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Compliance in Cannabis: Debit Network Shutdown

Compliance
August 11, 2023
Adam Glogovsky

In December, I wrote about how cannabis retailers nationwide had been rushing to find an alternative to cashless ATMs. This came after Visa’s announcement that cashless ATMs are prohibited, as they disguise a retail transaction as an ATM withdrawal. A significant number of vendors seeked out Aeropay to replace their non-compliant cashless ATM systems. 

Now, once again, there’s a surge of cannabis retailers turning to Aeropay. The new rush is in response to Mastercard asking banks to stop processing cannabis related transactions made through debit cards on their network. These warnings from the two largest payment networks in the world are related to two distinct workarounds that the cannabis industry had been utilizing over the past decade.



PIN Debit obfuscates transaction coding in broad daylight:



1. Cardholder presents the debit card: When making a purchase at a point-of-sale (POS) terminal, the cardholder inserts their card into the reader.
2. Merchant initiates the transaction: The merchant sends a payment request to the cardholder’s bank (the issuer) through an available debit network (e.g., Visa, Mastercard, or other networks).
3. Cardholder enters a PIN: To authorize the transaction, the cardholder enters their unique PIN into the keypad and the transaction is processed.

Up to this point, there is nothing unusual about the transaction until you look at how the PIN Debit processor is coding it. MCCs (merchant category codes) are used to identify the industry that a receiver of card payments is in. We’ve seen PIN Debit providers tout that the MCC code 5912 is compliant to use in the United States for legal cannabis transactions, but this statement is inaccurate. 5912 was originally created for traditional drug stores & pharmacies and has recently been considered the appropriate code for legal cannabis transactions in Canada (where cannabis is federally legal), but not the United States (where cannabis is not federally legal).

Here is an excerpt of the guidance from
Mastercard’s quick reference booklet (pg. 123):



Here's how a cashless ATM typically works:

1. Customer initiates the transaction: The customer approaches the cashless ATM terminal and indicates the amount of cash they wish to withdraw or the transaction they want to complete.

2. Transaction authorization: The customer inserts their debit card to the cashless ATM operator. The operator processes the transaction through their payment network coded as an ATM withdrawal.

3. Funds transfer: The requested amount is electronically transferred from the customer's bank account to the cashless ATM operator's account in a flat round amount akin to an ATM withdrawal.

4. Dispensing of cash: The merchant will return any difference in the actual transaction amount and related fees to the customer in cash. After the funds are transferred to the operator's account, the operator will transfer the funds to the merchant in batches within a few days.

Disguising a purchase by misrepresenting it as an ATM transaction through incorrect coding constitutes fraudulent activity. The processors that use this method to facilitate transactions with their financial institution are violating their contractual terms. Furthermore, the cashless ATM processors must be providing false information on their applications with the financial institutions, coercing them into approving these inaccurately coded transactions.

Despite these circumstances, cannabis retailers have still found some cashless ATM providers that have survived detection and continue to not be deterred with their potential money-laundering behavior.

Aeropay uses ACH - a much simpler, transparent solution:

1. Aeropay’s ODFIs are specialized in serving the legal cannabis industry where all onboarded merchants must meet the enhanced diligence required to accept payments via Aeropay.

2. Once merchant’s are onboarded, their users are encouraged to create Aeropay accounts by securely connecting their bank to their profile. The Aeropay marketing team will assist in driving adoption at your business!

3. When user’s transact, they will always be paying the intended amount (no round-ups) with no fees enforced by Aeropay. The entry for each transaction on their bank statement will display the merchant’s operating name (DBA).

Non-compliant solutions like cashless ATMs and PIN debit may persist, but Aeropay is here to assure merchants that our solution is following all of the rules and regulations. We operate with complete confidence that our system will not face shutdown by card network providers seeing that we don’t interact with them.

Aeropay continues to make strides into new industries and keeps innovating towards what we believe to be the future of payments made between bank accounts. If you have any inquiries about the content of this blog or simply wish to engage in discussions about payment systems or regulated industries, feel free to contact me at adam@aeropay.com.

Author

Adam Glogovsky

Senior Director, Risk & Compliance
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