See how First MCS can help you with a merchant account for your cannabis business
Cannabis is one of the fastest growing industries in the U.S., but it is illegal in most states. While it can be legalized at the state level, it currently remains illegal on the federal level which creates a few complications when it comes to running your cannabis business. Finding a merchant account for a cannabis dispensary is one of these complications.
Marijuana is considered a Schedule I drug by the Food & Drug Administration (FDA) which makes it illegal under federal law. However, marijuana is legal for medicinal purposes in 37 states and legal for recreational use in 18 states. As more cannabis dispensaries open in states where medicinal and recreational use is legal, the need for a reliable payment processing system for these businesses continues to grow. Cannabis businesses cannot use traditional merchant account services because banking institutions and credit card companies must comply with federal law.
In this guide, we will discuss the complications of getting a merchant account for your cannabis business as well as what to look for in merchant services that do accept cannabis businesses. If you need merchant account services for your cannabis dispensary in the Chicago, IL area, talk to our professionals at First MCS.
Legal Payment Processing Issues with Cannabis
What sets the cannabis industry apart is that it is one of the only industries in which the legality of its main product differs from state to state. This creates a number of legal issues when it comes to payment processing.
Illegal at the Federal Level
The FDA has listed cannabis products that contain more than 0.3 percent tetrahydrocannabinol (THC) as a Schedule I drug that is illegal to possess, use, or distribute under federal law. As more states have legalized marijuana, the federal government has not taken any action against these states to enforce the federal ban. However, under the Supremacy Clause of the U.S. Constitution, federal law is given precedence over state law so the federal government could crack down on legal states. This contributes to a level of uncertainty surrounding the legality of cannabis products.
Banks and Credit Companies Follow Federal Law
The biggest complication with payment processing for cannabis businesses is that there are currently no legal credit card processing solutions available. This is because banking institutions and banks that issue credit cards are regulated on the federal level and must comply with federal law. Therefore, it is illegal to purchase cannabis products using credit cards, even in states where marijuana is legal. If you try to accept credit card payments for cannabis products and get caught, your merchant account will be shut down and your business could be put on the Terminated Merchant File list.
Cannabis businesses also cannot usually accept debit card payments for the same reasons as credit cards. However, there are debit card payment options available for cannabis businesses that are legally compliant. Cannabis businesses that offer more payment options to their customers than just cash will have more of a competitive advantage.
Offshore Accounts Violate Money Laundering Laws
If you have thought about getting an offshore merchant account to process credit card payments without going through a U.S. bank, DON’T do this. Processing payments from the sale of cannabis products in the U.S. in a foreign account and transferring the funds back to a U.S. bank violates federal money laundering laws. You could face criminal charges for money laundering if you try this strategy.
Illegal to Ship Cannabis Products through USPS
Another major complication to payment processing for cannabis businesses is that cannabis products cannot be legally shipped through the U.S. Postal Services (USPS). Shipping Schedule I drugs is considered a felony under federal law, even if the cannabis products are shipped within a legal state. Major private carriers like FedEx and UPS also refuse to ship cannabis products in fear of violating federal law.
This makes it very difficult for cannabis businesses to run an eCommerce dispensary. It is possible for eCommerce cannabis businesses to ship products to states that have legalized marijuana by working with a private courier.
Cannabis Payment Processing Considered High-Risk
Despite the inconsistent legality of cannabis products and the ban at the federal level, there are payment processors that can legally work with cannabis businesses. However, many of these payment processors may still hesitate to accept cannabis businesses because they are considered “high-risk,” or hard to place merchant accounts.
Of the payment processors that can work with cannabis businesses, only a few will. Cannabis businesses looking for merchant account services may be subject to restrictive contract terms and high processing rates and account fees from payment processors willing to work with them. You can get more reasonable contract terms and pricing by working with a reputable payment processor that specializes in hard to place merchant accounts.
Cannabis businesses are considered a high risk for payment processors for the following reasons:
- Legal status: As explained above, marijuana is illegal on the federal level and its legality at the state level varies from state to state. The legal status of cannabis prevents businesses from accepting credit or debit card payments or shipping cannabis products unless they work with a private shipping firm. The legal limitations to credit card processing and shipping make cannabis businesses a high risk for payment processors.
- High chargeback rates: The chargeback rate for cannabis businesses is higher than most other types of businesses. There are several reasons why customers may request a chargeback after purchasing cannabis products, such as perceived ineffectiveness of medicinal cannabis products. While payment processers do accept a higher threshold for chargeback rates than traditional banking institutions, they do still have a limit.
- Reputation: Some payment processors that could work with cannabis businesses may choose not to because of the effect it can have on their reputation. The stigma behind marijuana use does appear to be fading, but payment processors may still choose to avoid these businesses to protect their reputation.
Finding Merchant Account Services for Your Cannabis Business
With limited options available, it is important for you to find the right merchant account services for your cannabis business. You need a payment processor that offers fair contract terms, reasonable pricing, and great customer service.
Make sure you consider the following to find the right payment processor to work with your business:
Will the payment processor work with cannabis businesses?
Asking this question will quickly help you narrow down your search for a payment processor. As discussed above, many payment processors that work with hard to place merchant accounts may still have reservations about working with cannabis businesses. Those who are willing to work with your business likely have experience with the cannabis industry.
Does the underwriting process happen before account approval?
It is important for the payment processor to complete their underwriting process before approving your account and allowing you to process payments. Completing the underwriting process first will protect you from having your account shut down after approval. You should avoid payment processors that offer instant approval as they may find a reason during the underwriting process after approval to shut you down.
What are the payment processing costs?
As a cannabis business, you can expect higher payment processing costs than a business that is more low risk. Ask about recurring and incidental fees so you can compare pricing and choose a provider that best fits your budget. Because cannabis businesses cannot accept credit card payments, you will not have to worry about the fees that come with them which can help save on costs.
Do they have a reserve?
Some payment processors may put a reserve on your account, which is when they withhold a percentage of your funds and release them back to you when you meet the reserve amount. You will eventually get all of your funds, but this could restrict cashflow in the meantime.
Do they offer short or long-term contracts?
Check what kind of contracts the payment processor offers. If they provide short-term contracts, then you have more freedom to close your account and switch providers without paying an early termination fee (ETF). If they offer long-term contracts, these contracts may lock you in for 1-3 years and have an ETF. You should decide which of these contract options is best for your business before making a decision.
Will they provide you with an appropriate point of sale (POS) system?
A payment processor will have to provide your cannabis business with a point-of-sale system that can process cash payments as well as point-of-banking transactions so you can legally accept debit card payments. A good POS system will help you process and track your transactions and provide the data you need to manage your finances.
Do they offer customer support?
Providing quality customer support is what separates reputable payment processors from the others. It is important for cannabis businesses to work with a payment processor that provides excellent customer support and will be available to help any time there is a problem. Make sure to check their reputation when it comes to providing customer support.
Hard to Place Merchant Account Services from First MCS
The legal status of marijuana complicates the payment processing when it comes to the sale of cannabis products in legal states. Even among businesses generally considered high risk, there are additional complications unique to the cannabis industry that make it more difficult to figure out a merchant account solution. Fortunately, cannabis businesses in legal states like Illinois can turn to First MCS for hard to place merchant account services.
Our professionals work with businesses in the cannabis industry to set them up with legally binding merchant accounts that allow them to process multiple types of payments. Our merchant services include point-of-sale systems, including the terminals and other hardware needed, as well as excellent customer support.
Contact our professionals at First MCS by calling (866) 673-3099 to learn more about how we can help your cannabis business in the Chicago, IL area.