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Cannabis Credit Card Processing Guide
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Contents
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Cannabis credit processing is not available for medical or recreational marijuana dispensaries in the United States.
However, cannabis dispensaries do have access to payment processing that is almost equivalent to credit card processing and in some aspects, it’s better. This is all explained below.
The major credit card companies (Visa, Mastercard, American Express, Discover) don’t permit cannabis transactions on their networks.
This shouldn’t be news to you if you are involved or remotely interested in the cannabis industry. You can’t buy cannabis at a medical or recreational marijuana dispensary using a credit card.
The credit card network’s stance is very clear yet there is still much confusion around dispensary credit card processing. We hope to clear up some of the confusion.
Although there is no dispensary credit card processing, secure payments for dispensaries have been available for many years. The cannabis payment solutions that are currently available will be discussed below.
Cannabis credit card processing hype
The lack of dispensary credit card processing is widely known and is often blamed for cannabis being labeled as an “all cash” industry in the media.
Again, as anyone involved or remotely interested in the cannabis industry knows, the all cash and no banking storyline is no longer accurate. That storyline was accurate since about 2017.
Essential banking services are now readily available to cannabis businesses in all states and plenty of legitimate electronic cannabis payment options exist.
Yet the steady flow of stories about how something needs to be done so these poor businesses aren’t buried in cash continues.
Maybe the stories sell, maybe it’s misinformation, maybe it’s sensationalist journalism, or maybe it’s politically motivated. Most likely, it’s a combination of these factors.
Credit card processing will be a disappointment
Many in the cannabis businesses have unrealistic expectations for what credit card processing will bring to the industry and could be in for a disappointment.
The financial benefits could be much less than some hope and cannabis payments will still be a mess after marijuana credit processing is available (discussed more later in the article).
Electronic payments have plenty of benefits, including higher average tickets, customer convenience, faster line speeds, and improved safety.
If the goal of having access to credit card processing is to increase the adoption of electronic payments, then dispensaries don’t stand to gain much.
If cannabis businesses didn’t have any secure electronic payment options, the lack of credit card processing for dispensaries would be a very big deal.
But cannabis businesses do have legitimate secure payment options. And some, like debit card processing, offer virtually the same level of merchant services any business has.
Gone are the days when dispensaries were all cash, and the best they could do to improve the shopping experience for their customers was to put an ATM machine on site.
Combine debit card processing with ACH payments for online purchases and dispensaries have access to a full suite of secure electronic payments.
Credit card processing won’t be a savior
Reasons cannabis credit card processing wouldn’t provide a sizeable impact for dispensaries include:
- Consumers prefer to use debit cards
- There is a cap on peak electronic payment adoption
- Small ticket size will mute the impact of credit
Debit card usage exceeds credit cards
Debit card use exceeds credit card use in the United States by a large margin. A 2022 study by the Federal Reserve Bank of San Francisco showed that 44% of consumers prefer to use a debit card for in-person payments compared to 32% for credit cards.
The chart below is from the Federal Reserve Bank study.
Peak adoption
Studies have shown that given a choice to pay for cannabis with cash, debit card, or credit card, 50% of consumers prefer cash.
A cannabis consumer study asked consumers if they had a choice to purchase marijuana with cash, debit card, credit card, or ACH app. 63.5% of consumers said they would choose cash.
It should be noted that in the study above, the debit and credit card options specified that consumers would not have to pay a convenience fee, so fees did not influence consumers’ answers.
Based on the study above, peak electronic payment adoption for dispensaries appears to be around 40%.
Many medical and recreational dispensaries already have electronic payment adoption rates of 40% or higher so the availability of credit card processing would have minimal impact.
We work with some dispensaries that have a large delivery channel and have integrated electronic payments into their delivery app or website and they achieve electronic payment adoption rates of over 50%.
It should be noted that the cannabis consumer payment preference study above was done under the current legal framework (i.e., cannabis is Federally illegal).
If cannabis was Federally legal, and consumers weren’t as worried about payment records of their marijuana purchases, electronic payment adoption rates for dispensaries would be expected to mirror the adoption rate of all other retail businesses of about 80%
What about buying on credit
Credit cards do offer the ability for customers to buy on credit and for industries like appliance sales, furniture sales, and car repair, which large average tickets, consumers being able to buy on credit is very important.
If consumers can’t purchase furniture, appliances, or car repairs with a credit card, many would have no choice but to delay or forgo the purchase.
With the relatively small average ticket size (>$100), the ability to purchase on credit would offer minimal sales lift for dispensaries.
The intangible benefit of credit card processing
The availability of credit card processing for dispensaries would bring legitimacy to the industry by reducing the stigma (and all the news stories) of not offering credit cards.
The ultimate in legitimacy would be Federal legalization, but absent that, credit card processing would bring some normalcy to the cannabis shopping experience.
Why marijuana credit processing isn’t available
Cannabis is listed as a Schedule I drug (along with heroin and LSD, cocaine is a Schedule II drug) by the United States Drug Enforcement Agency making the sale or possession of marijuana illegal according to Federal law.
Any transaction that violates Federal law is not permitted by the credit card networks (Visa, Mastercard, American Express, Discover).
Credit card networks are global companies and rely on Federally licensed and insured banks to process transactions. If they start allowing Federally illegal cannabis transactions, what kind of precedent would they be setting?
Credit card networks require each merchant to be assigned a Merchant Category Code (MCC) based on their primary business activity based on annual sales volume. There is no MCC for cannabis sales in the United States.
If a merchant has more than one line of business, they must use the MCC for the line of business with the highest sales volume or different MCCs for each line of business.
If a dispensary sells merchandise or has a consulting or real estate arm, they can’t just get a merchant services account under the non-cannabis business line and then process cannabis transactions under that account.
They must use the MCC for the highest grossing sales business line (retail cannabis sales) or separate MCCs for each division. Plenty have likely tried this approach only to be shut down quickly.
The name of the business on their merchant services application, which will be shown on customer statements, must be the name most prominently displayed by the merchant and by which cardholders recognize the merchant (while also reflecting the merchant’s DBA name).
Further, if a name may be recognizable on a sign at a merchant’s location but could confuse a cardholder when it appears on their statement, the name must include a descriptor such as “restaurant” or “bar” plus a location number or descriptor for merchants with multiple locations.
Merchant service providers (referred to as acquirers) are responsible for ensuring that merchants undergo an adequate due diligence review to verify the correct location of each merchant.
Correct merchant name and location are needed for several reasons including reducing chargebacks by cardholders who may not recognize the name or location of a transaction on their statement.
State laws don’t matter
Because of the confusion between Federal and state laws regarding the sale of cannabis, the U.S. Attorney General issued the Cole Memorandum in 2013/2014.
The Cole memo provided guidance to Unites States Attorneys on the proper prioritization of marijuana enforcement in their districts. The memo listed eight priorities to help United States Attorneys prioritize their investigative resources.
The Cole memo essentially provided insight into how the Federal government viewed conflicting state and Federal cannabis laws thereby giving cannabis businesses and service providers confidence they would not be investigated for a federal crime.
The Cole memo was rescinded in 2018 but its guidelines provided a framework for dealing with the discrepancies between Federal and state marijuana laws.
There are no formal banking guidelines for cannabis, but regulators have generally not taken action against financial institutions serving cannabis businesses as long as they have proper policies, procedures, and risk management in place.
State laws, United States Attorney General memorandums, and FinCEN banking guidelines aren’t enough to enable cannabis credit card processing.
The SAFE Banking Act won’t help
The SAFE Banking Act has gotten a lot of press. Congress has attempted to pass the SAFE Banking ACT six times. The SAFE Banking Act has also failed six times so the press has had a lot of opportunities to talk about it.
Many hail the SAFE Banking Act as the savior of all cannabis financial services. If the SAFE Banking Act ever passes there could be a lot of disappointment when not much changes. Much of what the SAFE Banking Act was designed to help is no longer in need of help.
Sure, the SAFE Banking Act will improve cannabis banking, but banking services are already readily available for cannabis businesses so there is little to gain.
The availability of dispensary credit card processing is often mentioned as a benefit of the SAFE Banking Act passing. This is inaccurate.
The SAFE Banking Act does not remove cannabis as a Schedule I drug, so its sale will remain against Federal law so cannabis transactions will still not be permissible by the credit card networks.
As discussed below, CBD credit card processing became available when it was removed as a Schedule I drug.
CBD credit card processing as a predictor
CBD credit processing is a separate issue from cannabis credit card processing but it’s interesting to look at how CBD credit card processing evolved as it provides the likely roadmap for dispensary credit card processing.
Prior to the passing of the Farm Bill in 2018, CBD credit card processing was in the same position as cannabis credit card processing. Neither industry had access to credit card processing.
The Farm Bill removed CBD (containing less than 0.3% THC) from the Schedule I drug listing and credit card processing became available to CBD businesses.
Initially, several large banks and processors started accepting CBD merchant accounts, but many merchant services providers stayed away. CBD businesses are considered high-risk, and most banks and processors don’t work with high-risk merchant accounts.
While credit card processing was available to CBD businesses, it wasn’t widely available.
However, it didn’t take long before some of these early, large providers of CBD credit card processing exited the market.
The excitement of the new market brought a “wild west” mentality as credit card processing sales agents (acquirers) aggressively pursued CBD businesses.
Financial institutions quickly realized many of the acquirers didn’t understand high-risk merchant processing or the CBD industry, making it difficult to determine if compliance requirements were being met.
A major compliance challenge of serving CBD businesses is assuring that every product a merchant sells is under 0.3% THC, so it’s considered CBD, not marijuana.
What also happened was marijuana dispensaries, which also sell CBD, saw an opportunity and applied for a merchant processing account as a CBD business. It didn’t take long for banks to realize they were selling more than CBD and shut the accounts down.
CBD credit card processing has become a niche market served by a few specialty high-risk merchant processors. Getting a CBD merchant services account is challenging but achievable.
The path taken by CBD credit card processors is significant for cannabis credit processing for a couple of reasons.
- The initial period of excitement was followed by a period of instability before finally settling into a niche market handled by specialty high-risk processors who understand the CBD industry.
- It took the removal of CBD as a Schedule 1 drug, not a congressional act, to enable credit card processing.
The history of CBD credit card processing provides a valuable glimpse into what to expect when credit card processing for dispensaries becomes available.
Using the CBD industry as a history book, cannabis credit card processing won’t be available until marijuana is removed from the Schedule I drug list, and then, after a rocky start, a group of niche merchant service providers who specialize in cannabis credit card processing will emerge.
Cannabis payment options
Secure payments for dispensaries have come a long way and recently made a huge leap forward with the emergence of true cannabis debit card processing.
Medical and recreational marijuana dispensaries now have access to what is very close to traditional merchant services. And a far cry from the cannabis payment options available a few years ago.
Dispensary payment options include:
- Debit card processing (for in-store ad delivery)
- Online payments (using ACH)
- Cash (includes ATMs and cashless ATMs)
The graphic below illustrates have far cannabis payments have come and how close they are to the ultimate goal of full debit and credit card processing.
Debit card processing
Cannabis debit card processing offers traditional merchant processing but without credit card processing. That’s right, cannabis businesses currently have access to what are essentially full merchant services.
Debit cards can be integrated into POS systems for seamless checkout and can even allow customers to add a tip for budtenders to the transaction.
Cannabis debit card processing is close to traditional merchant processing, but it does have a couple of limitations.
One limitation of current cannabis debit card processing is that not every card will be accepted due to the debit networks used by a particular card. Acceptance rates vary by geographic region, but on average provide a 95% acceptance rate.
Another limitation is that currently, only card-present transactions can be processed for cannabis businesses. This means debit cards can be used for in-store cannabis purchases and cannabis deliveries where the product is paid for at the time the product is delivered (not when it is ordered).
ACH payments
ACH payments utilize account-to-account (consumer bank account to a dispensary’s bank account) using Electronic Funds Transfers (EFT).
A major advantage of ACH payments for dispensaries is that they can be used for online payments. This makes it possible for customers to place an online order for cannabis pickup or deliver and pay online at the time they place the order.
Paying ahead is super convenient for customers and super-efficient for dispensaries since customers picking up an online order don’t have to wait in line.
Pre-paid delivery orders are also a tremendous benefit for dispensaries since delivery drivers don’t have to deal with cash and can prevent wasted trips due to customers not having enough cash, their card not working, or their card being declined for lack of funds.
There are more cannabis ACH payment options now than ever. Having options is great but you also need to choose wisely.
If an ACH program doesn’t include proper controls to: (1) prevent and fight fraudulent transactions; and (2) prevent NSF transactions and collect any NSFs do occur, merchant losses could be material.
As soon as people find a crack in the fraud defense practices of an ACH payment system word of the scam spreads fast and ACH payment providers will always be playing catch up if they aren’t careful.
Fighting fraud and NSF transactions isn’t easy and if an ACH payment provider isn’t experienced, fraud and NSF transactions can result in significant lost revenue.
Cashless ATMs
Cashless ATMs are the most controversial cannabis payment option but also the most popular. The name is also ironic as they aren’t really cashless.
In case you aren’t familiar with cashless ATMs, here is a high-level overview. The devices look like a typical card terminal that sits on the counter at checkout, not like an ATM machine.
To pay for a purchase, customers swipe/insert their card and enter their PIN to make an ATM withdrawal. Here’s where the “cashless” part comes in, instead of receiving cash, the customer receives the product they purchased plus change for the difference between the amount of their ATM withdrawal and the price of the products purchased.
Sure, it’s a confusing and awkward payment experience, but before debit card processing was available, cashless ATMs were the only quasi card-based payment method available for dispensaries, so customers and dispensaries put up with the inconvenience.
Prohibited transactions
The goofiness of the checkout process is just the beginning of the challenges for cashless ATMs. Cashless ATMs use Visa and Mastercard ATM networks.
Not only do Visa and Mastercard not permit cannabis transactions on their networks, but their ATM networks are to be used for cash withdrawal transactions only. Purchase transactions are not permitted.
The art of disguise
To make the transactions appear like cash withdrawals, instead of purchase transactions, cashless ATMs round transaction amounts up to the next 5-dollar or 10-dollar increment. That’s why budtenders must give change back to the customers.
The longevity of cashless ATMs is questionable because both Visa and Mastercard have warned financial institutions, processors, and agents they are aware of the scheme, and it violates their network standards, and fines and assessments are possible.
The art of deception
Merchant services accounts require a business to be underwritten to get a merchant services account. Cashless ATMs use ATM networks, so the only thing needed is the name and address where the ATM machine is located.
Needing to provide less information about the business makes it easier to hide the true nature of the business. Despite needing to provide much less information to the processor and financial institution, it’s widely reported that cashless ATM providers falsify the name and address of dispensaries to further disguise the true use of the machines.
The ATM contract can easily be put in a name other than the cannabis retail business because there is no underwriting the name of the business doesn’t appear on customers’ statements since it’s an ATM withdrawal.
A sorted past
Cashless ATMs have a long history of being used to facilitate illicit business activity because it’s relatively easy to hide what the business is and what the transactions are for. It only makes sense they started being used to hide cannabis transactions.
Cashless ATMs also have operational challenges. They aren’t designed for retail transactions so they can’t be integrated with POS systems. Additionally, due to rounding transactions up, they can’t be reconciled to sales reports.
Aside from the questionable legality of using ATM networks for cannabis purchase transactions, the biggest concern for dispensaries is chargebacks. Customers have learned that if they dispute the ATM withdrawal charge there is nothing the processor can do to fight it since the customer truly did not receive cash related to the ATM withdrawal.
Cashless ATM concerns
To summarize, the challenges with cashless ATMs include:
- Violating card network standards against cannabis transactions
- Violating card network standards against purchase transactions running on an ATM network
- Awkward checkout process
- Can’t integrate with POS systems
- Can’t reconcile to sales reports
- Still involve cash
- Chargebacks could be crippling
The fact that cashless ATMs, with all their limitations and challenges, are as popular as they are shows how desperate marijuana dispensaries are for card-based payments.
Cashless ATM pros?
There are a few things about cashless ATMs that dispensaries may find appealing, even though it may hurt their business. These include:
- Customers pay an ATM withdrawal fee (often called a convenience fee) so dispensaries don’t have to pay processing fees. This may appeal to dispensaries but as discussed below, it actually hurts their profits.
- Giving cash back to customers makes it easy to tip budtenders.
- Dispensaries can a portion of customer convenience fees as a kickback.
Cryptocurrency
Many have long thought that cannabis is a perfect market for cryptocurrency, but it hasn’t caught on.
Eventually, cryptocurrency transaction technology will get to the point where it can be used for cannabis transactions. It will be interesting to see what happens first, a cryptocurrency technology for cannabis transactions is developed or cannabis is removed as a Schedule I drug.
Even if a cannabis cryptocurrency payment solution emerges, adoption may be a challenge until cryptocurrency is more universally trusted and adopted as a form of payment.
What about purported cannabis credit card processing “solutions”
A quick Google search will show ads for multiple providers purporting to be able to offer legitimate, fully transparent cannabis credit card processing.
By this point, you can probably guess that these supposed solutions are too good to be true.
Any cannabis credit card processor claiming to offer credit card processing for marijuana dispensaries is either using deceitful marketing or they are tricking a processor, a financial institution, and the credit card networks. Either way, its sneaky.
Some common shady tactics used by these supposed cannabis credit solutions include:
- Using a different merchant name (typically a management company, consulting company, or merchandise seller associated with the merchant)
- Using an incorrect address
- Using the correct address but an incorrect suite #
- Using the wrong MCC
Employing one, or a combination, of the tactics above could work and enable you to get credit card processing for your dispensary but don’t expect it to last long.
When your account is shut down you risk losing any unsettled transactions which could be up to three days’ sales for a holiday weekend.
Be especially leery if someone offers you marijuana credit card processing but requires a reserve account. When your merchant services account is shut down you could lose your reserve account and your unsettled transactions.
There have been multiple instances of dispensaries losing millions in offshore reserve or settlement accounts or from shady processors disappearing with unsettled funds.
Signing up with one of these services will require you to falsify (possibly unknowingly) information to a financial institution which is a Federal crime.
Cannabis will always be high-risk
Regardless of Federal law, cannabis will always be a high-risk industry for merchant services. As such, cannabis credit processing will always be more challenging than more traditional retail businesses.
Merchant services assign risk levels to businesses (and types of transactions) based on several factors. The risk level of a business affects things like pricing, due diligence requirements, and compliance requirements.
The industry is just one thing that can cause a business to be considered high-risk. Other factors that can cause a business to be considered high-risk include:
- How long a merchant has been in business
- Personal credit rating
- A merchant’s processing history
- Card-not-present sales
- Recurring billing
- Big-ticket transactions
- High volume
- Network regulations
Expect cannabis businesses to be considered high-risk not just because they sell cannabis but also because they must maintain a state license to sell marijuana and sales must be to a customer of a certain age.
Challenges of high-risk credit card processing
Serving high-risk merchant requires special knowledge of high-risk merchant processing and of a business’s operations. Even though high-risk industries represent some very large industries, not every financial institution and acquirer wants to serve high-risk merchants.
The due diligence and compliance requirements are simply too burdensome and the risk too great, so they avoid these businesses to focus on more traditional businesses.
There are over 50 industries generally considered to be high-risk for merchant services. Below are a few industries considered high-risk.
| High-Risk Merchant Processing Industries | ||
|---|---|---|
|
Airline, lodging, travel |
Drugs & prescriptions |
Pawnshops |
|
Alcohol |
Firearm sales |
Pet sales & supplies |
|
Antiques |
Furniture sales |
Self storage |
|
Beauty, skin & hair |
Insurance |
Supplements / nutraceuticals |
|
Computer sales |
Jewelry |
Tobacco |
|
Dating services |
Moving services |
Vape / E-Cig |
Many of the industries considered high-risk are not surprising but many mainstream industries are considered high-risk based on a long history of chargebacks.
High-risk merchant services realities
High-risk merchants can expect:
- Fewer banks to choose from
- Extra due diligence requirements
- Ongoing compliance requirements
- Transaction limits
- Possible cash reserve requirements
- Higher fees
The thing high-risk merchants complain about the most is the higher fees. Merchant services fees are based on the risk of the business and the type of transaction. Card not present (online and phone orders transactions are riskier than card present (in-store) transactions.
The graphic below shows the spectrum of merchant processing fees.
Cannabis businesses should expect to pay higher merchant processing fees, especially initially, before they establish a merchant services history.
What cannabis businesses should do until credit card processing is available
It could be years before marijuana credit card processing is available, but you can start preparing now.
Until credit card processing is available, the best thing a marijuana dispensary can do is offer the most normal payment process available (currently that’s debit cards) and use ACH payments for online orders to allow customers to pay at the time they place an order for pickup or delivery.
Build a merchant services history
By establishing a debit card processing merchant account now, dispensaries can start establishing their merchant services history to qualify for better pricing when cannabis credit card process is available.
Grow electronic payment adoption
Dispensaries should encourage as many sales as possible to be paid electronically. Not only does this provide the best shopping experience for customers but it increases sales and reduces expenses. Here’s how:
- Increased sales – it’s widely accepted that average tickets are 15 – 30% higher for customers paying electronically compared to paying with cash.
- Reduced expenses – cash is more expensive than merchant processing fees. The average cost of cash for all retail businesses is 9.1% (with a range of 4 – 15%). This shocks most people which is understandable. The cost of cash is not a separate line item like merchant processing fees.
Instead, the cost of cash is included in multiple expense line items like:
- Labor (cash drawer reconciliation, cash counting, deposit preparation)
- Armored transportation
- Deposit and bank fees
- Cash shrinkage
Cannabis businesses weren’t included in the study, but the study did include a range of retail businesses. As a percentage of sales, cannabis businesses surely have a higher percentage of cash sales and therefore would have a cost of cash at the high end of the range or above.
That means cannabis businesses could have a cost of cash of 15%+. That’s considerably higher than the highest merchant services fees.
The cost difference makes it obvious that marijuana dispensaries should do everything they can to increase customer adoption of electronic payments.
Avoid customer convenience fees
The cost difference is also what makes dispensaries’ decision to charge customer convenience fees so hard to understand (even if they get a kickback from a cashless ATM provider) because convenience fees cause some customers to pay cash instead of electronically.
The customer convenience fee makes no sense which is why it’s not common in any other industry.
Even if a dispensary thinks its cost of cash is at the lowest end of the range (4%) in the study, its cost of cash is still higher than (or in the same ballpark) current merchant services fees for secure dispensary payments.
Factor in sales lost to competitors who don’t charge a convenience fee and it makes no sense. You might even win some customers from a competitor by not charging a convenience fee.
It’s hard to imagine a scenario where charging a customer convenience fee makes financial sense.
A lot of dispensaries ask about charging a customer convenience fee (or using cash discount pricing), so we created a calculator to run profit analysis using your own assumptions.
Summary of what to do before credit card processing
Below is a summary of things dispensaries can do before credit card processing is available:
- Get a debit card processing merchant services account to establish a merchant services history
- Use ACH payments for online transactions
- Don’t charge a customer convenience fee
Cannabis merchant services risks
The absence of credit card processing for dispensaries and the rapid growth of the cannabis industry have left the door open for less shady payment schemes and even shadier promotors to gain traction.
This has bad cannabis merchant services as perhaps the riskiest industry for merchants. There are valid options available to them but the temptation from the shady providers is real and it can be hard to tell the good from the bad.
The risks of making a bad merchant services decision include operational risks, financial risks, legal risks, and reputational risks.
Operational risks
Cannabis payment solutions with awkward checkout or customer education processes can slow line speeds.
Reconciliation and reporting challenges can waste administrative time. Frequent NSF charges, and even worse, uncollectible NSF charges add additional accounting time to track and record properly.
When a merchant’s payment processing goes down due to network or server issues or is shut down by a processor or financial institution it can cause havoc on operations.
Financial risks
All merchant services solutions have unsettled funds. These are receivables for customer sales that the merchant has not received from the processor yet.
With most merchant services, merchants typically receive settlements 1-2 days after a sale. Weekends and bank holidays can extend this to 4-5 days.
Any unsettled funds are at risk of not being collected if a processor is shut down because the funds could be seized to pay fines or penalties.
When payment processing goes out or is shut down merchants will lose sales because customers came to their store expecting to pay electronically and didn’t bring cash or can’t pay online for pickup or delivery orders.
A payment solution with a high rate of chargebacks or uncollectible NSF transactions also presents a financial risk to merchants.
It’s possible that card networks could impose fines on merchants who knowingly utilized their networks to settle prohibited transactions or provided incorrect information.
Legal risks
To gain access to payment rails, some payment schemes require falsifying information to a financial institution which is a federal crime.
Reputational risks
Charging customer convenience fees, having unreliable payment processing, and not offering online payments for pickup and delivery orders can frustrate customers. Some frustrated customers could decide to shop at a competitor.
Dispensaries are also susceptible to reputational damage for data breaches by their payment processor. Any data breach is damaging but some cannabis customer may not appreciate their marijuana purchase history being leaked.
The major credit card companies utilize a database of blacklisted merchants known as the terminated merchant file (TMF), also referred to as a MATCH list.
The TMF is a shared resource that prevents known bad actors from obtaining a merchant services account with another processor to protect the credit card networks.
Merchants are added to the TMF for various reasons including merchant collusion, fraud, money laundering, and high chargebacks.
Obtaining a merchant services account under false pretenses is fraud and will result in being added to the TMF.
Being on the TMF prevents benefits owners of a merchant from obtaining a merchant services account not only for the offending business but also for any other business.
What to expect when cannabis credit processing is available
As discussed earlier, CBD credit card processing provides a pretty good road map for what to expect when credit card processing for marijuana dispensaries is available.
CBD credit card processing hardly went smoothly in the early years. The cannabis industry is much larger and higher profile so expect it to be even messier. In short, expect a messy start and expect processing fees to go up.
Expect chaos initially
When cannabis credit processing is allowed it will be a feeding frenzy for credit card processing sales reps hoping to get new accounts in a previously untapped market.
The feeding frenzy will entice a lot of merchant services providers who aren’t experienced in high-risk processing to enter the market.
Work with an experienced high-risk credit card processor. Any high-risk merchant services account requires additional underwriting and ongoing due diligence to ensure initial and ongoing compliance requirements of the acquiring financial institution and credit card networks are met.
If the cannabis merchant services provider can’t prove you are in compliance you could lose your merchant services account. Losing a merchant services account is a “ding” against you.
Losing a merchant services account makes it harder to get another merchant services account with a different marijuana dispensary credit card processor. If you get another merchant services account, the fees could go up because of your poor merchant services history.
Once you get a merchant services account, don’t lose it. You’re given the privilege of using the credit card networks so you have to play by their rules.
Remember above where we discussed factors that make a business high-risk? A poor merchant services history can make merchant high risk, even if nothing else about their business warrants them being categorized as high-risk.
Expect pricing shenanigans
In the early days of cannabis credit card processing, expect a lot of games to be played with pricing. Expect both price gouging and too good to be true pricing.
There will be a lot of acquirers looking to make a quick buck. Either thinking they can charge outrageously high rates or offering artificially low rates to win business hoping to make some money before the financial institution closes their accounts for not following compliance requirements.
High-risk merchant processing has higher fees because there is more work for them. If an acquirer underprices an account, they may not able willing to do the compliance work necessary for you to keep your merchant account.
Expect disappointment
Unless you are only accepting cash, finally being able to accept credit cards at your dispensary likely won’t be the crazy windfall of profits many hope or predict.
If you already have 30 – 50% adoption of electronic payments, accepting credit cards will probably only increase your adoption by 10 – 20%.
An additional 10 – 20% of sales paid electronically equates to a 3-6% increase in profit (sales – processing costs & cost of cash).
Compared to the approximate 17% increase in profit from going from all-cash sales to 50% electronic sales and it’s easy to see why credit card processing for marijuana dispensaries won’t be a giant financial windfall for the cannabis industry.
A huge moral victory definitely, but a minor financial victory.
It seems obvious, but worth saying. Do your due diligence when choosing a merchant services provider. Saving a few basis points in fees may end up costing you a lot more.
Avoid the nonsense
Much of the initial craziness of cannabis credit card processing can be avoided by working with an experienced and credible cannabis merchant processor.
If your merchant services provider is inexperienced or slacks on their compliance, it can cost you. Your business could be interrupted by losing your merchant processing and you could pay higher fees on your next merchant processing account.
Data security
Data security is another worry with some of the workaround cannabis payment solutions. Providers looking to make a quick buck with a cannabis card scheme before it gets shut down probably aren’t going to invest in proper data security protocols.
At a minimum, a cannabis payment processor should be PCI Certified. PCI stands for the Payment Card Industry and certification requires processors to meet certain standards and submit to yearly PCI audits.
Summary
Credit card processing for dispensaries is not available and won’t be until cannabis is removed from the list of Schedule 1 drugs.
The arrival of cannabis credit card processing might be a monumental achievement and a major step toward the legitimacy of the cannabis industry.
But don’t expect major financial gain to accompany the availability of credit processing for cannabis businesses.
In fact, when marijuana credit card processing first becomes available it will present a challenge for the industry with processing costs going up and gold rush opportunity attracting the shadiest of processor acquirers to the market.
Dispensaries can take steps now to not only prepare themselves for the arrival of credit card processing but also to experience most of the benefits of credit card processing.
Getting a debit card merchant processing account now will start establishing their merchant services history can help reduce their risk and the rates they will pay for credit card processing.
By combining debit card processing with ACH payments for online purchases, dispensaries can get essentially the same electronic payment adoption rate they could get if cannabis credit card processing were available
