Why do dispensaries round up your payment and then give back change?
For most people the term ATM conjures images of a large machine that swallows your bank card, then prompts you to choose whether you want to withdraw $20 or $40 (or another amount) from your bank account before spitting out the cash and (hopefully) your card again. Then you take your dough and go buy all the fun stuff.
But when you go to a dispensary to buy cannabis, you're using a different kind of ATM. They commonly referred this type of ATM to as a “Cashless ATM”. But it is more formally known in the payments industry as point-of-banking.
A cashless ATM is nothing like that monstrosity you find in the back of a bar. It's “cash-less”. So, how does it work?
What is a Cashless ATM?
A cashless ATM is a small normal looking payment terminal that allows customers to use their debit card to make purchases. For the most part, it works much the same way as any purchase you make at a checkout counter. The items are rung up at the counter, the customer dips or swipes their ATM card in the terminal, and the transaction is approved.
Except there are a few major differences.
First of all, the customer never pays the exact amount of the sale like they would when using their debit card at any other store. Instead, the sale is rounded up to the closest $5-$20 increments. The transaction is processed for the whole dollar amount and change is given to the customer for the difference.
This is one of the reasons it is like an ATM. When you go to an ATM, you cannot withdraw $14.25, you have to take out $20.
The transaction doesn’t process like a purchase transaction. Instead, the transaction looks and works like an ATM withdrawal, but no cash is ever dispensed. In this case, the money goes straight into the merchant's account for the purchase. They dole out change to the customer for the amount that had to be rounded up to the appropriate dollar increment. This is why it is called a cashless ATM.
It is not actually an ATM at all. The terminal is simply programmed to process the transaction like an ATM withdrawal instead of a purchase.
This can sometimes be confusing for customers not familiar with the process. It can also lead to excess costs for the customer, as most banks will charge the customer an out-of-network fee for the transaction. These out-of-network fees can often run as much as $3 per transaction. In addition to the bank fee, most dispensaries also charge a “convenience fee” at the time of purchase. Customers get hit with a fee on both ends of the transaction. These extra fees can really add up, costing customers a significant amount of excess cash.
Why do dispensaries use cashless ATMs?
Because taking payments for your goods and services is the fundamental driver of commerce today. Today’s consumers are more likely to use a card for payment than carry cash. We are continually moving towards a cashless society with recent polls showing that only about 16% of consumers “always” carry cash on them. Consumers want convenience and they want to pay the way they want.
Card payments represent a certain level of convenience for both consumers and retailers. Consumers are not likely to stop at their bank’s ATM to draw out money. And if they don’t know exactly what they're going to buy, they don't know how much cash they need.
For retailers, accepting card payments helps increase sales and increases customer satisfaction. Consumers tend to spend more when using a card. Data shows that the average credit or debit card purchase is around $112, while the average cash purchase is only $22. Moreover, debit card use continues to hold the market share over credit card use and cash.
And there’s the ever present issue of safety when there are stores of cash being held in a dispensary. Storing, transporting, and depositing large amounts of cash invites criminals, threatens the safety of staff, and increases costs.
Dispensary owners install cashless ATMs as an alternative because federal laws will not allow them to accept credit cards as a form of payment. Because the card brands (Visa, MC, etc), acquiring banks and card issuing banks, and the interchange network that payment transactions are processed over, are regulated by the federal government. And the federal government and card brand rules do not allow for their products and networks to be used to purchase a federally illegal substance.
That would violate the laws set forth in the Bank Secrecy Act and Anti-Money Laundering laws. Under the law, any funds gained from the sale of cannabis are considered illicit funds.
But, mostly, they install Cashless ATMs because they have been sold on the so-called legitimacy of the option. And they aren't always aware that there are actually options for more legitimate and compliant Cannabis Payment Processing available.
Are cashless ATMs legal?
Maybe. Probably not.
For the solution to be completely compliant, all entities involved must be aware of the true nature of the sale. The banks that fund the transaction and the acquiring bank that processes the transaction must be operating a compliant BSA/AML cannabis program. The merchant’s depository bank must also be notified and must run a compliant BSA/AML program.
And all card brands must be notified that the bank is supporting the cannabis industry.
Unfortunately, this is often not the case. When a customer buys cannabis at a dispensary, this is a point-of-sale direct purchase for a product. To the customer, it feels like a purchase. But to the bank, it looks like an ATM cash withdrawal was made. Many cashless ATMs are just programmed to act and look like a cash withdrawal. The entities involved with the transaction may not know the true nature of the purchase. Isn't this deliberately concealing the source of the funds?
Any time the true source of funds is hidden, it is considered money laundering. This can open a bank up to federal prosecution for money laundering. And it can expose the business to accusations of both intentions to commit bank fraud and money laundering.
Debit networks pose another unforeseen issue for the cashless ATM solution.
Most regional debit networks are private and operate unaffiliated from the major global card brands. These regional networks include STAR, Accel, and NYCE, among others. These debit networks have their own set of rules and regulations. But they must also abide by the rules set by the Dodd Frank Act and the provisions of the Durbin Amendment.
Some of the debit networks are global networks that are owned and operated by the major card brands. Interlink, Maestro, and Pulse are all owned by Visa, MasterCard, and Discover respectively. They also happen to be the most widely used networks.
When a customer uses their debit card, the transaction will be routed to the merchant and/or processor’s network of choice. Many times, the global network is set as the default network. That means that instead of the transaction routing over a private debit network, it may route over the credit card network as a debit transaction.
The major card brands have explicitly chosen not to support cannabis transactions on their networks. Any merchant processing a cannabis transaction on a network owned and operated by a major card brand is violating card brand rules.
For instance, Visa rules for the use of its Interlink network prohibit merchants from “submitting any transaction that it knows, or should have known, is fraudulent or illegal.” Visa’s core rules also include an Anti-Money Laundering Program Requirement.
Oftentimes, merchants using the solution are not fully aware that they are using a solution that may be unlawful. The payment provider may be misrepresenting the products as a legal work-around.
How can a merchant tell if their debit card solution is compliant?
For a debit card solution to be compliant, there has to be transparency among all parties involved with processing the payment transaction. That means the Sponsor bank, the Acquiring bank, the Depository bank, and the routing networks and card brands are all aware they are supporting cannabis transactions. They all must also be operating under compliant BSA/AML cannabis programs. Lastly, the merchant should have a true merchant account fenced to only accept debit transactions.
If this is the case, there will be no hidden information. The merchant should be able to know who their bank and processor are. The merchant's statement should show the real name and address of the dispensary business. The customer's receipt should show the name and address of the dispensary. And the purchase will transact like a purchase and not be disguised in any way to look like a cash withdrawal.
Merchants also must be sure that the transactions are processed only over approved debit networks. If a customer uses their debit card to make a purchase and does not have to enter their PIN, it is not being routed over the debit network. Only when a debit card transaction routes over the credit card network, can the customer use a signature instead of a PIN.
Dispensaries want to be able to accept card payments. They need to be able to. And that is what their customers want as well. But most dispensary owners have too much invested to risk losing it all to federal prosecution for bank fraud and money laundering.
While the Cashless ATM may seem like a viable option, it is neither legal nor sustainable. Until the federal government either removes cannabis from the Controlled Substances List, or provides a pathway for legal payment transactions, cannabis retailers will have to live with limited payment options.
That doesn't mean there aren't payment options out there. We believe in taking the high road and we encourage our cannabis partners to do the same. The best way to pave the way to legal and fair access to banking and payments is to show the powers that be that it can be done responsibly.
If you’d like to learn about how you can legitimately accept payments in your dispensary or delivery business, call B.I.G. today. We believe that by providing sustainable services that support our cannabis partners and help to keep them safe, we can support the long-term goals of the industry as a whole.