Everything You Need to Know About Cannabis Payment Processing Solutions
The recent surge of states passing legislation for legalized cannabis in some form has been nothing short of revolutionary. Not since the end of alcohol prohibition in 1933 has a product been rapidly unleashed onto the licensed market with such high and widespread demand. With each passing year, cannabis legalization, normalization, and demand continue to grow.
While the industry looks optimistically towards the future, the current federal classification of cannabis brings substantial challenges.
One of the most common issues faced by rising cannabis businesses is the need for reliable, consistent, and fully legal cannabis payment options.
As marijuana remains a Schedule 1 drug under the Federal Controlled Substance Act, companies within the cannabis space must manage their cannabis payments and corresponding finances with extreme diligence.
If you currently own or operate a cannabis dispensary - whether recreational, medical, or both – you likely have questions about the current landscape of available cannabis payment options.
In this guide, we'll walk you through all the cannabis payment solutions currently utilized in the industry. We'll share the risk and benefits around each option.
By the end of this guide, you'll understand more about your options to get rid of cash payments.
The Controlled Substances Act of 1970 made the possession of cannabis for any purpose federally illegal. Nonetheless, the Federal Government has begrudgingly permitted individual states to establish their own laws surrounding medical and recreational cannabis. The classification of cannabis as a Schedule 1 Drug creates legal complications, especially for cannabis enterprises operating near state borders or across state lines.
In 1996, California became the first state to legalize the use of medicinal marijuana. Since then, 35 other states have followed suit. In 2012, Colorado and Washington became the first states to legalize adult recreational use of cannabis. Currently, America sees states continue to flip rapidly and fully legalize (medical and recreational) cannabis. According to the Pew Research Center, "More than 43% of American adults are living in states that have embraced full legalization."
From the very beginning, cash was overwhelmingly the dominant form of payment, both because of the federal illegality of cannabis and because "Cash is King." Cannabis businesses typically would have their customers make cash withdrawals from an in-store ATM and would not accept any form of credit or debit card.
During the COVID-19 pandemic, the cannabis industry experienced explosive growth and dispensaries started moving away from cash in higher numbers to avoid the spread of illness and the change shortage. While America slowly returns to normal after the COVID-19 pandemic, consumer’s preference for digital payments versus money has remained. Digital payments are quicker, cleaner, and more convenient.
What are some of the nuances around cannabis and its legalization that businesses should be aware of?
Through the passing of the 2018 Farm Bill, the cultivation of industrial hemp, classified as cannabis containing .3% or less of the psychoactive 'euphoric' chemical tetrahydrocannabinol (THC), is federally legal.
All mainstream credit cards and payment methods are compliant for purchasing hemp-derived, non-Cannabidiol (CBD) products, i.e., hemp seeds and fiber.
CBD is the prominent non-intoxicating chemical, with multiple potential therapeutic benefits, found in both hemp and cannabis. Though the Farm Bill federally legalized industrial hemp cultivation, the regulations around the sale and purchasing of hemp-derived CBD products vary from state to state.
Where permitted, consumers can purchase CBD products with all mainstream credit cards.
Additionally, major eCommerce platforms such as BigCommerce, WooCommerce, and Shopify make it possible for licensed businesses to sell CBD products online and accept mainstream payments.
Yet, there are still nuances around selling these hemp-derived products compliantly. One nuance surrounds hemp-extracted delta-8 THC, a euphoric compound that through a loophole, its federal legality remains hazy. Since the Farm Act allows the growing and extracting of industrial hemp, delta-8 is possibly legal in states where cannabis is still banned. As there isn’t significant research around delta-8 and it is currently unregulated, more than 20% of all states have outright banned Delta-8 THC, with others considering or updating their laws to regulate the compound.
Currently, medical marijuana is legal in 37 states, the District of Columbia (D.C.), and four U.S. territories. By July 1st of 2021, cannabis is fully legal (meaning, medicinal and recreational) in 18 states, D.C., and two U.S. territories (Guam and the Northern Mariana Islands). These states include:
Several states fully legalized cannabis this year, as recently as June 2021 (Connecticut), with more expected to propose and pass legalization legislation in the foreseeable future.
Yet until federal reform legalizes cannabis or removes cannabis as a Schedule 1 controlled substance, all major credit card networks will continue to prohibit their customers from using credit cards for cannabis payments. Shopify directly prohibits the sale of any product derived from cannabis, including marijuana-derived CBD.
In general, the cannabis industry currently has a lot of momentum. When taken to a vote, most cannabis legal initiatives have resulted in the statewide legalization of cannabis.
Though cash payments are the most common way to transact in the retail cannabis space, it is not without its share of complications. Transacting predominantly in cash, especially when operating at a high-volume location, can create unforeseen additional costs associated with cash management.
As the cannabis industry rapidly grows and evolves, dispensaries continuously look for cash alternatives, including cashless automated teller machines (ATM).
Cashless ATMs allow dispensaries to accept debit card payments indirectly. A dispensary customer uses the cashless ATM to withdraw cash from their bank account and purchase cannabis products at the point of sale without handling money for most or all of the transaction. On the consumer’s bank statement, rather than charges appearing as a payment made at a dispensary, the transaction appears as a cash withdrawal from an ATM.
A customer requests $100 at a cashless ATM terminal. After providing necessary security info, i.e., Personal Identification Number (PIN), the terminal dispenses a receipt to the customer. The customer presents the receipt to the budtender. The budtender deducts the purchase total, applicable tax, and cashless ATM fee and returns any remaining change to the customer, still requiring dispensaries to have cash on hand.
Cashless ATMs permit the processing of cannabis payments with credit card rails - which is illegal.
"In short, processing a credit card payment for cannabis would be not only a violation of Network Rules, but it would be a violation of federal law as well. Further, a violation of Network Rules may result in disciplinary action against the Merchant, as well as a potential fine of $200,000 or $2,500 per day (which can be retroactively applied to and from the first day of noncompliance), and termination of the Merchant’s account.”
Since Bitcoin was developed in 2009, it and other cryptocurrencies (altcoins) have become increasingly popular.
While cryptocurrencies do have benefits, they are far from ideal for businesses operating in the cannabis industry. For starters, government regulation and conflicting laws in the cannabis space make it difficult to implement a crypto-based payment system directly. Additionally, only a handful of your potential customer base owns any crypto to begin with. And, importantly, cryptocurrency can be highly volatile.
As an example, Bitcoin lost approximately 85% of its value within a month in 2017. Especially in a heavily regulated industry, it is near impossible to operate a business when the value of your primary currency is unpredictable from week to week.
Americans are familiar with making everyday purchases with their credit cards. Often, it catches the casual cannabis consumer by surprise to learn that dispensaries do not accept credit cards as a payment method.
As cannabis is federally illegal and classified as a Schedule 1 controlled substance, major credit card companies, i.e., VISA, MasterCard, and American Express, currently prohibit credit card cannabis payments.
With the cannabis industry's focus on providing sophisticated and tech-savvy consumer buying experiences, archaic cash-only requirements can be off-putting to the customer. Many Americans use credit cards programmed in their mobile phone wallets and prefer cards to cash for convenience and loyalty points.
Any payment provider that currently offers credit card payment solutions to cannabis-related businesses is not compliant with federal law and possibly subject to financial and criminal penalties. Fines, having money stuck in escrow, MID masking, and active lawsuits (including criminal proceedings) are all potential problems of using credit cards in the cannabis space.
Though accepting credit cards may sound tempting, cannabis businesses should avoid it until federal legislation provides clarity and protection around card payment services.
Using ACH and digital payment platforms, cannabis owners can leverage financial technology (FinTech) to help protect themselves from legal challenges, minimize costs, and increase operating efficiency. These payment options offer various unique features, such as full integration, prepay, pre-authorization, and easy voiding/refunding. Both consumers and retailers prefer digital cannabis payment options, leading to increased market share for these payment platforms within the industry.
Undoubtedly, digital payments and cannabis continue to go hand in hand. As time goes on and the industry continues to grow, the use of digital payments will become even more widespread.
But why have digital payment solutions, like AeroPay, become so popular?
Cash payments can be problematic for cannabis companies. Cash shortages, processing costs, and security issues are just a few of the common issues that cash can create. It is also impossible to accept cash for online orders or for customers to prepay with cash when they place an order for pickup. Digital payment solutions help businesses avoid these common issues, operate more efficiently, and keep better track of payments.
Integrating with a digital payment solution like AeroPay, it is easy for a dispensary owner to monitor every component of their business from a single, centralized location. Tracking payments, generating reports, and correcting errors as needed can now all be done with ease.
Aren't you tired of telling your customers, "We are going to charge you an ATM fee, round up to the nearest five, and then give you two dollars back—sound good?" If so, you are not alone. Digital payments are not only much easier for the cannabis retailer but also less expensive for your customers.
A few businesses remain hesitant to switch to digital payments because they worry about getting paid. Through advances in FinTech, payment timelines are significantly accelerated through smart bank to bank transfers. Today, AeroPay offers next-day or even same-day deposits.
Besides providing customer benefits at the physical register, a digital payment system also makes it easier to manage other aspects of the customer experience, such as Buy Online Pickup in Store (BOPIS), delivery, and more.
The cannabis industry has a lot to consider, and businesses are becoming savvier regarding their entire cannabis technology ecosystem, including payments.
When deciding which cannabis payment option makes the most sense for your business, be sure to keep the following variables in mind:
How does a given cannabis payment solution affect your bottom line? While there may be a fee, consider the impact of a cashless payment solution to increase the total transaction value. Be sure to understand all the costs associated with a payment solution. When comparing margins across payment solutions, don't forget to consider cash management, compliance, and settlement times.
Does a given payment processing solution affect your business's ability to generate income? You might be able to get away with passing fees onto customers, but as the cannabis space evolves, consumers look for the best products and the best buying experience. The ideal cannabis payment processing solutions will benefit all parties involved.
How does your current payment processing affect your broader operations? Asking customers to visit an ATM, wait for assistance at a single register, or go out of their way while visiting your store, will increase wait times and impact your bottom line.
Curbside pickup, BOPIS, delivery, and other shopping channels are becoming increasingly popular. Be sure to select a cannabis payment solution that makes it easy to process payments for all shopping experiences.
How easily can you integrate a given payment processing solution into your already-existing operating systems? A payment solution should be simple for consumers, budtenders, and management alike.
In the non-cannabis space, customers choose between Visa, Mastercard, American Express, PayPal, Venmo, AfterPay, Klarna, Gift Cards, and more. Customers making a cannabis purchase may also want the ability to choose how to pay. Ultimately, the more difficult you make it for customers to pay you, the more difficult it will be to continue generating business.
Place yourself in the shoes of your customer. What types of payments would you, as a consumer, prefer to have available? Anything that can be done to increase security, efficiency, transparency, and legitimacy will make it much easier for you to ensure your customers are happy.
Clearly, there is a lot to consider when choosing which cannabis payment process is ideal for your dispensary. When considering all variables above, it’s evident digital payment providers, like AeroPay, will become the preferred payment solution in the cannabis space soon.
Over the past decade, the cannabis industry has witnessed incredible changes. But these changes are only the beginning. Over the next few years, there will likely be several more remarkable changes that alter the legal status of cannabis and corresponding cannabis payment options.
Re-introduced in 2021, the purpose of this Act is "To create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers for such businesses." When passed, more banks and financial institutions should feel comfortable providing additional banking services to the cannabis industry. However, until cannabis is federally legal or removed as a Schedule 1 drug, big banks and credit card companies may continue to prohibit cannabis-related transactions.
Per the Controlled Substance Act of 1970, cannabis is currently a Schedule I drug. There has been an ongoing, bipartisan push to reschedule or remove cannabis, which will help destigmatize cannabis while providing legal legitimacy to the industry.
Initially introduced in the Securities Exchange Act of 1934, this regulation helps promote "safe harbor" banking. By leveraging this regulation, and others like it, cannabis companies can bank compliantly.
Currently, 18 states (along with D.C. and two territories) have legalized cannabis at the recreational level. Though it will take some time for cannabis to become legal across the nation, the necessary legal processes are already in motion.
With each passing year, the legalization of both recreational and medicinal cannabis is becoming more accepted across American society. With greater acceptance, creating cannabis payment systems and their supporting infrastructure has become increasingly more possible. A Pew Research Center Poll from April 2021 revealed that 91% of Americans now support the federal legalization of cannabis—an all-time high.
As more states allow some form of legal and licensed cannabis, payment processing options will continue to expand. Within the next ten years, most states with a licensed cannabis market will incorporate payment processing infrastructure comparable to what exists for industrial hemp-derived products today. A challenge for cannabis suppliers will be finding ways to minimize fees and ensure payments are consistently processed.
While traditional banking services and credit card payments may become available for cannabis-related businesses at some point in the future, cannabis transactions will likely be considered high risk for quite some time. High risk regarding credit card payments will lead to significantly higher processing fees than seen with ACH payments.
As a result, bank transfers will continue to remain a popular payment option throughout the cannabis industry.
Signing up for AeroPay is easy. Simply complete a compliance form and a training overview (total time required is less than 2 hours). At that point, your business will be ready to accept payments.
Digital payment options, without a doubt, represent the future of the cannabis industry.
Find out how AeroPay could be right for your business.Request a Demo