The US cannabis market is booming as more states continue to legalize its use. This has led to reduced stereotypes about the weed plant and a resulting increase in product demand. This is why the industry is predicted to reach the $30 billion mark by 2025.
However, numerous roadblocks hinder the industry from growing further. The main one is that cannabis is still illegal at the federal level. This presents substantial challenges, especially when it comes to payment processing.
Banks and payment processors consider cannabusinesses as higher risk than other businesses. Therefore, businesses in the cannabis landscape have somewhat few options for processing payments.
Read on as we shed light on why credit cards are still a no-go zone for dispensaries in 2022. We will also delve into cannabis payment solutions and the risks and benefits associated with each option.
Why Is Credit Card Processing Illegal?
Consumers are used to credit card payments for almost everything they want. In fact, 70% of consumers prefer card payments as opposed to cash. In this technological age of convenience, consumers desire hassle-free payment options, regardless of what they're purchasing. Often, it catches most cannabis consumers by surprise when they find out that dispensaries don't accept credit card payments. But why?
It’s a Schedule 1 Drug
The reason is simple: Cannabis is categorized as a Schedule 1 controlled substance at the federal level, which makes it illegal. This hinders credit payment processors from deliberately working with cannabis businesses.
Credit card processing involves the participation of federally regulated entities and communication channels that include:
- Acquiring banks: The banks that receive the funds.
- Card brands (AMEX, MasterCard or Visa)
- Card issuing banks: The banks that issue credit cards to the customers. Essentially, they provide a microloan for each customer's purchase.
- Interchange: The open lines of communication used by the card brands as well as issuing banks via all credit card payments are routed and supervised by the federal government.
Because the above-mentioned businesses are federally regulated, they are mandated to adhere to federal law and directives. So, unless cannabis is legalized at the federal level, accepting credit cards is not possible.
The Risks of Using Credit Cards in the Cannabis Space
You still might be contemplating using credit card processing in your dispensary to lure more customers. Remember, the risks are not worth it. Possible consequences include:
- Blacklisting/shutdown. Credit card companies have designed algorithms to flag payments or merchants selling marijuana, so they will shut down the offending merchant account and may also have it blacklisted. In the future, this may mean that you're barred from accepting credit card payments even if the rest of the industry is permitted.
- Active lawsuits
- Fines imposed by the state
- License revocation
Having ruled out the use of credit cards, here are the available legitimate cannabis payment processing options for dispensaries:
Cash payments are common in most retail spaces, including the cannabis sector. However, this form of payment comes with its share of challenges and additional costs. These include:
- More time spent on counting the money by employees
- Hiring armored vans to make cash deposits
- Slower transactions because of the need to count the money and give back change
- Security threats to your dispensary employees as well as those transporting the cash during deposits
- Tax collection expenses
- Consumers spend a lot less money via cash payments. According to a study in 2019, the average worth of a cash transaction was $22, in contrast to $112 for the average cashless transaction.
- Transfer of communicable diseases like Covid-19
Regardless of the limitations associated with being a cash-only cannabis business, you cannot completely do away with cash transactions. This is because some consumers prefer to use cash. And as a dispensary owner, you must adopt the best methods for dispensary cash management.
An alternative payment method for dispensaries that don't want to manage a lot of cash transactions but lack a point of banking solution is using ACH transfers. ACH (Automated Clearing House) is the process of transferring cash electronically between banks without cards, checks, or wire transfers. Basically, ACH payments are facilitated by the customer through their bank account to remit payments directly to the cannabis dispensary or retailer. Here are some of the key characteristics of this payment method:
Payment services using the ACH network offer a comparable experience to shopping at traditional retail outlets while using bank-issued debit cards. It's a similar network your bank employs to settle debit card purchases.
Since these ACH transfers are done electronically, you can immediately ascertain that the money has been transferred from the customer account to your business bank account. The ACH network does not prohibit cannabis transactions, and therefore bank transfers are legal, secure, and reliable.
ACH transfers require third-party solutions. This means that the customer has to first register their account information with the third-party system and download its mobile application. At your dispensary, they can log into the app and check out. Then, with an integrated POS, the customer just inputs their four-digit code to log out.
The use of digital payment options in the cannabis industry is set to grow tremendously in the near future. As the cannabis market continues to grow, more and more customers will resort to using digital payments because of the convenience they offer.
Point of Banking
With the rapid growth of the cannabis industry, dispensaries are always looking for cash alternatives. One such payment option is point of banking, which is also called a cashless ATM. Point of banking is a payment processing method that allows consumers to access their respective bank accounts and buy cannabis products at the point of sale without handling cash for most of the transaction.
Point of banking works like traditional Automated Teller Machines (ATMs), where you insert your bank card and input your personal identification number (PIN). However, customers don't insert their debit cards into an actual ATM. Instead, this method employs a countertop point-of-sale terminal to imitate an ATM transaction.
Instead of forking out cash, the cashless ATM solution is completely electronic and transfers the payment directly to the merchant's bank account. It provides proof that the payment has been deposited into your dispensary account from your customer's bank account.
To give the impression of an actual ATM cash withdrawal, customers can make transactions in increments of $5. They are also charged a front-end fee and another prospective cash withdrawal cost from their own bank once the transaction settles. On their bank statements, the electronic deposit made to the dispensary's bank account appears only as an ATM cash withdrawal transaction, which has drawn some controversy and has been challenged by an increasing number of banks, leading many to transition to PIN debit.
PIN Debit Cards
PIN debit payment processing is another exciting payment solution for cannabis dispensaries. With PIN debit, customers can make cannabis purchases with the money they have available in their accounts. Similar to a credit card, the transaction is processed via the interchange network. And authorizations and funding are conducted using a traditional merchant account.
It provides a simple and fast purchasing experience that's similar to visiting the grocery store. Basically, a consumer walks into your cannabis dispensary, chooses their preferred cannabis flower, pre-rolls, or any weed product for that matter, and pays the actual sum owed with a simple dip, tap, or swipe.
Because transactions are for actual dollar amounts, this means:
- Cashless payment
- Customers are not charged “out of network” costs, which improve customer satisfaction
- Full backing from debit networks
- No checkout mix-ups
- No convenience fees
- No cash transportation fees
- Makes your business credit-card ready for when cannabis is eventually decriminalized at the federal level. You will be among the first cannabis businesses to accept credit card payments without the need to apply for a new merchant account.
Some licensed dispensaries accept cryptocurrencies like Bitcoin and Etherium at the point-of-sale terminal for marijuana purchases. These cryptocurrencies must originally be bought or “mined” before they can be used by the consumer to make cannabis payments.
The future of cannabis payments is digital. No wonder the use of crypto is becoming more popular. It's anonymous and secure, which is why tech-savvy individuals love it. However, cryptocurrencies come with their share of intricacies and may be unfamiliar to the typical cannabis consumer.
- Federal regulations and contrasting laws in the weed industry make it challenging to introduce a direct crypto-based payment system. Currently, there's no industry-wide cryptocurrency for cannabis, with only a few stores having this tech in full functionality.
- Only a select few of your target market own crypto coins.
- Cryptocurrencies are quite volatile. With cannabis being a heavily regulated industry, it is almost impractical to run a dispensary using a currency whose value is volatile from one week to another.
- Most people use credit cards to purchase cryptocurrencies, which are then used for cannabis payments. This action is equivalent to using crypto as a mask to enable credit card purchases, which is deemed illegal.
While more and more people are gaining trust in digital currencies, albeit at a slow pace, it's rather early for dispensaries to depend on crypto as the main cannabis payment processing solution.
Choosing the Best Payment Solution for Your Dispensary
Here are the aspects to consider when picking the cannabis payment processing option that makes the most sense for your dispensary:
How will the payment solution impact your bottom line? Ideally, you want a payment solution that will add to the total transaction value.
Does the payment solution impact the ability of your business to generate income? While you might opt to pass on fees to your customers, remember customers are always looking for quality products and a memorable shopping experience. Thus, the best payment option should leave both the merchant and the customer satisfied.
The given payment processing solution should be easy to incorporate into your already existing point-of-sale system. It should be easy for your customers and dispensary employees to understand and use it. Adopting a non-integrated solution adds to the likelihood of human error as well as reconciliation problems.
Customer Payment Options
In the cannabis space, customers enjoy the freedom to choose how to pay. So, you'll want to provide them with various payment processing options, including cash, perhaps traditional ATMs, and PIN debit solutions.
The Bottom Line
The cannabis marketplace has limited payment processing options at the moment. However, the future of cannabis payments will be characterized by a host of solutions following the unlocking of traditional banking services. This greatly depends on easing the legislation around federal-level fiscal services for the cannabis marketplace.
The ratification of the SAFE Banking Act would allow major banking facilities to engage in legal cannabis sales with no potential federal punishment. Another legal action that would see the cannabis industry grow is the removal of cannabis from the Schedule 1 drug list and making it legal at the federal level.