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Everything you need to know about payments for the cannabis industry.
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 compliant cannabis payment services.
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.
With the changing legal status of cannabis, and making sure transactions are as transparent as possible, it is important to have a trusted cannabis payments provider. While cash is commonly used to make cannabis payments, cashless payment options allow for bookkeeping and increased security.
In this guide, we'll walk you through the cannabis payment solutions currently utilized in the industry and the risks and benefits around each option.
By the end of this guide, you'll understand more about cashless compliant payments and the benefits of having a reliable cannabis payment provider, like Aeropay, to start accepting digital cannabis 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.
From the very beginning, cash was overwhelmingly the dominant form of payment in the cannabis space, because of the federal illegality of cannabis. 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 cash has remained. Digital payments are quicker, cleaner, and more convenient. Plus, no ATM fees.
Is there any difference legally between medicinal cannabis and adult recreational use?
Currently, medical marijuana is legal in 37 states, the District of Columbia (D.C.), and four U.S. territories including Puerto Rico. As of January 2023, cannabis is fully legal (meaning, medicinal and recreational) in 21 states, D.C., and two U.S. territories (Guam and the Northern Mariana Islands).
Legal recreational states include:
Several states have fully legalized cannabis in 2023, with more expected to propose and pass some form of legalization legislation in the foreseeable future.
Yet until federal reform legalizes cannabis, major card providers remain unwilling to work with businesses in the cannabis industry.
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.Read More
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.
The cannabis industry newswire exploded at the end of 2021 when Visa issued a statement titled “Cashless ATM” and Misuse of ATM Transactions Prohibited.
In this statement, Visa stated, “Cashless ATMs are primarily marketed to merchant types that are unable to obtain payment services — whether due to the Visa Rules, the fuels of other networks, or legal/regulatory concerns. Therefore, supporting this scheme affects the integrity of VisaNet and the Plus network, as well as the Visa payment system.” This statement indeed was a warning that cashless ATMS were on the verge of being shut down at the end of 2022.
Cannabis retailers nationwide have been rushing to find an alternative to cashless ATMs given the recent shut down at the end of 2022. Until December of 2022, you would have seen many dispensaries accept debit card payments where totals were rounded to a flat amount and cash was given back to the customer. This was called a cashless ATM and was shut down following VISA’s warning. It was a workaround method that was never compliant and evolved from traditional credit card companies not wanting to touch cannabis due to it being federally illegal.
Processing a transaction for cannabis with a pin debit card violates the payment cards network policies. Every merchant has a merchant ID number identifying the business with the payment processing systems, essentially telling the payment processor where to send money that has been transacted. Along with the merchant ID number, there is a Merchant Category Code which identifies what kind of business the merchant is conducting.
Since cannabis is still federally illegal, there is no way to correctly identify the business that remains in accordance with payment processing processes. Hiding or masking the transfer of money can raise an alert for potential money laundering schemes, putting the merchant at risk.
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 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 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.
Cashless ATMs permit the processing of cannabis payments with debit cards - which violates card network policy agreements.
Aeropay is transparent with regulators in each state it operates.
Customers pay exactly the right amount, no rounding to the nearest $5.
Customers are never charged a fee.
You're in control with the ability to void and refund transactions before they have settled.
Best APIs and technology end points to allow for a seamless integration.
Aeropay doesn't require any bulky or expensive hardware for customers to pay in your store.
PIN Debit obfuscates transaction coding in broad daylight:
1. Cardholder presents the debit card: When purchasing at a point-of-sale (POS) terminal, the cardholder inserts the 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. The 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 codes it. MCCs (merchant category codes) are used to identify the industry that a receiver of card payments is in. PIN Debit providers tout that the MCC code 5912 is compliant to utilize in the United States for legal cannabis transactions, but this statement is inaccurate. 5912 was 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):
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 merchants are onboard, 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 users transact, they will always pay 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).
Since Bitcoin was developed in 2009, it and other cryptocurrencies (altcoins) have become increasingly popular. The industry continues to be regulated as you can expect to be scrutinized if you were to accept any form of cryptocurrency payment method.
While cryptocurrencies do have benefits, they are far from ideal for businesses operating in the cannabis industry. Only a handful of your potential customer base owns any crypto and it can be difficult to help your customers set up their crypto accounts.
At the same time, crypto can be extremely volatile. Bitcoin lost approximately 85% of its value within a month in 2017 and 70% so far since 2021 highs. Volatile price fluctuations can become a risk and difficult to manage if you're always converting between currencies.
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 remains 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, 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.
Though accepting credit cards may sound tempting, cannabis businesses should avoid it until federal legislation provides clarity and card networks begin transparently endorsing the use of their networks in cannabis.
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.
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:
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, are the preferred payment solution in the cannabis space.
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 marijuana payment solutions.
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. A challenge for cannabis suppliers will be finding ways to minimize fees and ensure payments are consistently processed with little chargeback.
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 as consumers enjoy the smooth user experience each time they return.
The Secure and Fair Enforcement Regulation (SAFER) Banking Act addresses challenges faced by businesses, particularly State-sanctioned cannabis businesses, in accessing essential financial services due to conflicts between Federal and State laws.
The SAFER Banking Act aims to ensure access to deposit accounts, insurance, and financial services for all businesses, including State-sanctioned cannabis businesses. It also seeks to establish standards for banks and credit unions to maintain customer relationships and expand access to deposit accounts, especially for underbanked groups.
Despite cannabis legalization in many states, financial institutions are reluctant to engage with legitimate cannabis businesses due to legal conflicts, limiting their access to crucial services such as deposit accounts, credit lines, and mortgages.
The SAFER Banking Act aims to resolve the financial challenges faced by cannabis businesses, providing a framework for safe and sound banking practices while promoting access to essential services for a diverse range of companies.
The critical distinction between the SAFER Banking Act and the SAFE Banking Act lies in their specific emphases and provisions. The SAFE Banking Act provides a safe harbor for financial institutions to engage with cannabis-related businesses, shielding them from federal penalties and regulatory actions. On the other hand, the SAFER Banking Act, while sharing the goal of facilitating financial services for cannabis businesses, takes a broader approach. It establishes a safe harbor and emphasizes the creation of standards for banks and credit unions to maintain customer relationships and expand access to financial services, particularly for underbanked groups. The SAFER Banking Act appears to encompass a more comprehensive framework for addressing economic challenges businesses face, extending beyond the cannabis industry to promote broader financial inclusion and safety considerations.
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.
We’d love to show you how we put bank-to-bank transfers to work for your business.