Dispensaries Are Still Waiting On Banks To Catch Up
Six years after Colorado and Washington became the first states to fully legalize recreational marijuana, most law-abiding dispensaries are still unable to obtain a reliable merchant account. Visa explicitly forbids the sale of cannabis on its networks as long as marijuana remains illegal under federal law, while MasterCard dodges the issue by saying that it continues to monitor the situation and seek guidance from regulators. Most national banks will not supply banking services to legal cannabis dispensaries, and the federal government has become less supportive of the cannabis industry than it was in 2012. In other words, banks and lawmakers are still impeding the otherwise explosive growth of marijuana revenues in the U.S.
The situation isn’t hopeless, though. Some marijuana merchants and merchant account providers have found creative workarounds for their electronic payments problem, and they’ll continue to innovate ahead of the regulatory curve until legislators and bankers finally embrace the inevitable. To give you a sense of how cannabis sellers are processing digital payments in store and online, we’ve compiled the following list of ways that marijuana dispensaries currently accept credit cards. If you’re wondering how your competitors can accept card payments while credit card processors deny your applications, you can assume they are engaging in one of these practices. We will continue to update this list as more solutions become available, and we will also update our list of the best merchant accounts for marijuana once we identify more reliable options.
NOTE: The following methods are extremely risky and possibly illegal. They are presented for informational purposes only. CPO does not recommend that merchants use these strategies. Sellers of cannabis or cannabis derivatives will be responsible for any legal or financial consequences should they pursue these solutions.
1. Use a different merchant category code
Merchant category codes (MCCs) are numerical identifiers that Visa and MasterCard use to classify your business type and determine which interchange rates to charge you. Strangely, neither Visa nor MasterCard currently has an MCC for cannabis-related businesses, which means that any dispensary that is currently accepting credit cards has been either intentionally or unknowingly miscoded by their processor. Common alternative codes for medical and recreational marijuana include 5999 (Miscellaneous Retail) and 5193 (Florist Supplies, Nursery Stock, and Flowers), although any retail code with an average ticket size similar to your dispensary’s typical sales will be unlikely to raise eyebrows.
Intentional miscoding is an outright breach of Visa and MasterCard rules. Processors who are found to be engaging in this practice can be fined or dropped by their acquiring banks, and merchants who operate under an incorrect MCC can have their merchant account closed and funds frozen at a moment’s notice. Most marijuana merchant account providers do not disclose how they are categorizing their merchants to avoid regulatory scrutiny, and most of those merchants probably don’t want to know how they’re being categorized as long as the solution works. However, willful ignorance won’t protect your business from regulators. In fact, you might be able to better align your branding and products with your MCC if you know which MCC you’re transacting under.
Until Visa and MasterCard offer a valid MCC for marijuana businesses, miscoding will be the only way for dispensaries to process payments through the credit card networks. If you choose to go this route, you’ll need to decide how much you really want to know. It is our belief that you will benefit from knowing exactly how your account is set up so that you can anticipate the potential consequences and ensure that your processor doesn’t pin any future blame on you.
2. Create a shell company
This method is often used in conjunction with MCC miscoding, as cannabis merchants will create an innocuous-sounding parent company (such as “Quality Garden Products”) and open a merchant account under that name. They can then hide their revenue from the dispensary beneath the layer of the “legitimate” parent company. This gives the credit card processor some plausible deniability and often buys the merchant a little more time before anybody looks into the details of their transactions.
Unfortunately, this method is also a flagrant breach of Visa/MasterCard rules, and it has the added risk of deceiving the merchant account provider involved. If your processor finds out that you were processing marijuana payments under its nose, it will not hesitate to close your merchant account and possibly add your business to the TMF/MATCH list. For this reason, we consider it more advisable to plan your processing strategy with a marijuana-friendly merchant account provider than to try to fly under the radar with a processor that is hostile to cannabis. You’ll pay more for the heightened risk, but it’s always better to have your provider on your team.
3. Process payments via “shadow banking” or a credit union
With major U.S. banks such as Wells Fargo and Chase steadfastly refusing to serve marijuana businesses, payment processors have been forced to partner with small banks, regional banks, marijuana-friendly credit unions, and offshore banks for access to a payment network. These banks do not publicly advertise that they are willing to sponsor marijuana merchant account providers, but most industry experts agree that some financial institutions are privately willing to take a chance on cannabis payments. If your merchant account provider claims to have a legal, domestic, bank-approved solution for accepting credit cards, then the odds are that they have partnered with one of these banks.
One interesting study by S&P Global determined that banks regulated by the Office of the Comptroller of the Currency (OCC) are far and away the most likely to terminate marijuana merchant accounts. OCC-regulated banks include Wells Fargo, U.S. Bank, PNC Bank, Capital One, Citizens National, and JPMorgan Chase, although a comprehensive list can be seen here. It seems clear that you will have a significantly better chance of operating without your account being terminated if your processor is partnered with a bank or credit union that is not regulated by the OCC.
Unfortunately, it’s nearly impossible for you as a merchant to find out which credit unions are secretly partnering with cannabis-friendly merchant account providers. That’s why your best hope might lie with credit unions such as Fourth Corner Credit Union, which recently became the first credit union allowed to apply for a “master” account that connects to the credit card processing networks. As of this article’s publication, Fourth Corner cannot provide merchant accounts for businesses that directly sell marijuana products, but it can serve marijuana advocacy groups, charities, and ancillary companies such as accountants. If and when the National Credit Union Administration (NCUA) finally opens up payment processing to dispensaries, credit unions like Fourth Corner will be in the best possible position to serve your dispensary within the bounds of the law.
4. Accept cryptocurrency
With so many barriers and hazards built into the conventional credit card processing system, you might want to steer clear of it entirely. That’s what cryptocurrency is designed to do. Customers can use their credit cards to purchase digital currency through coin exchanges, and then your dispensary can accept that digital currency as payment for marijuana. You can then convert that digital currency back into cash via an exchange and deposit it into your bank account. Some cryptocurrency apps even come with point-of-sale hardware and automatically convert payments to and from their designated cryptocurrency, making the experience as seamless and instantaneous as a conventional credit card transaction.
There are many cryptocurrency startups for bitcoin in general and for the marijuana industry specifically at this time, and whether you wish to accept them should come down to what your customers are willing to use. But one major drawback of accepting cryptocurrency for marijuana comes when you exchange it for cash. Cryptocurrency earnings are taxable income that is classified as capital gains, so they can seriously skew the number of taxes you owe. Moreover, the IRS may take a closer look at your business’s accounting if you are making a large amount of money via cryptocurrency, which is bad if you are also using other creative workarounds for payment processing. While cryptocurrency is a viable option on a small scale, it is not the perfect replacement for credit cards that advocates will sometimes claim.
5. Buy a point of banking system
If none of the above credit card processing options will work for you, then you might want to consider accepting debit only. Accepting debit cards will cut back on the amount of cash you hold on site as well as provide cash-free customers with a convenient payment option. Moreover, debit card acceptance has been historically more reliable than credit card processing for dispensaries because it does not use Visa and MasterCard’s credit networks. Debit card processing is made possible at dispensaries via a product called a point of banking system.
Also known as a “cashless ATM,” a point of banking system functions in the store as a PIN-based swiped transaction, but the actual processing of the payment is completely different from traditional credit card processing. When a customer swipes a credit, debit, or ATM card through a point of banking terminal, the terminal essentially acts as an ATM that the customer might find at his or her bank. The only difference is that no physical cash is ever withdrawn from the customer’s account. Instead, the customer must enter a PIN, choose a type of transaction (in this case a withdrawal), and specify the dollar amount being withdrawn. Just as with ATMs, these dollar amounts are in increments of five dollars ($10, $15, $25, etc.). The terminal then prints a receipt for the customer to sign, and the merchant places a copy of that receipt in the register before providing the customer with change to make up the difference. For example, a cashier in a dispensary would hand back $3.20 in cash for a $16.80 purchase made by a customer who selected a $20 withdrawal. This greatly reduces the amount of cash on site, and the swiped payment is deposited in the merchant’s bank account usually within three days.
Generally speaking, marijuana merchant services providers encourage merchants to charge a convenience fee (usually about $0.99) on each transaction to cover the cost of the terminal. This fee comes at the customer’s expense, so merchants should weigh a customer’s potential irritation with a surcharge against the convenience of offering card payments.
The Race Is On
Things are changing quickly in the marijuana merchant services space. Processors are scrambling to find a solution that lets them process under the radar, and most merchants are willing to take any option that works. Until the government finally legalizes cannabis nationwide, however, the entire industry is going to have to continue to exploit loopholes and gray areas in order to serve its cardholding customers. Whatever decision you make for your business, you should make sure that you understand the risks involved, and you should be prepared to deal with account closures, fund freezes, or scrutiny from the IRS. Whether federal law changes tomorrow or after another six years, smart business owners will need to make sure they’re still around to take advantage of it.
Do you know of a way to accept credit cards for marijuana besides the options listed above? Share your solution in the comment section below!