How Stable Is Your Cannabis Payment Platform?

How stable is your cannabis payment platform? Are there dangers lurking in your cannabis payment solution?

The fact that banks are federally regulated and required to abide by federal laws such as the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) has left the cannabis industry without many options. eing forced to operate as a cash-only business with limited access to banking services has created numerous challenges for every branch of the industry. Not only is cash expensive to handle, but protecting it creates numerous security and safety issues. If you’re in the cannabis industry, you’re no stranger to the struggles. Not only are these so-called workaround solutions subpar and confusing for customers but they can also result in serious consequences for the providers and the merchants who use them.

Dispensaries and other supporting retail operations, along with payments providers, have struggled to find a compliant way to facilitate electronic payments. Let alone create a legal Cannabis Payment Processing solution to accept card payments for cannabis. 

The goal is twofold. Merchants need a way to reduce operational hardships by becoming less cash heavy and customers need more secure and familiar options to pay the way they like. This creates a win-win where businesses work more efficiently and profitably and consumers have secure payment options that allow them to shop freely. As our society moves closer and closer to becoming cashless this payment method is generally by card – one that they already have in their wallet.

Desperation has led to unstable (and illegal) card payment solutions.

Desperation has led businesses to search out alternative ways to accept payments. But how stable are these alternative solutions? And more importantly, how much risk do they bring to your business and your freedom? Let’s explore some of the solutions and the issues that come along with them.

First, there were offshore merchant accounts which seemed like a good option at first glance. But these solutions come with hefty risks and a real risk of abrupt merchant account shut down, leaving businesses without any way to accept payments. They are/were very expensive and merchants had to pay heavy fees to have their funds processed and then wired. Additionally, they often only wire the funds once a week, making it difficult to manage cash flow. Offshore merchant accounts also require the merchant to create a large reserve account, which can cripple a business with no guarantee they’ll ever get the reserves returned. Not to mention that sending a transaction offshore and then funding it back to the U.S. is money laundering!

Then there are closed-loop wallets and wallets. These solutions work by allowing a customer to preload a virtual account, or wallet, with funds and then use those funds to make purchases at dispensaries. This solution might seem like a great way to facilitate payments in a dispensary. But they are inconvenient and limiting for both the customer and the outlet. Apps and wallets like these are usually only good at the dispensary offering them. Meaning that customers who frequent multiple dispensaries may have to create an account or download an app for every place they like to shop and then load each one of those accounts. As a result, they often have low adoption rates. Many closed-loop solutions are also used as a means to disguise a credit card transaction by allowing the customer to load their account with a credit card. This practice is illegal by not only breaking card brand laws but it constitutes money laundering.

Another unfortunate practice involves miscoding the business as a Merchant Category Code that is not prohibited by the bank or processor. This practice leaves the business open to an almost inevitable merchant account shutdown, again without notice. When the account is shut down, generally, the funds that are yet to be sent to the merchant are frozen and never recovered. This can be significant if an account is closed on a Monday with 3 days of sales waiting for finalized funding… Merchant businesses and owners are usually added to the card brand “Black List” making it nearly impossible to establish a new merchant for a long long time. Besides that, it is illegal, violates all card brand rules, and is considered bank fraud.

Then there’s the all-too-popular Cashless ATM or Point of Banking. This is a payment loophole that’s been getting a lot of scrutiny lately including a grand jury probe and warning letters from a major card brand. More recently in December of 2022, thousands of merchants found themselves suddenly without the ability to accept card payments. The major card brands strictly prohibit cannabis transactions on their cards or over their networks. Any transactions using a card or communicating over their network violate card brand rules.

Cashless ATM transactions are programmed to look like an ATM withdrawal, when in fact, it is a point-of-sale purchase transactions. Many times these transactions are routed over networks that have cannabis on their prohibited merchant’s list. Additionally, and in most cases, the true nature of the business is hidden from the acquiring bank. How do you know? Simply look at your receipt or descriptor on your bank statement – does it show the real business DBA and Contact info? No? Then the bank does not know that this “ATM” is inside a cannabis dispensary… Another good option is to simply ask who the processor and acquiring bank is.

No one is pulling the wool over their eyes. While they may largely turn a blind eye, they are becoming less tolerant of this blatant disregard for card brand rules. To that point, Visa issued a statement in December 2021 stating that not only were they “aware of this scheme”, but that it violates both Visa Core Rules and Plus Network Core Rules. They went on to warn acquirers that they would be subject to non-compliance assessments if found violating Visa Rules.

MasterCard also took a stance on the use of Cashless ATMs in dispensaries. In a letter to an undisclosed party, MC pointed out that they will not tolerate illegal transactions.

“Mastercard Standards prohibit our customers and their service providers from engaging in or supporting activity that is illegal. Currently, U.S. Federal Law prohibits the purchase and sale of cannabis within the United States. As such, Mastercard Standards prohibit any such purchase or sale using Mastercard branded cards. These purchases and sales are prohibited both through direct processing, as well as through any means designed to disguise such transactions or circumvent such laws and/or Standards. An example of such an action is commonly referred to as a “Cashless ATM” transaction.”

The letter went on to state that if they were to find an entity processing illegal activity; it is a violation of MasterCard Standards and they will take action.

The true reasons behind the recent Cashless ATM shutting the network down in December of 2022 remain to be seen. We have heard all kinds of reports but nothing that could be validated. Opinion? We think it is just the first of many network crackdowns on this type of payment processing. At the end of the day, banks don’t like being lied to!

Illegal and unstable cannabis payment solutions put everyone in the industry at risk.

Violating card brand rules is just one of the many risks Cashless ATMs and other workaround “solutions” put cannabis business owners in. Most of the time, banks, networks, and card brands are unaware of the nature of the transaction with these solutions. These transactions hide the true nature of the purchase and disguise the source of the funds. This means the bank and the processors are committing Bank fraud, and violating The Bank Secrecy Act and Anti-Money Laundering Laws.

But it’s not just the financial entities or sales offices involved in the transaction. Cannabis business owners can be held complicit in the crime. Both merchants and POS providers can be complicit in the facilitation of illegal payment schemes. By signing up for a non-compliant payment service, which merchants may “know” is not fully above board, and having those funds deposited to their financial institution (transparent or not), they can be committing bank fraud. While it is highly unlikely that they will be indicted, it is still possible. And it has happened. There has been more than one instance of former CEOs and CFOs finding out the hard way and being convicted of conspiracy to commit bank fraud.

When any one of these solutions gets shut down, it can have significant financial consequences for the business. Most of the time, the payment solution is shut down without notice and all outstanding funds are seized. That means cannabis merchants can have tens of thousands of dollars worth of processed transactions held and they may never recoup. In addition, “willfully” violating card brands’ rules is also grounds for the card brands assessing significant fines and placing the business and its owners on the “blacklist” which makes it nearly impossible to get a merchant account in the future.

Not being able to accept credit card payments and having to operate as a cash-heavy business is a difficult problem for cannabis business owners. These alternative or creative “payment workarounds” and FinTech’s attempt to remedy this problem. But at what cost?

Choosing legitimate payment options helps push legal cannabis payments and the cannabis industry forward. 

It doesn’t matter if you’re selling cannabis retail, or if you’re an ancillary business such as a grower, distributor, delivery, testing lab, and more. If you’re in the cannabis industry, you need a way to accept payments beyond just cash. You also need to protect your business, yourself, and the future of the industry as a whole. The only way to do that is to choose legitimate options, even if that means not accepting credit cards. When cannabis payments fraud makes headlines it supports those who oppose the industry.

While there is no shortage of unscrupulous salesmen just looking to make a buck or shady loopholes that mimic real payment methods, there are still better ways. There are payment processors and industry professionals that are creating relationships and building legal pathways to provide legitimate payment solutions for the industry.

One of those payment solutions is B.I.G.’s PIN Debit payment processing curated specifically to meet the rigorous compliance requirements that the industry must adhere to. PIN Debit allows customers to pay for their purchases just like they do anywhere else using their Debit card and PIN. The sale is for the exact amount and there’s no rounding up, cash back, or other confusion. What makes B.I.G.’s solution unique goes well beyond their legendary customer service. Their PIN Debit processing is bank backed and 100% transparent offering full bank and processor disclosures along with accurate account descriptors. It is an actual cannabis merchant account, just without the ability to accept credit cards. Once there is a federal change the ability to accept credit cards can be activated nearly instantly.

When you choose legitimate options, you’re not only supporting the industry’s fight for real fair access to legal payment avenues. You’re also supporting your business’s ability to continue to stay open and accept electronic payment for your products. Not to mention, your liability and freedom.

To learn more about legitimate cannabis payment options, call us today. One of our ETA-Certified Payments Professionals will be happy to be straight with you about your options.

Author

Rhett Baylies

Rhett Baylies, CMO for Bankcard International Group, is a 18 year veteran of the merchant services industry focusing on all aspects of electronic payment processing and compliance.  His comprehensive experience with merchant services includes credit and debit card processing, PCI security, fraud mitigation, chargeback management, technology implementation, high risk industry payment processing, and Cannabis ERP consulting/sales.  Though he has an intense focus on bringing service back to the payments industry, Rhett’s great passion is for the education about and sustainable growth of the cannabis and hemp industries through responsible and fair access to business services.

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Tony Gallo and the team of experts and consultants at Sapphire Risk Advisory Group have worked to secure medical marijuana and recreational cannabis businesses in 37 states. Follow us on social media to stay up to date with more security best practices and cannabis industry updates!