What is the stability of 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.
Being forced to operate as a cash only business with no access to banking services has created numerous challenges for every branch of the industry. Not only is cash expensive, but protecting it creates numerous security and safety issues. If you're in the cannabis industry, you're no stranger to the struggles.
In the relatively short period since states began legalizing cannabis, merchants have tried numerous payment solutions, wallets, apps and creative work-arounds.
Not only are these so-called solutions sub par, but they can also result in serious consequences for the merchants who use them.
Dispensaries and other supporting retail operations, along with payments providers, have struggled to find a satisfactory way to facilitate payment transactions. Let alone a legal Cannabis Payment Processing solution to accept card payments for cannabis.
The goal has been twofold. Merchants and payment providers need to find a way to reduce operational hardships by becoming less cash heavy and allowing customers more options to pay the way they like.
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 personal freedom? Let’s explore some of the solutions, and the issues that come along with them.
Offshore merchant accounts seemed like a good option at first glance. But these solutions come with hefty risks and a real risk for abrupt merchant account shut down, leaving business without any way to accept payments without notice. They are very expensive and merchants had to pay heavy fees to have their funds wired. And they often only wire the funds once a week, making it difficult to manage cash flow. They 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.
Then there are closed-loop wallets and wallets powered by blockchain. These solutions work by allowing a customer to preload an 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 it. That means customers who frequent multiple dispensaries would 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.
Another unfortunate practice involves mis-coding the business as a Merchant Category Code that is not prohibited by the bank. This also leaves the business open to an almost inevitable merchant account shut down, again without notice. Besides that, it is illegal and violates all card brand rules.
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.
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 transaction. And many times these transactions are routed over one of the card brand’s networks, like Visa’s Plus Network.
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 2021stating 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.
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 put cannabis business owners in. Most of the time, banks, networks and card brands are unaware of the nature of the transaction. 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 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. The former CEO of an MSO delivery service found out the hard way when he pleaded guilty to conspiracy to commit bank fraud earlier this year.
When any one of these solutions gets shut down, it can have significant financial consequences for the business. Most of the time, the solution is shut down without notice and all funds are seized. That means cannabis merchants can have tens of thousands of dollars' worth of processed transactions held and they may never get that money. In addition, “willfully” violating card brands rules is also grounds for the card brands assessing significant fines.
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 “payment workarounds” attempt to remedy this problem. But at what cost?
Choosing legitimate payment options helps push legal cannabis payments and the industry forward.
It doesn't matter if you're selling cannabis retail, or if you're a supporting business such as grower, distributor, delivery, testing lab and more. If you're in the cannabis industry, you need a way to accept payments other than just cash.
But you also need to protect your business, and yourself, from federal prosecution. The only way to do that is to choose legitimate options, even if they're not the most desirable payment method.
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.
When you choose these options, you're supporting the industry's fight for real, legal payment avenues. But you're also supporting your business's ability to continue to stay open and accept payment for your products. Not to mention, your personal liability and freedom from federal prosecution.
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.