It’s a brave new world we live in as we head into 2023. There are nearly a dozen states, plus the District of Columbia, that have legalized cannabis for recreational purposes. Heck, even “Motor City” Michigan recently legalized the good herb!
More states could join that list in the years to come. Also, a majority of states from coast to coast allow for the legal sale of medicinal marijuana to some extent.
As recently as 2016, the legal cannabis industry in the U.S. did $6.7 billion worth of business. This figure ballooned to $25 billion in 2021. The number for 2023 will exceed $35 billion. These numbers are only likely to increase in the years and decades to come, especially if it is legalized federally.
However, there’s one serious problem for the marijuana industry, regardless of whether you are in the dispensary business, recreational business, or even the hemp business.
The problem is how do you collect payments. How do you manage payment processing in the U.S where there are still federal, state and local legal conflicts?
Simply put, the problem is that cannabis payment processing is almost impossible for marijuana-related businesses to obtain.
Naturally, this one big problem is causing a number of other complications for marijuana dispensaries and shops of all sizes.
What Is Payment Processing?
Payment processing is something most of us experience on a daily basis, whether we realize it or not.
Any store or business we visit that accepts purchases via credit and debit cards has a third-party processor to handle those transactions. It’s become so commonplace that we don’t even think about it until it’s not there.
Unfortunately, that is the situation for marijuana-related businesses throughout the country who struggle to find a processor so that they can accept payments from customers who want to use credit and debit cards.
What Makes the Cannabis Industry Different?
A majority of businesses in the cannabis industry can’t accept credit cards because they aren’t backed by banks or financial institutions of any kind.
While many states have legalized cannabis to one extent or another, on a federal level, it’s still considered a banned substance at the federal level, despite politician after politician claiming federal legalization would be a priority for them during their campaign process.
As a result, banks won’t accept deposits or process payments for businesses whose activities break federal law. Technically, this applies to shops that sell cannabis, even if no state cannabis laws are being broken.
For what it’s worth, in 2014, the Obama administration opened the door for federally-backed financial institutions to work with marijuana-related businesses via a directive in the Financial Crimes Enforcement Network.
The main stipulation is that cannabis businesses had to comply with anti-money-laundering laws.
However, that hasn’t been enough to get banks onboard with marijuana-related businesses. As of 2017, only about 300 of the 11,000 operational banks in the country are willing to do business with marijuana dispensaries.
Those 300 banks represent roughly 2.7% of the banks in the country. Even the banks that are willing to dip their toe in the cannabis industry charge high rates and make business owners jump through more hoops than other industries, leaving a lot of legitimate cannabis businesses high and dry.
Since the major banks are federally-backed, they don’t want to risk helping companies that are technically breaking federal law.
Many banks fear being investigated or having their assets seized by the FDIC if they assist marijuana-related businesses. From their perspective, potential don’t outweigh the risks, and probably won’t before cannabis becomes federally legalized.
What are the Challenges for Cannabis Shops?
Without a bank account, cannabis shops have nowhere to deposit their income. They also can’t work with major credit card companies like Visa and Mastercard.
Many of these companies are closely tied to the banking system and have publicly stated that they won’t work with cannabis businesses. As a result, many marijuana-related businesses have no choice but to do business exclusively in cash.
Naturally, this creates a number of complications. Statistics show that, collectively, small businesses that don’t accept credit cards lose nearly 12 million customers per year. That’s a significant chunk of business lost by not being able to give customers the option to pay with credit.
With more and more people choosing to go without cash in lieu of their credit and debit cards, this problem will only get worse in the future for shops without credit card payments.
Cash-only Dispensaries Are Targeted by Criminals
Moreover, cannabis businesses that deal exclusively in cash are becoming targets for robbers and thieves. The cash will pile up with no bank account to deposit it into, and so thieves see cannabis shops as a potential five- or six-figure payday if they can orchestrate a successful robbery.
In 2014, an estimated 17% of the marijuana shops in Colorado, a pioneer for legal cannabis, were victimized by robbers to one extent or another. Because of this reality, many will hire armed security guards to curb the threat, which can be expensive and doesn’t always guarantee safekeeping for their profits that are 100% in cash.
Intuitively, these issues could be minimized if cannabis shops had access to banks and third-party processors that would enable them to accept credit and debit card purchases.
Legal Options for Cannabusiness Owners
For most, independent banks and credit unions are going to be the most viable course of action. In states like Colorado, there are some small, independent banks that are actively looking to partner with marijuana shops. However, processing credit card transactions remain problematic for dispensaries in most areas.
Even online and mobile processors like PayPal and Venmo have made it clear that they will be steering away from the cannabis industry. Some have tried options involving cashless ATMs or cryptocurrencies like Bitcoin, but the latter can be particularly problematic in the medium- and long-term due to their value fluctuations.
Fortunately, cannabis-specific payment processors are starting to be made available for marijuana dispensaries.
These companies offer hope for cannabis payment processing. And while there are a number of competent services, it’s vital that cannabis dispensaries have a clear idea of what to look for in payment processors so that they can find a permanent solution to this industry-wide problem.
How to Choose a Cannabis Payment Processor
Above all else, the most important thing to do when looking for a cannabis payment processor is to ask as many questions as possible. Don’t rush! You need to feel comfortable before forming a partnership with any operation, especially in this business, and every dispensary has different needs and wants.
But beyond that, here are a few specific things you should be looking for in a cannabis payment processor.
Stay away from companies that want to charge you a monthly fee
Legitimate operations will charge you for every transaction, but there will be no set-up costs or monthly administration fees.
Be sure to read contracts closely and walk away from any company that’s trying to charge you a hidden fee.
Keep in mind that cannabis is still considered a “high-risk” industry, so your transaction fees will be higher than businesses in other industries. A flat rate of 6% should also be the maximum fee. Any higher is a red flag.
Make Sure Your Processor Has a Legal Team
The cannabis industry is a complicated one in a legal sense, and your payment processor needs to understand the ins and outs of that legalese.
Any payment processor should have a working knowledge of the Cole Amendment, FinCEN, CSA, BSA, and DOJ. They should also know how to handle things if federal authorities are looking into your business.
Be Weary Of Overly Sales-Oriented Companies
While you should ask a lot of questions, you want a processor that will do the same. You should be upfront with a potential processor and tell them everything they need to know about your business before any kind of agreement is made.
At the same time, they should be interested in hearing everything so that they know you’re not hiding anything. Any business that doesn’t want background information on you almost certainly isn’t trustworthy.
Make Sure They Comply to All Levels Over Governing Law
Your payment processor should have a system in place that is compliant with all federal, state, and local laws regarding the cannabis industry. Obviously, regulations are different in different places, so companies need to be aware of these differences and have the flexibility to adapt.
Don’t Sign Long-Term Contracts
Make sure you aren’t making a long-term commitment. Going with a payment processor in the marijuana industry is a big decision, so only go month by month in the beginning until you feel ready to make a long-term commitment.
Look Into Business Reputation and Miscoding
Find out if they do miscoding. Every credit card transaction comes with a specific code that relates to the nature of that transaction. Certain companies will purposefully use inaccurate codes to get around some of the regulations in the cannabis industry.
There can be serious consequences for businesses that do this, so stay away from any operation that wants to steer you down this path.
Always Keep Your Ears Open as Industry Evolves
Always keep your options open. Even if you find a solution to your banking and processing problems, always have a couple of backups in mind that you can go to.
In December 2017, a community bank in Florida that was working with most of the state’s marijuana-related businesses suddenly closed those accounts after they were bought out by a federal institution. You don’t want to end up in a similar situation.
In 2022 Majority Leader Chuck Schumer said that he would welcome a bill for complete federal legalization of cannabis, which would in effect solve the banking solution by removing the plant from the list of controlled substances and thus allowing the sale to be no different from alcohol or tobacco.
Final Thoughts & Parting Advice
Obviously, marijuana-related businesses have a serious problem that is hindering their growth and causing unnecessary complications. There are a few cannabis payment processing options available, but nothing that puts them on par with other industries.
Until cannabis businesses have the same access to bank accounts and credit card companies, they should proceed with caution when working with a payment processor. They should be wise to do their due diligence and ask as many questions as possible before jumping into anything. It can save big money, headache, and heartache.
