Note: This is part 4 in our series about legal cannabis sales, transaction processing and banking. For previous articles in the series, please use these links: Part 1 – Transaction Processing | Part 2 – Why is Cannabis Banking High Risk? | Part 3 – Cannabis Business Banking
What is the risk with cash alternatives for legal cannabis sales?
That’s always one of the last questions, strangely enough, that I get asked when discussing legal cannabis sales and prospective cash alternatives. I’m not really sure why, and it’s not restricted to the state legal cannabis industry, either.
We’ve been processing high risk accounts (see part 2 if you’re not clear on MCC and risk assignments by the banking system) for almost 20 years; realistically speaking, before the internet there was very little that was actually assigned to a category known as high risk. The internet has also been a big driver of credit and debit card adoption, as well as ACH. It’s so simple and easy for people to set up their own payments, not to mention cost effective, since the burden of data entry and verification is no longer handled by random bank employees who are paid by the hour.
Legal cannabis sales is a strange sort of misnomer to begin with – while states and cities, provinces and parishes, may legalize some form of marijuana sales for a variety of reasons, the federal government still considers weed to be verboten (and we aren’t here to discuss politics, at least not today), so the risks are a bit higher than those of the corner store, unless they happen to be selling dope and dirty movies…
Rating the risk levels
The biggest risk when (IF) you transition to credit, debit or ACH processing, is that you will somehow run afoul of the FinCEN guidance rules the bank must follow, and they’ll be forced to freeze your accounts in order to stay compliant with federal laws. The problem with this scenario is they have your money, even if you are state compliant, so they are in control of your finances.Of course the same thing happens when the police raid your building and confiscate your cash. Click To Tweet
The benefits to transitioning away from cash for legal cannabis sales (if you can) greatly outweigh the risks, in my opinion. Here are a few things to consider:
#1 – More banks are seeing the kind of volume that state legal cannabis can deliver, and bankers are a greedy lot.
This is not a judgement call about bankers, but it is a leverage point for anyone with any kind of sales volume that might be looking for a home. If you’re only doing a couple hundred dollars in average daily sales right now, you won’t find the banks lining up to offer you the opportunity to pay them to hold your money. That’s not to say that you can’t get a processing account potentially; it’s the simple reality of the math involved.
#2 – There are (so far) very few chargebacks in the CBD segment of legal cannabis sales.
If you don’t sell CBD products, and you think this has no bearing on you – think again. It is incredibly encouraging for banks to see numbers that are favorable. Especially when a product is assigned a high risk MCC because of the type of product and not the estimated number of chargebacks.
Every bank that is even considering becoming an acquiring solution (you can flip back to Part 2 if you need a primer on acquiring and issuing) has a nightmare scenario that plays out like this:
People start buying cannabis products, whether CBD or medical (or maybe even rec use) with their credit cards. Then they figure out that if they call their issuing banks and say, “hey, I just bought some illegal marijuana with my credit card, I want to reverse this transaction, I can’t be a lawbreaker…”, that the issuing banks will dispute the charges for them… perhaps disputing even more than a single transaction in the process.
#3 – Why would banks think that legal cannabis sales could turn into a chargeback nightmare almost overnight?
Because they could, that’s why. It wouldn’t take more than a few posts on some internet forums or social media and a lot of people would be in on the scam. Everyone loves a broken ATM, right?
Banks that don’t have high risk experience may not understand how this is going to play out, but the ones that have already been burned with adult, gaming, poker, supplements, etc – these guys know the score and they are proceeding with caution, at least until they are positive that the potential upside is greater than the downside.
Which brings us to the 64 Thousand Dollar Question…
Should you start looking for banks or acquiring solutions that are willing to test the waters with legal cannabis sales?
- My short answer is yes. It’s not cheap, let’s be clear on that. But it does create at least one point in your supply chain that isn’t being transacted in cash. If you’ve been relying on Shopify, Stripe, Paypal, or Square, you realize it’s only a matter of time before you’re terminated for TOS violations.
- You no longer need to worry about your budtenders’ safety if 60% of the sales are being handled by credit, debit or ACH.
- You’re not using an “armored car service” to pick up your cash and bank it for you any more.
- You’re not walking into the bank with cash to deposit every day so you can keep the deposits smaller.
- You have some record keeping (besides cash receipts) that indicates the volume of sales you are doing when it’s tax time.
Obviously this is not every reason that you should look into moving at least part of your legal cannabis sales into something besides cash; it’s a very important start to that list, however.
When we talk about the cost of transacting, there are a lot of people who tend to balk. Yes, it’s a high rate, relative to what someone is paying with Paypal or Shopify (until they are terminated for TOS violations), but you’re also getting the security of dealing with a bank that wants your business, knows what you are doing, and is willing to meet you halfway.
Legitimacy starts with each one of us, and as the industry matures, the rules will become more complex and clear.