Do you operate a business in the flourishing market for cannabis products? Are you having a tough go of it finding a payment processing company that understands the market and your payment processing needs? You’re not alone.
Marijuana dispensaries and other businesses selling cannabis products are woefully underserved by traditional banks and payment processing companies. Much of the problem stems from a mismatch of state and federal laws and regulations regarding cannabis products. The situation is complicated further by the fact that the cannabis industry is a young industry with unique needs that most banks and payment processing companies lack the institutional knowledge to address.
Lack of Federal Legalization Leaves Many Cannabis Businesses Outside Banking Mainstream
Cannabis business makes up one of the fastest growing industries in the U.S. today. New Frontier Data estimates legal sales in the U.S. topped $13.6 billion in 2019, a whopping 31.7% increase over 2018 sales. Yet, despite cannabis being legalized for recreational and/or medicinal uses in 33 states, businesses staking a claim in the burgeoning market for cannabis products are hard-pressed to find banks and payment processors to provide the access these businesses need to modern payment systems, like the credit card networks. There are 2 obvious deal breakers:
- federal law continues to treat cannabis as illegal, and banks, being federally regulated, defer to federal statutes such as the Controlled Substances Act, which criminalizes marijuana and other cannabis products.
- State laws and regulations around cannabis sales vary rendering compliance a complicated proposition.
The credit card networks are not constrained by federal banking regulations but have adopted policies that ban payments for cannabis products. And payment processing companies, while not banks, gain entrée to the credit card networks through banks. Some payment processing companies try to circumvent federal law by routing payments through offshore processing accounts, but these are expensive and risky. The reserve requirements against chargebacks and disputes that come with these offshore arrangements can take a substantial chunk of a business owner’s hard-earned revenues. Other payment processing companies try to circumvent prohibitions by mis-categorizing cannabis businesses as some other, allowable, merchant category code. But these schemes invariably fail the sniff test with partner banks and/or the credit card networks, and the merchant accounts typically get shut down. It’s not just marijuana dispensaries that get shunned. Storefronts and eCommerce sites selling CBD products, hemp clothing, marijuana paraphernalia, as well as growers, testing labs and distributors – any business that sells or touches cannabis or related products – is viewed as undesirable by banks and payment processing companies.
A 2018 law – the Federal Farm Act – took some of the sting out of federal cannabis prohibitions by reclassifying hemp (defined as any cannabis plant containing less than 0.3% THC) as a commodity, on par with other agricultural commodities, such as corn and soybeans. The U.S. Departments of Justice and Treasury, meanwhile, have issued guidance, such as heightened transaction monitoring by banks and credit unions that want to serve businesses in the cannabis industry. But to date, only a few dozen banks and credit unions have opened accounts for cannabis businesses. The situation has become so dire that one state, California, has proposed offering a new category of state banking license to institutions that exclusively serve marijuana dispensaries and other cannabis businesses.
Federal relief may be on the way, in the form of a proposed law, the Secure and Fair Enforcement (SAFE) Banking Act, which would create a “safe harbor” for banks and credit unions that want to open their doors to cannabis businesses. The proposal passed the U.S. House and is awaiting action in the Senate.
Compliant Solutions for Legal Cannabis Businesses
With billions of dollars a year in legal sales, cannabis businesses cannot afford to wait for Congress to come to terms with what the states already have ushered in: a vibrant market for marijuana and other cannabis products, as well as related services. This burgeoning industry, in turn, has given rise to a need breed of payment processing company focused on the cannabis industry.
Not just any payment processing company has what it takes to support cannabis companies. The payment processing needs of a marijuana dispensary, for example, are going to be demonstrably different from a fine dining establishment or a convenience store. A business selling cannabis and related products needs a processing partner that can support modern payment acceptance in compliance with all applicable federal and state laws and regulations, and card network rules, related to cannabis transactions.
Let’s look at 2 of the most common payment acceptance options available to cannabis businesses: Cashless ATMs and Electronic Checks.
Cashless ATM’s, sometimes called Point of Banking Systems, allow marijuana dispensaries and other businesses selling cannabis and related products to accept credit and debit card payments that customers authorize using their personal identification numbers (PINs), just as they would authorize ATM cash advances (from credit cards) or withdrawals (debit cards). The transactions clear through ATM (debit) networks, so credit card network rules don’t apply.
Debit transactions cost significantly less to process, too. Unlike the credit card networks, which assess merchant fees as a percentage of tickets, debit networks charge flat fees which significantly undercut the credit card fees on large-ticket purchases like marijuana.
Many processors also offer cannabis businesses the option of passing along processing fees to customers, who are already accustomed to paying fees to withdraw cash from ATM’s or receiving cash back on POS transactions.
Electronic checks, commonly referred to as eChecks, are electronic versions of the tried-and-true paper check. They are ideally suited to business-to-business transactions, such as those involving cannabis growers, testing labs and distributors. eChecks leverage recent innovations that electronify the clearing and settlement of payments initiated from a payer’s demand deposit (checking) account. Payees can be assured good funds in their accounts in as little as 1 or 2 days, which is much faster than other common B2B payment options, like automated clearing house (ACH) transactions. The cost to process eChecks is also substantially less than other payment options, notably credit cards.
eCommerce Ordering Solutions
Significant opportunities exist for improving the buyer experience through eCommerce platforms in cannabis, just as it has in other verticals. Consumers already accustomed to the online experience for other buying activities (like groceries and dining) expect the same when purchasing cannabis products.
Unfortunately, current state and federal laws restrict online sales of most cannabis products, except for hemp. eCommerce options are available, however, for purchasing products and services related to cannabis, such as suppliers of smoking implements, growing supplies, oil extraction tools, and testing labs. An eCommerce site can also be used to display cannabis products for ordering, with payment at pickup.
Evaluating Payment Processing Solutions for your Cannabis Business
Every business deserves fair and equitable access to payment processing and other financial services. But not all payment processing solutions fit the unique needs of cannabis businesses. Here are some important considerations that can help evaluate payment processing solutions for marijuana dispensaries and other businesses selling cannabis and related products and services. The solution should:
- Be fully compliant with federal and state laws and regulations around cannabis sales.
- Readily integrate with your company’s point-of-sale software.
- Support a variety of payment options, as well as payment-related tools like risk monitoring and chargeback prevention.
- Support eCommerce order-placement and payments, even if the business is not yet accepting online orders or payments.
- Integrate seamlessly with back end systems, including marketing systems.
- Come with excellent customer support. Oftentimes, a payment processing company will promise good support when pitching a deal, but post-sale support can be lacking. Ask the solution provider for references and check them out!