Cannabis banking sometimes sounds like an oxymoron.
After all, marijuana is illegal at the federal level in the US, and Canada has a few laws of their own about the industry. Cannabis banking is never cut and dry – like oh, you have a shop owner or a hair salon that wants to take checks and credit cards and deposit the money into their bank account so they can pay their bills and do the everyday business of actually running a business.
[NOTE: Yesterday’s announcement from Sean Spicer about the new administration potentially stepping up enforcement efforts in regards to recreational cannabis merchants will likely have some effect on my original article. I’ll update in the next part of the series as needed, and will edit Part 1 if needed.]
I started writing this series of articles a couple of weeks ago – the first one focused on the backstory –
I’m going to do a quick review, in case you missed it, of the four categories that logically divide the industry from a retail perspective:
1 – Paraphernalia and accessories. This is glass, cartridges, vapes, etc that are being sold empty. No product in them at all.
2 – CBD, topicals, sublinguals, hemp products under 3% concentration. This includes everything from soap to health and wellness products, as it applies to products being sold in the industry.
3 – Medical cannabis products. These are plant products being sold in state legal medical facilities.
4 – Recreational use marijuana. These are products that are only sold in recreational use states by licensed facilities.
The last article also talked about Cole, FinCEN, and other legal issues that relate to cannabis banking.
Now it’s time to talk about transaction processing.
As you already know, there are a few ways to make a sale. These include cash, credit cards, ACH or checks, and the old standby called the barter system. Any of these methods can be used to facilitate cannabis banking, transaction processing or account banking.
1 – Cash. Easy enough. You have weed, someone wants it, they give you cash, you give them weed. Nothing wrong with this system at the basic transaction level, people still pay for everything from groceries to automobiles with cash. Banks and the governments don’t really like cash though – it’s easy to spend and hard to track.Cash is good, there's no doubt, but there's also such a thing as too much of a good thing. Click To Tweet
2 – Checks or ACH. Not that many people still write paper checks today (although it does happen, lol), but a lot of people use ACH, which is a form of check presented electronically via the routing and account numbers for a bank account.
ACH has a few advantages over paper checks, most of them being for the merchant. Money travels faster, ACH doesn’t get lost in the mail, there’s no need to save enough checks up to make a decent deposit before dragging one’s behind over to the bank, etc. Online check purchases are handled via ACH, as are a lot of direct debit bill pay.
3 – Credit or debit cards. Now we get to the tricky part. Or parts, more aptly. If you’re not familiar with how credit card processing works, let me lay it out for you.
You probably understand how a consumer gets a credit card (issued card). They use their SSN to apply, and based on their credit history and their job, they get a credit limit, and a credit card number. The issuing bank also applies some limits to their account. We’ll talk about limits later.
It’s a very similar process for a merchant to be able to accept credit cards (merchant account). They use an EIN to apply, and based upon the products, estimated sales volume, average ticket price, and so on, and the acquiring bank issues them a MID (merchant ID number) and applies some limits to their account. Again, we’ll go over limits in a few minutes.
4 – Barter. This is obviously my red herring, since almost no one does it. The government doesn’t like it since it’s very hard to tax and track, but if you call it partnering then it somehow magically becomes more acceptable from an accounting standpoint.
Limits on credit and debit card transactions.
I mentioned above that banks set limits; these apply to both issued cards and merchant accounts. Here’s a mini list of various limits and who they apply to:
Credit limit – issued cards and merchant accounts are both subject to credit limits. For a card, it’s the amount the issuer feels like they can trust a person to repay; for a merchant account, it’s the amount of sales over a time period that the issuing bank is willing to believe the merchant can safely do without fraudulent transactions or excessive chargebacks.
Maximum ticket – again, cards and merchant accounts have limits on the single purchase out or in that the bank likes. Yes, I know you can buy an airplane with your AMEX, but you won’t get that transaction approved unless you’re already spending like a madman and paying them on time long enough to establish a history.
MCC Coding – Merchant Classification Codes – every merchant has a classification. A veterinarian, for instance, is 0742. Your cable TV provider is 4899, and the bakery is 5462.Every merchant has a code, but not all codes are equal. Click To Tweet
Huh? What do you mean “not all MCC codes are equal”?
In the same way that different people qualify for different credit card interest rates, types of cards and so on (let’s be real, not everyone wants Capital One in their wallet with the crazy high interest they tack on if you are a day late one time with a payment…), there are different types of merchant accounts, and some of these apply in cannabis banking.
The type of product or service that you offer directly determines your MCC code and the level of risk (and the price to transact) that is assigned to the transaction.
And that transaction, in the cannabis industry, is going to be high risk. Right now, and for the foreseeable future. Is this reasonable? That depends on how you look at it. Normally, high risk is used in industries or with products that carry a high chargeback ratio or chance of fraud.
Frankly, CBD is one of the lowest chargeback products I’ve ever seen in high risk, but it’s still painted with the same brush as someone buying flower that’s been miscoded as if it were a florist shop. Miscoded? What? In case you don’t know, miscoded is what happens when someone gets you a merchant account to sell flowers instead of bud.
However, cannabis sales of any kind are still federally illegal at the moment (yes, I know the great CBD/hemp/farm bill debate continues to rage, and both sides have some valid points), so as far as the banks who are willing to stick their necks out and test the water with cannabis banking and processing are concerned, it’s even more high risk.
High risk means high dollar.
Bankers are also very good at smelling blood in the water. A large part of the state legal cannabis industry is drowning in so much cash that they can’t legally move into legitimate storage that the banks KNOW they have the upper hand. There are only so many armored car services with check cashing companies next door…
The bottom line for the banks that take the risk is that they can make decent money doing it, if they can manage to make enough money in fees while keeping their ABA numbers in good standing. In the same way that adult entertainment, poker, time shares, MLM, gaming, gambling (I’m sure my Canadian friends remember Calvin Ayre rather fondly), and others had to pay the toll to get over the bridge with Visa, MC, and a host of banks.
Back to those MCC codes…
Since I’ve already mentioned gambling and poker, let’s talk about the ways that MCC codes are used by both the issuing and acquiring sides of a transaction to “police” what various people can do with their cards and accounts.
It’s pretty easy for a bank to make a card ineligible to run a transaction that leads back to a specific MCC code. It’s like flipping a switch.
It’s happening all the time, at all levels of the transaction hierarchy. If your company issues you a credit card, they can ask the bank to decline a specific group of MCC codes (maybe the list above, for instance), to decline charges from non-US companies, to limit your spending, etc.
The bank can also limit transactions for other reasons – US banks are forced to decline all properly coded transactions for gambling, sportsbook or poker sites, since those transactions are illegal in the US, unless the person is in the casino. Some banks have declined adult transactions over the years, as a group, since the chargebacks were out of control.
Then there’s also the decline based on the acquiring banks code; this one means that the card issuer doesn’t care what kind of transaction it is, there’s a reason they won’t take it. A US citizen in a Cuban restaurant, with a bank listed as Cuban – Americans weren’t allowed to spend money in Cuba so the US banks automatically declined any Cuban business trying to process an American credit card – even if the owner of the credit card was Canadian, and able to vacation in Cuba. Crazy, eh?
With that note, it’s the end of Part 2 in my series about cannabis banking and transaction processing.
I’ll do some updates (as needed) to the first two parts if there are any new updates to the American situation on prosecutions and how it might affect banks and their willingness to work with state legal cannabis companies.
In part 3, we’re going to discuss how to organize your business properly to get cannabis banking and transaction processing set up, if you’re running a business that might qualify for these type of accounts.