Card transactions are a serious problem for the cannabis industry—not because consumers can’t use them to purchase products, but because merchants accept them. Instead of adhering to the prohibition of debit card and credit card use, numerous business operators at all levels opt for workarounds that cause more damage than they might realize.
Let’s set the record straight: Branded card networks—both credit and debit—are opposed to any cannabis transactions occurring on their rails. Cannabis, along with terrorism, online gambling, and child pornography, is not just frowned upon. It’s prohibited.
As a result, anybody offering branded card merchant accounts for brick-and-mortar, online, or order-ahead cannabis retailers is making fraudulent claims to acquiring banks (the merchant bank or acquirer is the financial institution that maintains merchants’ processing accounts) somewhere along the line. Typically, this is accomplished by lying about which goods or services are being purchased.
For example, some dispensaries are listed as flower shops or health food stores. A recent example received a lot of media attention because a dispensary was working out of a food truck, claiming to be selling street food instead of cannabis products.
This is fraud. Lying to a financial institution is a federal crime.
Sadly, some salespeople and merchant service providers (MSPs), striving to make a quick profit at the industry’s expense, are telling merchants such lying is permissible. In doing so, they’re adding even more misinformation to a sector that’s already clouded with gray areas.
Merchant accounts obtained by deception pose a serious problem for dispensary owners and operators, exposing retailers to a range of major issues.
First, merchants caught committing fraud are at risk of being blacklisted or placed on the Terminated Merchant File (TMF) or MATCH list. The lists are shared among acquiring banks and card processors; if a merchant is banned from one card processor, they can be prevented from opening a merchant account with a different card processor. Once on the lists, banned retailers may not be able to obtain access to merchant accounts even if or when the branded card networks eventually enter the cannabis space.
Second, based on a recent delivery lawsuit in California, I anticipate litigation between retailers for fraudulent and unfair practices. If one dispensary plays by the rules, accepting only permissible forms of merchant payment processing while the dispensary down the road fraudulently obtained a merchant account, the dispensary adhering to the rules potentially can sue for unfair business practices. I assure you a wave of lawsuits is coming.
Third, some solutions use offshore processing. This means a bank in a country you probably wouldn’t even want to visit will be holding your money. When you try to bring that money back to the United States so you can use it, you could face serious costs and administrative hurdles, if you can get the money at all. In some cases, retailers I’ve met in this situation have lost hundreds of thousands of dollars from this mistake.
Finally, retailers open themselves to huge risk of chargebacks. Imagine a consumer who has been able to use a debit or credit card for the past three years, maybe spending $20,000 during that time. If that consumer calls and asks a card company to reverse a transaction, both the bank that issued the card (the “issuing bank”) and the merchant’s bank will be notified to review the claim before money is disbursed to the merchant. This could expose retailers to chargeback liability on a massive scale. Just imagine how many consumers would opt to get their money back once chargebacks become a trending topic on social media. Retailers could see a wave of refund requests, potentially costing them hundreds of thousands of dollars.
Beyond the implications for retailers, financial institutions also are put in a tricky situation. For them, serving the industry by accepting deposits from fraudulent transactions represents significant potential liability.
Because branded card networks are opposed to cannabis transactions, merchants are committing fraud to gain access. Additionally, it’s outside the bank or credit union’s ability to choose whether they accept those payments. Even if a financial institution is willing to bank funds from its state’s legal cannabis industry, those same funds become fraudulent if they come through a branded card network that prohibits these transactions.
Consumers also suffer because of fraudulent card payments. Systems are frequently down, making them unreliable. Plus, the offshore accounts I mentioned hurting retailers also can hurt consumers. Who knows where the personal data goes and who might have access to it?
As a result, the concept of a clean, clear, and easily accessible cannabis offering is undermined.
As cannabis moves toward federal legitimacy, both in terms of removing stigma and expanding the range and scope of employment opportunity and economic impact, the current use of debit and credit cards is moving us back toward illegality. It’s time for the industry to operate in a compliant, sustainable way. After all, why would lawmakers listen to activists campaigning for new rules and procedures when so many operators are skirting around existing policies?
Once the cannabis industry as a whole begins complying with the rules, I predict we will see tremendous growth and success. Everyone from consumers and retailers to financial institutions and regulators will experience consistency and reliability. This will reassure investors and partners, resulting in greater market expansion. Then, if governments and policies change, the industry will be sustainable and trustworthy. At that point, if the branded card networks change their stance and allow cannabis transactions, they will do so from a place of transparency and compliance.
So, the next time you complain about debit/credit card options for cannabis, think about what nefarious operators are doing to the rest of the cannabis ecosystem. And perhaps look for alternatives that help the industry grow instead of undermining its validity.
Tyler Beuerlein is chief revenue officer at Hypur, where he has been at the forefront of the company’s expansion efforts for more than four years. Hypur is a comprehensive technology provider that enables financial institutions, merchants, and consumers to transact in highly regulated industries. Beuerlein’s role touches financial institutions, government officials, regulatory bodies, and the state-legal cannabis industry. As a result, he possesses an intricate knowledge of the banking and regulatory climate.
