A Complicated, Developing Issue for Merchants
While legislation that has legalized the sale of marijuana for the purposes of both medical and recreational use has opened a new world of possibilities to merchants, businesses now find themselves stuck between a rock and a hard place. That’s because even though the sale of the once-contraband substance is now permitted, laws governing the bank accounts of businesses making those transactions have not been deregulated in lockstep. As of May 2020, marijuana has been fully legalized in Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington state, and Washington D.C. That is furthered by the fact that most other states have either legalized medical marijuana or passed reforms decriminalizing its derivatives like CBD oil. In fact, marijuana is completely illegal in just 8 states in the country.
While states have undertaken this initiative, the federal government’s overarching criminal classification of the drug has made merchants making sales in locations where their business is entirely legal difficult. The primary issue that these merchants face is finding a banking solution for their merchant account. These difficulties exist in spite of how clearly lucrative the industry is, with up to $30 billion in total sales expected to be generated by 2023. Though complicated, merchants can take initiative to be sure they have a way to bank their revenue in a manner that is fiscally responsible and completely legal.
Understanding State Laws
Given that states where merchants are doing business have already legalized the sale of marijuana on either medical or recreational grounds, it shouldn’t be surprising that banking options exist to accommodate merchants. From small-scale credit unions to large Wall Street pedigree banks, banks are not prohibited from offering checking accounts to merchants in those states. In fact, a study examining bank accounts held by marijuana merchants in Massachusetts found that 34% of medical marijuana merchants relied upon either Bank of America, Wells Fargo, Chase, or Citigroup. Of those businesses, more than 50% of bank accounts were with Bank of America. Smaller banks and credit unions took things further following Massachusetts’ outright legalization of marijuana. GFA Federal Credit Union in Gardner, MA became the first banking institution to offer recreational marijuana businesses banking services in the state. Both Century Bank of Medford and BatCoast Bank of Swansea followed suit soon thereafter. While the state does not prohibit banks from serving marijuana companies, few institutions offer services to merchants.
The contrast of medical marijuana merchant’s bank accounts being served by larger banks and recreational businesses’ relying upon smaller institutions conveys the conservative approach conglomerate banking institutions have taken. Fortunately, states have begun to offer guidance to banks to advise them on how to offer their services to marijuana merchants while complying with relevant federal banking laws. The United States Department of Treasury’s Financial Crimes Enforcement Network also provides similar guidance to banking institutions. Given the complexity of navigating these issues, merchants should be prudent to examine the guidance offered by state and federal authorities to be sure that they conduct their business in compliance with the parameters set forth by law enforcement and banking agencies as well as to ensure that the banking institution they select is well-aware of and acting in accordance with those dictates. Any and all of that information should be sought after by merchants to avoid serious legal implications that could pose financial, if not criminal penalties.
Maintaining an Outlook on Federal Reform
The most effective way to alleviate the concerns merchants in the medical and recreational marijuana markets have would be comprehensive reform of the federally-imposed banking laws. Unfortunately, progress in that vein continues to move at a snail’s pace. However, the U.S. House of Representatives passed H.R. 1595 – Secure And Fair Enforcement Banking Act of 2019 last year after its approval by the House Financial Services Committee by a vote of 45-15. H.R. 1595 received overwhelming bipartisan support in the House of Representatives, even gaining 152 different co-sponsors. That support conveys a hopeful future for the proposed legislation. Today, the future of the bill languishes on the Senate floor where it has yet to be voted on by the Senate Banking Committee. That committee is itself chaired by Mike Crapo (R-ID) hailing from one of the minority of 8 states to have marijuana exclusively illegal.
Despite the stagnation of the prospective landscape shifting bill’s progress, the law’s potential would have a drastic and far-reaching impact on helping marijuana merchants easily attain bank accounts for their businesses. Furthermore, the U.S. House of Representatives has introduced the House, the Marijuana Opportunity, Reinvestment, and Expungement Act which would achieve even more broad reform including the repeal of Section 280 of the Internal Revenue Service Code’s application to these businesses. The multitude of federal reform initiatives that have gained traction convey reason for optimism for marijuana merchants nationwide, even if it may be in the future that is not near enough.
The Important of Finding the Right Marijuana Merchant Services
If and when federal reform makes finding a banking option easy for merchants in the marijuana business, the impact of the right merchant account is a separate but just as imperative issue. Marijuana businesses face the issues that other high risk merchants must navigate. These issues result in rates, fees, and contract terms that low risk merchants do not. A marijuana merchant being deemed high risk has much more to do with the mere industry they belong to. The financial history of the merchant, the size and scale of its business, as well as its potential standing as a new business contribute to assessing its overall risk. Reviewing potential high risk merchant accounts in consideration of how they weigh those factors is essential to securing as low of a transaction rate and contract terms free of costly early termination fees, fund hold policies, monthly minimums, rolling reserves, and other provisions.
Some high risk credit card processing specialists have started to offer workarounds that enable merchants to accept credit cards through domestic merchant accounts. However, many merchant accounts exist to serve marijuana businesses exclusively. Reviewing options for a merchant account that is adept at offering the full suite of services as well as agreeable contract terms is essential to operate in unison with whatever banking solutions best serve their needs.