Marijuana businesses find card processing still elusive
By Elaine Pofeldt | Published: January 19, 2016
Marijuana entrepreneurs who want to process credit card transactions through a bank will have to adopt a key strategy for the time being: Patience.
Despite anecdotal reports that there are banks that are processing the transactions legally, experts say that this solution has been elusive.
"There is no credit card processing to my understanding at this time that is legitimate," says Leslie Bocskor, managing partner at Electrum Partners LLC, a boutique consulting firm in Las Vegas specializing in the marijuana industry, and founding chairman of the Nevada Cannabis Industry Association. As a result, many owners of marijuana businesses must still rely on a cash-only model, which can be difficult because of the risks of robbery, internal theft and record keeping mistakes.
Selling pot is illegal under federal law, though 23 states have legalized medical marijuana. Recreational marijuana use has been legalized the District of Columbia and four states -- Alaska, Colorado, Oregon and Washington.
Nonetheless, most banks in these states have shied away from processing credit card transactions for entrepreneurs whose businesses "touch the plant."
According to a December 2015 survey by the Marijuana Business Daily, about 60 percent of cannabis-related companies don't even have a bank account for their business -- that number rises to 70 percent for companies that handle the plant.
"Everybody I know in the industry has had problems with banking," says Micah Tapman, partner and program manager at CanopyBoulder, a seed stage investment program for startups in the cannabis industry. "They've had to move their banks once, twice, four times." All participants in CanopyBoulder are in ancillary businesses that don't come into direct contact with marijuana, he says.
Congress, courts tackle issue
Change may be coming. One bill that could potentially pave the way for the processing of marijuana transactions by banks, the Marijuana Business Access to Banking Act, is still pending in Congress, after being introduced in April 2015. "It would prevent the Justice Department from using federal funds to keep states from carrying out their own medical marijuana laws," says attorney Michael Halfacre, a counsel in the alcohol and regulated products practice group at the Red Bank, New Jersey, office of law firm Genova Burns.
Everybody I know in the industry has had problems with banking.
The law would prevent federal banking regulators from ending or limiting the deposit or share insurance of a depository institution because it serves legitimate marijuana-related businesses, or from prohibiting, penalizing or otherwise discouraging the institution from providing these services.
Federal agencies accommodate pot business ...
The bill follows two significant government agency decisions. In August 2013, the U.S. Justice Department said it would not try to challenge state laws that allow for the medical and recreational use of marijuana, as long as these laws didn't conflict with eight new federal enforcement policies, such as preventing the distribution of marijuana to minors.
Then in February 2014, the U.S. Department of Treasury issued a memo saying it would allow banks to serve cannabis businesses under certain conditions and rules -- such as verifying that the business is licensed and registered as required -- but few banks are doing so.
At the moment, though, the regulatory climate remains unfavorable to marijuana processing by banks, say experts.
... But federal court delivers a setback
In a landmark decision, a U.S. district judge on Jan. 5 rejected a lawsuit by Denver-based Fourth Corner Credit Union against the Federal Reserve Bank of Kansas City. In July 2015, the Fed had denied the credit union, whose sole focus is cannabis businesses, a "master account" because of the nature of its business. A master account would let it open up and interact with other financial institutions.
The judge in the case admitted current laws are confusing, but said the court could not use its powers "to issue an order that would facilitate criminal activity."
Banks fear anti-money laundering
Beyond the conflict between state and federal laws, many existing banks fear the administrative burden of working with firms in the pot industry, says CanopyBoulder's Tapman.
"It's not really a legality issue, per se," he says. "The real issue is one of regulation." He says contrary to popular opinion that the banks are afraid of being prosecuted for money laundering, "They are primarily concerned about having to respond all the time to FinCen Financial Crimes Enforcement Network."
FinCen is a branch of the U.S. Department of the Treasury that is charged with protecting the financial system from illicit use and money laundering. Banks must report any suspicious activity to FinCen, which would include any transactions involving marijuana businesses, because it is still federally illegal, Tapman says.
"If they were to provide merchant services to a dispensary, every single transaction would need to be reported as a suspicious activity, because it's part of a criminal enterprise," he says.
In Tapman's experience, businesses whose names suggest a connection to the cannabis industry are at a real disadvantage in obtaining banking services. "We had a company that was going to be called Cannagrow," Tapman says. "They weren't going to touch the plant. The bank said no. They went and changed the name of the company and opened a new account somewhere else. It was a learning experience. One of our pieces of advice is don't name your company 'canna' anything."
When banks are willing to take a chance on working with marijuana businesses at all, they charge high prices for it, according to Tapman. He is aware of banks charging $2,000 a month for a bank account. "I've heard of several of them," he says. "I don't want to name names."
Credit card processing rare, opaque
Another obstacle has been the stance of big credit card companies.
"Currently, neither Visa nor MasterCard nor American Express will allow PIN-debit or credit card transactions by a merchant in the U.S. that is declaring itself as a legal cannabis retailer," says Electrum Partners' Bocskor. "So, if anybody is currently doing it, it is likely they are currently using a provider who is either miscategorizing what the business is or running it through an offshore processor where there is some type of lack of clarity, as well. By the letter of the law, those are dicey. They present a lot of risk."
As a result, banks are averse to processing credit card transactions for marijuana businesses. Currently, say industry experts, there are no sponsoring banks -- also known as acquiring banks -- accepting cannabis transactions. Sponsoring banks have obtained membership in Visa or MasterCard. Processors must form a relationship with a sponsoring bank to get access to these networks.
While there are some marijuana businesses processing credit cards, it is through credit card processing firms, known as Independent Sales Organizations (ISOs), which are likely hiding the nature of these businesses, according to Jeff Foster, co-founder of Boca Raton, Florida-based Jane. Jane sells kiosks intended to reduce cash theft at dispensaries by having the customer pay directly into a secure kiosk instead of to a human cashier.
The bottom line is they are miscoding transactions.
"The obvious question, if there are no sponsor banks accepting these transactions and the only way to process credit card transactions is through sponsor banks, is 'How are dispensaries processing credit cards?'" Foster says. "The bottom line is they are miscoding transactions."
A dispensary could potentially process transactions through the Merchant Category Code (MCC) for miscellaneous retail or use the code for a flower shop, hair salon or some other retail business with a similar sized average ticket and sales volume -- about 200 transactions on a weekday and 250 to 300 on weekends, Foster says. "The average ticket in a marijuana dispensary is around $70," Foster says.
Dispensary owners may not know the miscoding is taking place, he says. "I've talked to lots and lots of dispensary owners who have taken credit cards," says Foster. "Less than 10 percent had any idea that something was going on that shouldn't be going on. It's the ISOs selling the credit card processing that are doing a disservice to the dispensary owners and to the industry. They are telling them things like, 'Yes the bank knows all about it. We can't tell you who the bank is.'"
He says his company's kiosks only take cash. "We don't know of any way to meet the legal and regulatory burden of accepting credit cards in the U.S. for cannabis transactions right now," he says.
Some new solutions are developing. Bocskor says that "closed-loop payment systems" are evolving. These are private debit card networks, where customers can get a card. "I've been hearing a lot of people talking about it," says Bocskor.
"The Marijuana Show," an online reality show where marijuana entrepreneurs compete "Shark Tank" style, has partnered with an investment bank to offer what founder Wendy Robbins says is processing credit cards via banks for dispensaries, growers and producers of edibles in states where marijuana is legal. The banks can process Visa, MasterCard and Discover cards, she says.
Asked via text message how the transactions were coded, Robbins responded, "Sorry can't share that." She said her credit card processor has operated for more than a year with 75 terminals. "All of them are still operating," she said.
Robbins declined to share the company's annual revenue. She would not say how many customers she has but says the business, concentrated in Colorado and Seattle, Washington, is "growing daily."
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