By: Alan Hanson
As most people know, cannabis banking is a new frontier because the industry is primarily cash-based. Traditional financial services are not available; this includes standard payment methods such as credit and debit cards. Dealing in cash is both risky and burdensome, and the industry is looking for alternatives to using cash. The cannabis industry is very innovative and is continually looking for ways to minimize the reliance on cash. While some of these payment solutions are great, others are simply deceptive work-arounds.
The basic rule when it comes to cannabis banking is that credit and debit cards are off limits to purchase cannabis. Any solution that requires the use of a credit or debit card should be suspect. Now let me give the standard lawyer caveat, I am expressing my opinions without regard to any specific payment system and am not providing any specific legal advice that can be relied upon.
Because credit cards are off-limits, the credit/debit card companies own networks to facilitate the transfer of funds between the parties to the transactions. Since these companies own the networks, they make the rules on how the network can be used. All major credit/debit card companies have publicly stated that their networks will not support cannabis transactions.
How are dispensaries able to use credit or debit cards?
Cannabis banking’s answer is that someone is hiding from the card companies. All credit and debit card companies use a Merchant Category Code (MCC) or a Standard Industry Code (SIC) to identify the types of products or services sold and the fees that may be charged. There are no codes for cannabis, so any code that is used will technically be inaccurate and your company will get shut down once the credit card company determines that you are a cannabis company. This being said, it may take years before the credit card company will shut down an account.
Third-party vendors do not have access to more codes than are available to you, so if they say they can get you a fully-complaint credit card account, they are using a false MCC or SIC code on your behalf. Once the credit/debit card company discovers this, they will shut down your account along with all the other vendor customers.
Why are there so many ATMs located in dispensaries?
The ATM transaction is different than a credit or debit card transaction because people use ATMs to withdraw cash from an account. This is in contrast to banking cards, which people use to purchase goods or services. Customers do not purchase anything directly through the ATM; even though an ATM may be located in a dispensary, there is no link from the cash withdrawal to the purchase of cannabis. Without that link, the ATM transaction does not violate network rules.
That’s not to say that there cannot be a link between an ATM transaction and the purchase of cannabis. Some ATMs dispense script instead of cash. Typically, once the script is dispensed from the ATM, the script is then handed to the dispensary to purchase cannabis. If that script is only valid at the dispensary, then the sole purpose of the ATM transaction is to purchase cannabis. With that link created, this will likely violate the credit/debit card rules.
What about other types of cards?
Not all cards use the credit/debit card networks—these are known as closed-loop networks. A common closed-loop is a store gift card, which is purchased at a particular store and can only be used at that store. Closed loops can also have broader acceptance, such as a mall gift card. Someone can purchase a gift card from a shopping mall and that card can be used at any store located within the shopping mall.
The main concern with the closed-loop systems is how the gift card was originally purchased and where it can be used. If you purchase a gift card using a banking card, that transaction could violate the debit/credit network rules. For example, if you purchase a store gift card from a cannabis company and the gift card can only be used at the cannabis company, that will violate the credit/debit network rules. However, if you purchase a mall gift card and one location within the mall is a dispensary, there may not be a close enough link between the credit/debit card transaction to the purchase of cannabis, so it may not violate the network rules. There are other ways to purchase gift cards that don’t use credit or debit card network such as cash or bank account transfers.
What about cryptocurrency?
Cryptocurrency will be treated similarly to gift cards. If you purchase Canna-Coin with a banking card and Canna-Coin can only be used to purchase cannabis, that is likely to violate card network rules. If you purchase a widely used coin such as BitCoin, it may be similar to withdrawing cash from an ATM and it does not link the transaction to the purchase of cannabis. However, there are risks associated with cryptocurrency, such as fluctuations in value and hacking.
Credit and debit card networks can impact other types of payment systems; there are also other risks in cannabis banking that were not addressed in this article. The majority of available payment solutions use debit or credit cards at some point in the transaction, so it is important to understand the connection.
As with most areas of law in the cannabis industry, there is a lot of gray space in cannabis banking. Payment systems are no exceptions. If you are looking at using an alternative payment system for your company, you need to understand how the payment system works and the risks associated with it. When a vendor says “Trust me, I have the perfect solution,” that is usually the first red flag.