woman using an ATM machine

Cashless ATMs at Marijuana Dispensaries – Why All the Fuss

Cashless ATMs are the most widely used cannabis payment solution right now. They’re also the most controversial.

The goal of this guide is to help you better understand cashless ATMs, how they work, the risks involved, and what the controversy is all about.

For an industry desperately trying to distance itself from its past, cashless ATMs are a potential major black eye at an inopportune time. Industry leaders knowingly using an illegitimate payment system doesn’t help the industry’s chances of gaining credibility through legislation.

By embracing cashless ATMs, the cannabis industry is aligning itself with some of the shadiest businesses around.

Cashless ATMs checkered past

Dispensaries aren’t the first businesses to use cashless ATMs. Cashless ATMs have long been used to hide illicit business activity because it’s easy to mask who a business is and what transactions are for.

Businesses that are a front for an illegal operation or that also run an illegal side business frequently use cashless ATMs to hide their activity (e.g., massage parlors).

If these businesses used traditional merchant processing, their sales volume would exceed what’s expected for their type and size of business resulting in losing their merchant account and possible investigation by law enforcement.

Traditional merchant processing also requires underwriting the business and its owners. Cashless ATMs only require a contract to place an ATM at a location.

According to Visa, “Cashless ATMs are primarily marketed to merchant types that are unable to obtain payment services—whether due to the Visa Rules, the rules of other networks, or legal or regulatory prohibitions.”

It’s no surprise that dispensaries discovered that they could use cashless ATMs to try to hide their transactions.

Issues with cashless ATMs

Cashless ATMs have plenty of legal and operational challenges, including:

  1. Violating card network standards against cannabis transactions
  2. Violating card network standards against purchase transactions
  3. Customer fees violate the Durbin amendment
  4. Awkward checkout process
  5. Don’t integrate with POS systems
  6. Reconciling to accounting records is challenging
  7. Cash is still required
  8. Chargebacks could be crippling

Given all these shortfalls, and some new challenges discussed below, it almost defies logic that cashless ATMs are still operating.

How we got here

Financial institutions have used our technology to provide banking and payment services to cannabis businesses since 2015 so we’ve had a front-row seat to the fiasco that cannabis payments have become.

The evolution of cannabis payment solutions has been part fintech, part replaying the oldies by bringing back payment methods that haven’t been popular for many years, and part fraud.

It’s widely known (and the topic of countless news stories) that cannabis credit processing is not permitted by the major credit card brands (Visa, Mastercard, American Express, and Discover). Without access to credit card processing, the cannabis industry has turned to alternative dispensary payment solutions.

Before cannabis PIN debit card processing became available, cashless ATMs offered the only card-based payment solution (that wasn’t a pre-paid program). Cashless ATMs weren’t the first workaround solution to be pitched to dispensaries so many happily tried this new payment option. 

Customers and dispensaries people put up with the goofy payment process and operational challenges because cashless ATMs finally offered a card-based solution. With all their flaws and legal uncertainty, the widespread use of cashless ATMs by dispensaries shows how desperate the industry is for a “normal-like” payment process.

For the first couple of years, cashless ATMs were available, most dispensaries were probably unaware of the potential legal trouble they were stepping into.

Between the recent warnings from Visa and Mastercard, the negative media stories, and the availability of cannabis debit card processing, it will be interesting to see what the future holds for cashless ATMs.

Cashless ATMs have experienced isolated short-term service interruptions but so far have avoided a widespread cannabis cashless ATM shutdown.

Many cannabis payment solutions have come and gone but cashless ATMs would be the most widely used solution to fail or be shut down.

Evolution of cannabis payments

The graphic below shows how far cannabis payment solutions have come since cashless ATMs were introduced as an option.

graph showing evolution of cannabis payments

Cashless ATMs in the news

Cashless ATMs have made the news a lot lately. And not for being the answer to the industry’s cry for legitimate secure payments for dispensaries.

Here’s a sample of some recent news stories about cashless ATMs. The list includes some of the biggest news outlets, and all the articles are highly critical of cashless ATMs.

Fortune – Cashless ATMs at Cannabis Dispensaries Are the Industry’s Latest Disguise Against Banks

Forbes – Unlocking the Payment Matrix of the Cannabis Industry

Forbes – What Visa’s Warning About ‘Cashless ATMs’ Means for the Cannabis Industry

Bloomberg – Marijuana Fintech Players are Vying to Replace Cashless ATMs

Bloomberg – Trump Media probe seeks information from Rocket One Capital (which was founded by the largest cashless ATM provider)

Benzinga – Visa Warns It Will Crack Down on Cannabis Retailers’ Use of Cashless ATM Payment ‘Scheme’

MJBizDaily – Cashless ATMs in Marijuana Stores Might be Headed for Extinction After Visa Warning, Experts Say

The following quotes from the stories above set the tone for the articles.

This news sent shock waves and chills up the spines of many business owners who were guided by their merchant service providers, point-of-sale systems, and payment processing companies, to unknowingly commit federal banking fraud by utilizing one of these “work around” payment methods.

… the fallout could be more severe, according to some industry executives. They believe criminal charges could be on the way for those involved in helping set up cashless ATMs in marijuana shops.

… any marijuana retailer using a cashless ATM should consult with an attorney, because another potential outcome to be avoided at all costs is getting blacklisted by Visa. Such a result, he said, could be “catastrophic” for any business that is hoping to survive until federal legalization actually happens.

With the number of unique complexities and challenges the cannabis industry faces, many operators don’t understand that they have been sold misrepresented products that may not be legal.

Merchants are encouraged to remove their cashless ATMs and seek out legitimate data and payment processors without violating Network Rules.

While many Merchants are willing to tolerate the risk for immediate profits, most Merchants have too much invested in their business to jeopardize it for an illegal fad.

The process is simple. Dispensaries intentionally miscode marijuana purchases as ATM withdrawals and then using a cashless ATM—that often looks identical to a card reader—take the funds from the customer’s account hassle-free.

How cashless ATMs work

Cashless ATMs don’t look like an ATM. They look like a standard payment card terminal at the checkout counter of any store, but the transactions feel like ATM withdrawals to customers. The payment process starts like a typical debit card transaction with a customer inserting their card and entering their PIN.

It’s at this point where things get different.

  1. Transaction amounts are rounded up to the next 5 or 10-dollar increment
  2. Customers receive products, instead of cash
  3. Customers receive change for the amount their transaction was rounded up
  4. Customers are charged an ATM fee by the ATM provider
  5. Customers may be charged an out-of-network ATM fee by their bank
  6. Customers’ bank statements show an ATM withdrawal

The checkout process is far from normal and requires customer education about its quirks. And cash is still involved. The goofy checkout process is required because cashless ATM transactions are trying to trick card networks and financial institutions.

The card networks prohibit cannabis transactions so cashless ATMs attempt to disguise transactions and submit them over ATM networks as cash withdrawals.

Submitting cannabis purchases through ATM networks violates card network rules in two ways.

  1. The networks used by cashless ATMs are reserved exclusively for cash withdrawal transactions and purchase transactions like those at cannabis dispensaries are prohibited.
  2. Cannabis transactions are not permitted on any card network.

The art of disguise

Debit and credit card payment networks require thorough underwriting of each business and a merchant category code (MCC) for the business (there is no MCC for cannabis in the U.S.).

ATMs don’t require underwriting, making it easier to hide the nature of the business by putting the ATM in the name of the property owner or holding company rather than the dispensary dba name required by debit and credit card networks.

Cashless ATMs also commonly use an incorrect address for the business where the ATM is located. The lack of underwriting and review/approval makes this possible.

Merchant services accounts have detailed rules regarding the name and address that appears on customer statements to help protect merchants from chargebacks. Chargebacks are a big problem for cashless ATMs that are discussed later.

Cashless ATMs further attempt to disguise transactions by rounding them up to even dollar amounts to make them look like ATM transactions to card networks and financial institutions.

Card networks are aware of the scheme

Cashless ATMs operated relatively unencumbered until Visa and Mastercard sent shockwaves through the industry and caused dispensaries everywhere to call their attorney for fear they could get in trouble.

Visa issued a memo (included at the bottom of this article) in December 2021 that referred to cashless ATMs as a scheme, saying using them the way dispensaries violates their rules and warns of penalties and additional compliance enforcements against violators.

Mastercard sent a letter directly to financial institutions in July 2022 informing them that they were aware cashless ATMs are being used to process cannabis transactions, that these transactions violate their rules, and that appropriate actions will be taken against violators.

Everyone is getting paid

Cashless ATMs are incredibly profitable, and a lot of players are sharing in the excess profits and are vested in the success of cashless ATMs.

Cashless ATM fees are the same or higher than cannabis debit card processing fees but cashless ATMs have much lower costs, resulting in high-profit margins. ATM transactions aren’t assessed interchange fees because the issuing bank doesn’t have any risk. This lower cost isn’t passed on to merchants, and some of it is used to build a sales network to distribute cashless ATMs.

Many dispensaries get kickbacks for cashless ATM transactions which means they’re benefiting from customer fees that may violate the Durbin amendment.

Some of the biggest promotors of cashless ATMs are cannabis POS systems which get paid handsomely if their customers use cashless ATMs. These are the same companies that promote their compliance features that help dispensaries avoid legal trouble.

Are cashless ATMs illegal?

There’s no question that cashless ATMs violate card network rules and violate Federal banking laws.

The question everyone is wondering is whether prosecution could extend beyond cashless ATM operators and promoters to the businesses using them.

At least one attorney that focuses on bank secrecy act/anti-money laundering compliance thinks businesses using cashless ATMs are not only violating card network rules but are also violating federal law.

Network rules from Mastercard and Visa that could cause trouble for merchants include:

MasterCard Section 5.11.7 “Illegal or Brand-Damaging Transactions” states: (1) a merchant or customer must not submit “any Transaction that is illegal, or in the sole discretion of the Corporation, may damage the goodwill of the Corporation or reflect negatively on the Marks.”

Visa Rules “Submission of Illegal Transactions” state “[a]n Acquirer must not knowingly accept from a Merchant for submission into the Visa payment system any Transaction that is illegal or that the Acquirer or Merchant should have known as illegal.”

Violating card network rules can result in potential fines of $2,500 to $200,000 per day which can be retroactively applied to, and from, the first day of noncompliance.

Similarities between cashless ATMs and the fraudulent payment scheme that affected Eaze also has operators worried about being involved with cashless ATMs. In the highly publicized case, prosecutors presented evidence that two men schemed to disguise payments. The men were convicted of conspiracy to commit bank fraud and sentenced to prison with substantial fines.  

The multiple steps taken by cashless ATMs to disguise transactions constitute an even more deliberate attempt to defraud payment networks and financial institutions than the scheme used in the Eaze case.

Given the blatant nature of the cashless ATM scheme, it would be hard for cashless ATM operators and dispensary owners to argue that they didn’t use cashless ATMs to disguise marijuana payments.

Customer convenience fees

Cashless ATMs charge customers an ATM fee (often called a “convenience fee”). Customers’ banks may also charge them an out-of-network fee. This makes using cashless ATMs expensive for customers. Especially for lower ticket purchases.

Cashless ATM convenience fees are typically around $3 which increases a $50 purchase by 6% (12% if a customer also pays a $3 out-of-network ATM fee). Many customers will pay cash to avoid convenience fees for paying with a card using a cashless ATM.

Customer convenience fees not only hurt a dispensary’s reputation but could also reduce profits because fewer customers will pay with a debit card so they will spend less. It doesn’t take many customers changing their behavior to have a real impact.

For example, if just 10% fewer customers pay with a card to avoid convenience fees and 2% of customers shop at a competitor to use a card with no fees, net sales would decrease by almost 3%.

We have a free calculator if you want to see how convenience fees impact your business.

Customer convenience fees may violate the Durbin amendment (part of the Dodd-Frank financial reform) which prevents merchants from charging a customer surcharge for debit card transactions.

Instead of a surcharge, merchants can offer a cash discount so customers paying with a debit card pay more but cash discount programs are tricky.

Offering a cash discount requires certain rules are adhered to like adding signage at the entrance, inside the store, and at checkout that clearly states the cash discount policy and modifying customer receipts to include the cash discount.

Many of our customers that utilize a cash discount program quickly terminate the program and report that they (and their customers) are happy with the decision.

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Cannabis Payment Processing

Cashless ATMs and credit cards

Some cashless ATMs may allow customers to use credit cards, but these transactions are processed as a cash advance by the customer, not a purchase transaction.

As a cash advance, cardholders incur interest charges starting on the day of the advance plus additional fees of 3-5% in addition to out-of-network ATM fees. This could lead to upset customers if they weren’t prepared for all the fees.

Operational challenges

The workaround nature of cashless ATMs is apparent in more than the odd checkout process. Using an ATM for retail purchases creates additional challenges including:

  1. Slower line speeds – inserting a card, entering a PIN, and counting change
  2. Cash drawer over/under reconciliation
  3. Reconciliation to sales reports is nearly impossible
  4. Chargebacks losses could be substantial
  5. High potential for disruption due to shutdowns
  6. Limited POS integration possibilities

Cashless ATMs are designed for ATM withdrawals, not retail transactions so they don’t have proper reporting for cash drawer and sales report reconciliations.

Daily reports from a cashless ATM show total withdrawals which don’t agree with sales reports because the amount of cash withdrawn was rounded up.

ATM fees/convenience fees and providing change just add to the confusion, making reconciling cash drawers a real challenge too.

Chargeback risk is excessive

To successfully charge back a cashless ATM transaction, all a customer must do is call their bank and tell them they didn’t receive cash for their ATM withdrawal. Their claim is true because they received marijuana instead of cash so the merchants and processors can’t fight the chargeback and don’t want to disclose that the customer was purchasing marijuana.

Customers have discovered how easy it is to charge back cashless ATM transactions and word is spreading fast so expect cashless ATM chargebacks to become problematic.

We’ve heard of cashless ATM providers telling merchants that they will cover chargebacks. This is a foolish business decision, and probably too good to be true.

Cashless ATMs go by various names

Card networks and financial institutions aren’t the only parties cashless ATMs try to deceive. With the term “cashless ATM” getting a bad rap, promotors also use terms like Point of Banking and Virtual Banking.

Some cashless ATM promotors just say it’s debit. If a debit product has any of these characteristics, it’s probably a cashless ATM:

  • Rounding transactions up
  • Providing change back to customers
  • Convenience fees / ATM fees paid by customers
  • Fee kickbacks to the merchant
  • No underwriting (cashless ATMs use a placement contract for the ATM machine)

Cashless ATM pros

As the first card-based cannabis payment solution, the initial appeal of cashless ATMs is understandable but there are some other features of cashless ATMs that some dispensaries may find appealing, despite the risk.

  1. No processing fees
  2. Giving cash back to customers makes it easy to tip budtenders
  3. Customer convenience fees kickback

Visa cashless ATM memo

Below is the memo Visa issued in December 2021. The memo was originally posted publicly in PDF format on visa.com but has since been removed.

Visa memo about cashless ATM scheme page 1
Visa memo about cashless ATM scheme page 2

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