Credit Card Processing, Specialty Businesses

Credit Card Processing Restrictions on Marijuana Businesses

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November 09, 2018

The legal marijuana industry is incredibly lucrative, but customers have little choice but to pay cash for their weed. That’s because while recreational marijuana is now available for sale through dispensaries in three states – Colorado, Oregon, Washington – as well as the District of Columbia, it’s not legal on the federal level. In fact, the federal government lists it as a Schedule I drug, considered as dangerous as heroin.

In 2016, Alaska, California, Maine, Massachusetts, and Nevada voted to legalize recreational marijuana. While medical marijuana has long been available in the Golden State, with fairly flexible prescription standards, legalizing recreational marijuana in California is predicted to bring in billions. So can credit card processors and banks ever get a piece of the marijuana pie, estimated by market researchers as one of the country’s fastest growing industries? It will literally require an Act of Congress.


Cash and Carry

For now, marijuana buyers and sellers have to tote and store large amounts of cash. Not only does “cash and carry” make customers and retailers ripe targets for theft, but there are other, less dangerous considerations. Large amounts of cash require large amounts of secure storage. That in turn forces pot entrepreneurs to rent out warehouses and hire armored trucks and armed guards. Marijuana retailers must pay taxes in cash, and those taxes are based on their gross revenue, not net income. Because pot isn’t federally legal, they can’t take the sort of deductions available to most businesses. They certainly can’t apply for Small Business Administration and other loan programs. Filing for bankruptcy isn’t an option, either.

Federal Laws

While individual states have legalized pot, they can’t do anything about federal laws regarding controlled substances. The Controlled Substances Act does not permit banks – or any other entities – to profit from marijuana. Under federal law, anyone “manufacturing, distributing, dispensing and possessing” marijuana is liable to prosecution, along with those “aiding, abetting, and conspiring” these activities.

In 2014, the Department of the Treasury’s Financial Crimes Enforcement Network issued guidance for banks on marijuana in the Bank Secrecy Act. The Act is designed to prevent money laundering, and banks can, in theory, work with cannabis businesses if complying with anti-laundering laws. Under these guidelines, the reporting necessary for any marijuana business – including notifying the feds of cash that smells like pot – are so onerous that very few banks are willing to take the risk. Should a marijuana enterprise try to skirt the rules by operating via a shell company, it is considered money laundering. Marijuana businesses that attempt to use another business’ merchant account would be engaging in credit card factoring, another illegal activity.

Since credit card processing and banks are so intimately connected, no bank access means no credit card payments for retailers. The major credit card companies expressly forbid the use of their cards for pot purchases.

Credit Card Factoring

Credit card factoring refers to using a merchant account that a processor set up for a different business. It’s illegal to use a merchant account for anything other than the original stated purpose, even if the transactions would otherwise be legal. For example, if you start a clothing store and open a merchant account for that store, you cannot allow your friend’s auto repair shop to use your merchant account to accept credit cards.

Businesses that attempt to use another business’ merchant account may try to do so for scam purposes or because their own business is not able to get a merchant account.

Related Article: Understanding Credit Card Factoring.


Startups Fill the Gap – Sort Of

Credit card processors and banks can’t deal with marijuana businesses, but startups are helping to bridge the gap. Tokken, a mobile payment option for pot buyers, allows clients to link to their bank account or credit or debit card and simply hit the “Pay” button on the app to purchase pot. According to the website, CEO Lamine Zarrad decided to start the company after “noticing inefficiencies while working as a bank regulator in Colorado.”

Tokken must verify that an applicant can legally purchase marijuana. Once verification is complete, the client can upload their banking or card information. At the marijuana retailer, the purchaser gives a numerical code to the clerk to complete the transaction.

Getting banks on board requires Tokken to take the transactions and make them into a digital “token.” In a manner similar to Bitcoin, all purchases are logged through a blockchain and then exchanged for money deposited into accounts. The banks know the purchases are legitimate. Tokken complies with “every relevant regulatory requirement.” Tokken isn’t alone in its endeavors. Competitors include Amercanex – the American Cannabis Exchange – and Kind Financial.

However, as these services rely on blockchain technology, businesses using these services aren’t actually accepting credit or debit cards. Some customers may not want to bother with another app for their phones.

On the business side of acceptance, Tokken doesn’t provide much information. We’ve reached out for details on how businesses can use the service. We’ll update this article as more information becomes available.

Related Article: How to Take Bitcoin at Your Business.


Billions in Legal Marijuana, No Credit Card Revenue

According to Business Insider, in 2016, legal marijuana sales topped $6.7 billion in North America. That means sales went up 30 percent in just one year. In just five years, experts forecast the market will reach $20.2 billion. In the past 25 years, only cable TV and broadband internet have grown so quickly in the consumer market. Credit card companies make good profits in these industries, but can’t enter the marijuana market.

Note that there are some processing companies that claim they can open a merchant account for marijuana businesses. In some cases, the processing company may be intentionally misclassifying your business as a tobacco/smoke shop or novelty sales. It’s never a good idea to work with a processor who tries to skirt existing laws and regulations, and banks frequently catch on to this behavior.

In other cases, non-FDIC insured local companies may be willing to underwrite marijuana businesses, but note that the “non-FDIC insured” part is a big deal. FDIC insurance protects deposits in the event of a bank failure, and working with a non-insured bank can open you up to a lot of risks.

A Warning About Cannabis Payment Processing

Because the legal cannabis industry is so new in many states, there’s a lot of misinformation out there. Unfortunately, this also leads to scam artists who prey on business owners and entrepreneurs who don’t understand the laws. One such individual recently contact me claiming to run a payment processing business. He claimed he runs the only FDIC-insured merchant payment processor that serves the cannabis industry. When I advised him this is impossible, he responded negatively, threatening and harassing me. A simple Google search revealed that he was previously accused of scamming small business owners by posing as a fake fire inspector.

Be aware as a cannabis business owner that while your state may allow medical or recreational businesses, the FDIC will not insure a payment processor or financial institution working with a cannabis business until it’s federally decriminalized. There’s no gray area in the cannabis industry – it’s still 100% illegal federally, and due diligence is necessary before giving money to anyone claiming otherwise.

Payment processors operating in the cannabis industry are known as “high risk” processors. They are not federally insured. This makes them as high risk to do business with as the cannabis industry itself. Be very careful before getting involved with a non-FDIC insured company. As a general rule, many cannabis industry experts warn to avoid merchant processors altogether to avoid violating anti-money-laundering laws.

An Uncertain Future

Recreational marijuana appeared on the upswing in recent years, and the federal government had not made it a priority to “crack down” on marijuana sales or use. That has changed a bit recently, as Attorney General Jeff Sessions opposes marijuana legalization and has stated the Department of Justice will enforce federal marijuana laws.

However, a bipartisan coalition recently sent a letter to the chair and ranking member of the House Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies asking that the DOJ not receiving funding to enforce medical marijuana prohibitions. The letter does not reference recreational pot. However, with medical marijuana approved in 29 states, it’s a substantial market.

On the other hand, some of the cash from the marijuana industry is going to politicians, and money in politics is often a game changer. Sessions said if Americans don’t want him to enforce federal marijuana laws, they should change the laws. It’s still unlikely that an Act of Congress will pass anytime soon making marijuana legal in the U.S.

O, Canada!

While the federal legalization of marijuana and subsequent entry into the market by banks and credit card processors appears far off, that’s not the case with other countries. While many countries have decriminalized the use of marijuana, it is totally legal in only a few. Canadian Prime Minister Justin Trudeau recently unveiled a bill legalizing recreational marijuana. Should the legislation pass, banks and credit card processors may become part of the way users pay for marijuana as early as mid-2018. European countries that have legalized the use of medical marijuana may follow suit with legal recreational pot.

No one can truly predict the future of legal marijuana, but the demand for pot isn’t going to disappear. It’s a when, not if, situation. Eventually, banks and credit card processors will become part of this lucrative market. Just as consumers pay for alcohol with credit cards, the day is coming when they’ll do the same with pot.

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Brian Penny also contributed to this article. 

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Jane Meggitt

BY Jane Meggitt

A graduate of New York University, Jane Meggitt is a former staff writer for a major New Jersey newspaper chain. Her work has appeared in dozens of publications, including LegalZoom, USA Today, Zack’s and The Motley Fool.

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