The state of marijuana dispensary payment processing in the US

Visit nearly any marijuana dispensary in the country and you will likely be presented with the option to pay with a credit or debit card. In light of the apparent wide acceptance of electronic transactions at many dispensaries, you may be surprised to find that Visa and Mastercard ban cannabis merchants from their platforms.

So what is the reason for the ban, and how do dispensaries continue to take credit and debit cards?

The short answer for why the ban: cannabis products are illegal under federal law. Unique to American jurisprudence, medical marijuana dispensaries and other cannabis businesses are legal in most states but remain illegal under federal law. Similarly, providing banking or payments for marijuana activities is a federal crime. But you would not guess this looking at the wide proliferation of marijuana-related merchants in California and the U.S.

Since California’s cannabis licensure began, more than 10,000 licensed cannabis companies now operate and approximately 1,000 licensed dispensaries sell directly to consumers. Several thousand more unlicensed dispensaries operate outside of the state legal system. Although finding banking for such dispensaries was difficult several years ago, financial institutions are now lining up to take their depository accounts. And except when other illegal activities occur, the federal government generally ignores them.

Certainly, the federal government has had ample opportunity to bring prosecutions against licensed marijuana businesses — yet it has not. One could write a book on the reasons why, but they include (1) legislation banning the Department of Justice from spending funds to prosecute state-legal medical marijuana businesses; (2) DOJ policy prioritizing prosecutions for state illegal activities; and (3) past U.S. attorneys general’s reluctance to confront these issues until Congress clarifies DOJ’s responsibilities regarding state-legal cannabis sales.

Instead, the federal Financial Crimes Enforcement Network tracks Cannabis transactions and to-date the feds have focused their prosecution efforts on otherwise illegal cannabis activity, i.e., sale by nonlicensed entities (which vastly exceed the number of licensed dispensaries in California), fraudulent activity and tax evasion.

The only case involving banking or payment processing for state-legal dispensaries in the last several years involve processing agents making false statements to banks. Last year, the DOJ indicted and subsequently convicted two agents for their role in processing for a number of businesses including dispensaries associated with the California technology company Eaze. The key allegation in the case was that the defendants orchestrated fake websites and shell businesses and merchant code misclassification to process for the dispensaries. Basically, they told the banks the merchants were selling “cat beds.”

But if you operate a licensed dispensary in California, pay your taxes, are open and honest with your banks, and do not bribe the mayor to get your license, you have been fairly safe from prosecution. Please notice my use of the past tense. In an industry dominated by smaller companies, privately owned and operated by entrepreneurial “cowboys,” a number of which are “legacy” operators who dominated marijuana sales prior to state legalization, that has been safe enough. And the banks taking the deposits tend to be smaller and dominated by closely held institutions or state-licensed credit unions without a substantial shareholder base. For these institutions too, the current framework has been safe enough.

However, it has not been safe enough for Visa and Mastercard. The card brands ban the use of their platforms for the sale of any products that are illegal in the jurisdiction where they are sold. They apparently have no other objection to the product. Their cards are widely accepted for cannabis sales in Canada, a jurisdiction that has legalized the sale of such products.

The card brands have not been willing to embrace the state legal/federal illegal dichotomy. Neither has stated why, but I expect that is due to the risk of prosecution for aiding and abetting the sale of an illegal product and the related money laundering charges. 21 U.S.C. Section 801 et seq. and 18 U.S.C. Section 2. Throughout the growth of state-legal marijuana sales, the federal government has reserved the right to change course to prosecute those involved in the sale and payment of such products, even reserving the right to prosecute for past transactions without giving notice that it is going to change course. Such a risk appears unacceptable to these large institutions with multibillion-dollar market capitalizations.

So how is it that dispensaries provide electronic payment options? Let me explain the various methods.

“Cat beds”: The time-honored way is to lie. Processing agents continue to urge dispensaries to sign up for credit card processing by misrepresenting what is being sold. In addition to cat beds, flower shops and vitamin shops are some of descriptions I have seen. The problem with this is that a false statement to a bank is a felony that can get an operator and the sales agent thrown into federal prison.

ACH: This method avoids credit cards altogether, and instead, takes money from the checking account of the consumer. Various ACH networks have embraced the payments and so far, NACHA, the governing body for the networks, has not objected. The problem here is that consumers are reluctant to supply their private banking information when they are trying to buy a bag of weed and, according to most reports, the acceptance of credit cards would increase sales for these merchants by at least 25%.

Point of banking: This method involves setting up a “cashless” ATM at the dispensary. The consumer uses the ATM to pay the merchant for the product, telling the network that it is withdrawing cash from the consumer’s debit card in $20 increments like an ATM would disperse, with the merchant handing over to the consumer any difference between the transaction amount and the amount withdrawn from the card. This is likely the most widely used system in America today. The problem here is that it is cumbersome, expensive, and limited to debit cards, not credit cards. Also, Visa has recently explicitly banned such transactions, so God knows what the processors are telling their banks or the ATM networks.

Indirect solutions: This relatively new method involves purchasing consumer crypto-currency with a credit or debit card and then using the crypto-currency to buy the product. Alternatively, the consumer uses his credit card to deposit an amount into an “electronic wallet” and the balance in the wallet is then used to purchase the marijuana. The problems here are consumer reluctance and the cumbersome nature of the process. Further, the card brands have not explicitly embraced this method and may terminate those systems if they believe this work-around exposes them to aiding and abetting liability or money laundering charges.

How will it work in the future? No one knows but based upon the recent announcement from Visa, I expect the “point-of-banking” solution’s days are numbered. And indirect solutions will gain market share for those dispensaries wishing to be compliant. Unless or until Visa and Mastercard decide that those solutions are unacceptable. Or, of course, until Congress finally federally legalizes the sale of cannabis in those states where the sale is legal. 