The old adage does not always hold true. Many businesses actually find cash to be too costly…..
- Large amounts of cash on hand make cannabis businesses a target for thieves. This endangers your business, your staff, and your customers.
- Cost of cash and depositing cash. Yes, accepting cash as a business actually does carry a cost. On top of that banks charge exorbitant fees for the transport, deposit, handling, and “cleaning” of cash from plant touching businesses.
- Cash is untraceable. Banks need to be able to trace the origins of where the cash derived from for BSA/AML purposes. In other words every dollar deposited needs to be traced back to the product sold. If you’re unable to provide this check and balance, then an all cash deposit increases the risk to the depositing bank.
- People tend to spend a lot less money when they use cash. While the studies vary greatly they all agree that consumers spend and tip more when they use their card than they do when they use cash. As a matter of fact, depending on the industry the average increase in spend is anywhere from 12-80%! One study showed the average value of a cash transaction was $22, compared to $112 for the average non-cash transaction in 2019. In our experience cannabis businesses see an average ticket increase of about 17% when they implement card payment services.
- COVID-19 - in today's world there are rising concerns about the cleanliness of paper money. Remaining contactless has become the new norm for a number of different industries including cannabis.
Cannabis business payment services options.
As you look to the future of your business, existing on a cash only basis becomes less and less viable. For your business to survive and thrive you need an efficient way to increase sales, service your customers and increase cash flow. While there are dozens of “proprietary solutions” out there we will break them down to their core elements. Let's make it simple and look at two categories, problematic and legitimate solutions.
Problematic Cashless Payment Options:
Crypto Wallet or Blockchain solutions
It's 2020 - why not futurize payments for Cannabis?
Blockchain could have a promising future, but, most current cannabis payment solutions are simply used to disguise a credit card transaction. While accepting crypto directly as payment is still a somewhat grey area, solutions that allow for cannabis credit card payments at the POS are laundering funds by hiding the true nature of the purchase from the card issuing bank. Remember:
- Crypto or blockchain solutions still require a bank to fund or accept the transactions deposits eventually. Even if you were able to accept all your transactions into cryptocurrency, the minute those funds are used for payroll, product, or bills those funds are converted into USD and need to be funded or accepted by a bank.
- Due to the reasons mentioned earlier, no acquiring bank can or will knowingly authorize or fund a credit card transaction for cannabis. These solutions are still masking the nature of the transaction, which in turn leads to bank fraud if you’re not being fully transparent with your bank.
- Solutions that use a wallet have proven sometimes difficult to retrieve funds from and in many cases merchants have never been funded.
- Poor reporting for accounting and compliance.
Closed Loop - or member systems
These solutions are when your customers hold a virtual account that is linked to their bank account and accessed by a card. They can fund their virtual account via ACH or bank transfer and then use those funds by using the card provided by the payment provider.
- Technically this is a viable solution when working with state sponsored banks in full transparency. So, on the upside they CAN be compliant and keep cash out of your dispensary. However, the closed loop card can only be used at that particular business or participating business similar to that of a Starbucks, or department store card.
- Lack of consumer adoption. Consumers don't like having to hold special accounts (with or without fees) just so they can transact a cannabis transaction.
- Cost. Often times these services are charging exorbitant fees to either the dispensary, the customer, or both.
Off-shore payment processing
Using an overseas bank to process and fund your credit card transactions.
- Most all reputable international banks will not KNOWINGLY work with a cannabis business.
- Accepting card payments in a different country and then depositing those funds back in the US (or transferring them at ANY point in the future) constitutes money laundering.
- Accepting payments for cannabis is against all card brand regulations.
- Offshore processing is prohibitively expensive for most cannabis businesses.
- Customers will be hit with international credit card transaction fees.
- Declined transactions. Offshore solutions usually have a high transaction decline rate due to built in fraud protection put in place by the card issuing bank.
- Chargebacks. Often times, with offshore processing, the descriptor on your customer’s statement will not match your business triggering them to chargeback the transaction.
- Most importantly, anything off-shore is considered suspicious and very high risk. If a business is offering any sort of off-shore solution you should turn the other way and avoid them at all cost, because you will be putting yourself and your business at risk.
- As long as the funding bank and ALL the accepted debit networks have approved use in cannabis facilities, ATMs are legitimate.
- The biggest problem with an ATM is that your customer self limits themselves as to how much they will spend. This is because when they walk in the door they withdraw what they think they are willing to spend. This leaves no room for upselling or spontaneous purchases, lowering your average sale amount.
- Your dispensary still has to handle and deposit cash.
Legitimate cannabis payment services options:
At this time there are limited legitimate and efficient methods to accept cashless transactions for cannabis. However, in 2021 B.I.G. has taken huge strides forward in fair access to merchant services for cannabis businesses.
PIN Debit Cannabis Payment Processing
By far the BEST and most exciting payment solution the cannabis industry has seen is our PIN Debit payment processing. This is the first bank backed merchant account to accept card payments for plant touching businesses. PIN Debit payment processing is NOT a Cashless ATM – they are completely different.
PIN Debit allows your customers to make a purchase exactly as they would at the grocery store.Transactions are for exact dollar amounts which means:
- NO cash handling.
- Less Confusion, costly mistakes, and access to cash.
- NO need for cannabis delivery drivers to carry any money.
- Your Customers will NOT be billed for “Out of Network” fees which will make them happy!
- Fully endorsed and approved by the debit networks
- Sales have proven to increase by 25%+ with PIN Debit solutions!
- Costs less than cash handling and transportation fees!
- Full Bank and Processor Disclosure - try and get that anywhere else.
- Accurate descriptors with your correct DBA and address on receipts and bank settlement reports.
- NO Convenience fees.
- NO Checkout confusion.
- Credit card ready when there is federal change - be the first to accept credit cards for cannabis by not having to apply for a new merchant account.
Our PIN Debit cannabis payment processing fulfills the highest level of compliance and transparency. Our clients are comforted in knowing exactly who their bank and payment processor are. Additionally, our banking partners have taken every step possible to make this a sustainable and growth focused payment solution.
The sponsoring bank has taken every conceivable step:
- Worked with Federal Regulators to structure the program requirements.
- Worked with the Nation’s leading legal team for banking and payments to independently audit the policies, procedures, and reporting.
- Verifies that all entities involved in the transaction process are aware of the nature of the transactions and that they have a compliant cannabis program in place.
- Notified the card brands of their intentions.
- Worked with the processor to verify their procedures.
- Opened to and successfully passed 2 federal audits of the program.
Want to know more about our PIN Debit Program?
Cashless ATM (Point of Banking)
Most of you have heard of or used a cashless ATM, however, if you are still unclear about how it works. Consider that a customer comes in (or orders online for delivery) and wants to purchase $47.50 worth of your inventory. Upon delivery the budtender or driver would enter the amount of the sale (rounded up to the nearest $5) into a modern credit card terminal that has been programmed to act like an ATM. So in this case he would enter $50 and ask the customer to insert, swipe or tap their debit card and enter their PIN. Once approved the budtender or driver would provide $2.50 for change. Oftentimes this “change” is left as a tip and everyone is happy. The funds from the sale are processed and deposited into your bank account.
- Once again as long as the funding bank and ALL the accepted debit networks have approved use in cannabis facilities, cashless ATMs are legitimate.
- Money is transferred on private rails without the complications of federal oversight.
- It has been shown, by the Federal Reserve Bank of Boston, that purchases made on a card (debit and credit included) are 5X higher than with cash! $22 for an average cash transaction across all industries versus $112 on non cash transactions!
- These systems can be zero cost or even become a revenue source for you.
- Cashless ATMs reduce your cash handling by depositing funds directly into your DDA.
ACH (automated clearing house) payments are facilitated by a customer using their bank account to transmit or transfer payment directly to a merchant for a purchase. Again as long as the processing and funding banks have approved use for cannabis facilities, ACH payments are legitimate and are widely used in the industry.
- The clearing house is independent of the federal government and only has to be concerned with state law.
- ACH payments can be facilitated through apps, over the phone, or at the time of purchase.
- ACH information can be stored (by the gateway) for customers who are frequent buyers so that they do not have to enter their information again.
- ACH payments are less expensive than credit cards.
- On the downside consumers do need to have both their routing and account information to make a purchase or have linked their bank account through an app or website.
Yes, you read right!
Also, a legitimate way to accept payments for cannabis. An eCheck is really just like accepting a check online. The check is printed with your customer’s virtual signature and either electronically or physically deposited into your account.
- Allowing customers to order online and pay online is a huge benefit to busy dispensaries and delivery operations.
- Payment information can be stored (by the gateway) for customers who are frequent buyers so that they do not have to enter their information again.
- On the downside some consumers do not like using their checking account to make purchases. This is because they don’t realize that it is just as or more secure than using a credit card!
Credit card processing for ancillary cannabis businesses
Yes, credit cards ARE a legitimate option…for non-plant touching businesses. Although these accounts are quite difficult to establish, there are still processing banks that will work with you. Remember even though you are not actually selling the drug you are benefiting from the sale of cannabis. Thus, all parties involved are subject to BSA/AML (anti money laundering) regulations.
- The account still has to be established with full transparency
- Empowers your business to accept credit and debit cards just like any other business – online, in person, or on the go.
- Take advantage of streamlined operations, increased sales, and reporting
- Underwriting will be more intensive than a traditional merchant account
- Rates may be higher due to the increase in compliance and risk for the bank
Cannabis Payment Services - Opinion.
Since 2012 we have been on the cutting edge of pushing for equal access to financial services in cannabis. We have lobbied for and supported the industry. The cannabis industry has always been one to be on the cusp of a very fine line.
However, practices like creating a shell company, intentionally “miscoding”, or creating another “work around” so that a cannabis business can accept credit cards is doing the industry a disservice and not helping its sustainable growth. By acting illegally to make money will only feed those who oppose the industry and damage the public’s perception of it. Fair access to financial services will happen but in the meantime we, as an industry, should look beyond the walls of our operations and think about the good of the industry.
Short term success or advantage should not come at the expense of long-term goals, your license, or your freedom let alone setting the industry back.
Conclusion: The future of dispensary payment services
In a lot of businesses, yes, there are 1000 ways to “skin a cat” but when it comes to highly regulated issues (cannabis payment processing) 990 of those ways could lead you to jail.
Next time a “new” solution comes knocking consider the way the money flows.
- Where do the funds originate (a credit card)?
- Where do the funds end up - your bank?
- How do the funds get there? Who is the processor and the acquiring bank?
If at any moment that transaction fails in transparency - then the solution is destined to fail.
If you would like to establish legitimate payment processing service. One that you can depend on. One that keeps your business and your customers safe. One that increases your profits. Give us a call or schedule an appointment below. We'd be happy to go through the solutions that are available, and the costs involved. No BS – just answers backed by experience and courteous service.The B.I.G. team is comprised of highly experienced, certified payment professionals. The B.I.G. philosophy is that when we provide great solutions and even better service to help you succeed we will create a lifelong relationship with your business. Give us a call - you'll be glad you did!
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Interested in a chargeback prevention program?
Bankcard International Group offers charge back prevention solutions
These programs are very effective at assisting high risk merchant account holders to manage and prevent charge backs before they happen. Many of our high risk or hard to place merchants find these programs useful. Online merchants tend to see more chargebacks than other merchant accounts. Just ask us for the details.