The tobacco industry has long been a lucrative industry not only in the U.S., but throughout the world.  Even with a 7 percent decline in tobacco customers between 2005 and 2019, the tobacco industry was still worth $48 billion in 2019 and is expected to remain steady.  For businesses that sell tobacco products including cigarettes, cigars, smokeless tobacco, and vape products, they may have a difficult time finding traditional merchant services.  Businesses in the tobacco industry are considered high risk businesses, especially online tobacco retailers.

The tobacco industry is considered a high-risk industry for several reasons, including age restrictions and regulations, unclear laws regarding online tobacco sales, and the long-term health effects of tobacco use.  Traditional banks and merchant service providers tend to avoid working with tobacco retailers, including online retailers.  However, there are merchant service providers that specialize in providing payment processing services for high-risk businesses, including tobacco sellers.

In this guide, we will discuss why the tobacco industry is considered a high-risk industry as well as how businesses within this industry can find a merchant service provider.  At First MCS, we provide merchant services for hard to place industries such as the tobacco industry in the Chicago, IL area.

Why is the Tobacco Industry Considered High-Risk?

The tobacco industry has been highly profitable for hundreds of years, but there are things within the industry that put it in the high-risk category.  One of the biggest reasons is the federal regulations and age limits put on the sale and use of tobacco products.  Traditional merchant service providers are also taking a reputational risk as the long-term health effects of tobacco use are well known and many providers would rather not take that risk.

When it comes to online tobacco sales, the laws regarding these sales are less concrete and there is also a high risk of chargebacks for online sales.  Businesses within the tobacco industry must find a professional that has experience working with high-risk businesses for merchant account services.

The following are the main reasons the tobacco industry is considered a high-risk industry:

• Age limits: As of 2019, the sale of tobacco products, including cigarettes, cigars, smokeless tobacco, and e-cigarettes, is prohibited to anyone under the age of 21. The need for constant age checks in tobacco stores makes these businesses high risk, and it is even more difficult to verify age checks for online tobacco sales.
• Federal regulation: Tobacco products are subject to heavy federal regulation and the rules and regulations change often. It is also possible for sanctions to be put on some tobacco products in the future.  The regulations even differ between different types of tobacco products:
  • Cigarettes: Online cigarette sales must follow rules put forth in the “Prevent All Cigarette Trafficking Act” (PACT).
  • Smokeless: Smokeless tobacco products are heavily regulated by PACT, and it is also difficult to accept card-not-present (CNP) payments due to federal laws.
  • Cigars: Cigars are not as heavily regulated as other tobacco products.
  • E-cigarettes and vapes: E-cigarette and vaping products face increasing FDA regulation with fears of further sanctions in the future.
  • Hookah (shisha): There are currently no regulations of hookah in the U.S., but there could be further regulations or sanctions in the future.
• Uncertain laws for online tobacco sales: Currently, the PACT requires online and mail-order tobacco retailers to comply with age verification requirements and pay the appropriate federal, state, and local taxes. The Act also prohibits mailing tobacco products through the U.S. Postal Service.  However, the law does not regulate other delivery carriers and parts of the law are still being litigated because of these loopholes.
• Reputation risks: It is well known that tobacco use can cause long-term health issues and the number of people who use tobacco products has been declining. Many traditional merchant service providers would rather not take the reputational risk of working with an industry that sells a product known to be harmful to health.
• High chargebacks: Online tobacco retailers tend to have high chargeback ratios due to underage buyers circumventing online age verification, disputes due to the lack of electronic receipts and order verifications, delivery delays, and cybercriminals that attack online tobacco retailers with scams and fraudulent purchases.

How to Reduce Chargeback Ratio

No merchant account service provider wants to work with a business that has a high chargeback ratio. While payment processors that specialize in services for high-risk industries will tolerate a slightly higher chargeback ratio than traditional payment processors, they will still terminate the accounts of businesses that do not keep their chargeback ratio under control.

It is important for tobacco sellers to take steps to keep their chargeback ratio low to increase their chance of getting a merchant account and protect their business from lost sales and fees.  Tobacco retailers can take the following steps to help reduce their chargeback ratio:

• Request alternate forms of payment: Online tobacco retailers can request forms of payment other than standard credit cards including eChecks or cryptocurrencies. This will help avoid credit card chargebacks.
• Verify age: Online tobacco sellers should take extra steps to verify a buyer’s age including requesting pictures of customers holding their IDs or requesting a phone number so businesses can call a customer directly to verify information.
• Ship to home addresses: Scammers often have items sent to P.O. Boxes. You can help reduce chargebacks and fraudulent purchases by requiring a home shipping address.
• Purchase verification: Online retailers should provide customers with purchase verification information directly after a purchase including itemized receipts with the products purchased and their prices, the vendor name, customer support number, and accurate expected delivery date and shipping information. This will reduce the confusion that can sometimes lead to chargebacks.
• Stay in touch: Most chargebacks occur within 4 days of a purchase, so it helps for online retailers to stay in touch with their customers for at least a week after they make a purchase. You can do this by sending a thank you email, purchase verification information, and customer satisfaction surveys.

How to Get a Merchant Account for Your Tobacco Business

It may be nearly impossible for tobacco businesses to secure merchant account services from traditional providers, but there are merchant service providers such as First MCS that specialize in working with businesses with hard to place merchant account needs.  Taking the following actions will help your tobacco business secure a merchant account:

• Get tobacco license: All tobacco retailers must have a license to sell tobacco products. You may need to get a tobacco license from your state as well as your municipality, so make sure you have the appropriate licenses so you can legally sell tobacco products.  You must also follow all the rules and regulations associated with your tobacco license.
• Establish history of stability: Merchant account providers want to know that your business is stable financially before deciding to work with you. Provide payment processers with the last several months of bank statements, processing statements, and other records necessary to establish a history of financial stability.  It also helps to show a history of good relationships with past merchant service providers.
• Actively reduce chargebacks: Merchant service providers that work with high-risk businesses prefer businesses that take actions to reduce chargebacks, fraud, and disputes.
• Secure, fully operational website: For online tobacco retailers, it is important that their websites are fully functional and secure to protect customer payment data.

Hard to Place Merchant Account Services from First MCS

The tobacco industry continues to be a lucrative, profitable industry and tobacco businesses and online retailers need safe and efficient payment processing from a trusted merchant service provider.  Businesses within the tobacco industry must reach out to payment processors like First MCS who have experience providing merchant account services for businesses within this industry.

First MCS provides hard to place merchant account services and we have experience working with businesses in the tobacco industry.  Our merchant account services include payment processing solutions with safe and efficient point of sale (POS) systems that allow you to accept and process multiple forms of payment.  We are also available to help resolve issues you have with your payment processing with 24/7 customer support.

You can reach First MCS by calling (866) 673-3099 to learn more about our hard to place merchant account services for businesses in the tobacco industry.