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Legal Conundrum

Why is it that Marijuana can be sold, taxed, and regulated in nearly half of the states in the U.S., but it can’t be purchased with a credit card?
The most significant obstacle to marijuana payment processing is the federal government’s stance on the sale and use of marijuana.

THE WALL STREET JOURNAL

    Card Conundrum Develops in Colorado over Marijuana Sales

    By Robin Sidel, Updated Jan. 6, 2014 8:48 p.m. ET (Excerpts)
  • Visa said in a statement that it follows federal law. But it added that "given the federal government's position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers are best suited to make any determination about potential illegality."
  • That is because the card giants, owners of the processing networks that handle electronic payments, have quietly decided not to enforce their rules, according to people familiar with their strategies.
  • The banking industry continues to drag its feet on providing digital payment solutions for the marijuana industry. Put simply, US banks are not willing to expose themselves to the financial and legal consequences.
  • Some companies that process marijuana transactions circumvent Visa and MasterCard rules by logging a marijuana purchase as a more innocuous-seeming transaction. Tinkering with the so-called merchant category codes is considered a severe violation of card-industry rules.

The Denver Post

    Hundreds of ATMs unplugged in legal pot shops in Colorado, Washington

    By David Migoya, the Denver Post, 10/23/2014 11:25:18 AM MDT (Excerpts)
  • Hundreds of ATMs located in medical marijuana dispensaries — the lifeblood of businesses otherwise forced to work in cash — were shut down Wednesday.
  • Cashless ATMs work differently from those that dispense currency, allowing customers to be charged for a transaction directly through a credit or debit card using a PIN rather than a signature. The transaction is recorded as a cash advance and does not route through the same system as when a user signs a receipt.
  • "MetaBank, as a federally chartered bank subject to federal banking regulation<>, cannot sponsor ATM terminals that are deployed in any business establishment that distributes marijuana”.
  • In most cases where licensed, legal, dispensaries have encountered processing disruptions or have had their card payment systems shut down altogether, the payment solutions being utilized did not adhere to either the federal laws or federal banking regulations governing US bank charters.

Bending the Rules Can Cost You

  • Despite the banks’ hesitance to provide marijuana merchant services to legitimate dispensary owners, some merchants have plowed ahead with workarounds and semi- legal solutions. Each of these options comes with some degree of risk:
  • The most obvious solution is to misrepresent the business type and products to a bank or a payment processor. This method is inadvisable for merchants in any industry as the risk of being placed on the Terminated Merchant (MATCH) File, an industry-wide blacklist, is high.
  • “Cashless ATMs” essentially function as PIN-debit transactions by allowing merchants to give customers change for on-site ATM withdrawals. Federally chartered banks are governed by regulations that prohibit these solutions. Your business risks have the system shut down virtually overnight as happened in Colorado in October 2014.
  • The use of a digital currency solution like Bitcoin has been proposed. Since it isn’t regulated by processing networks and essentially functions as digital cash, virtual currency could easily be exchanged for marijuana. However, most of the major bitcoin point-of-sale providers (including BitPay and CoinBase) have balked at the idea of processing payments for a product that is illegal at the federal level.

For now, Very Few Viable Solutions

  • Most of the existing solutions involve some degree of risk or inconvenience. However, most super-high risk industries today require strict screening protocols, but legally utilize Visa / MasterCard credit card processing services provided by European or other overseas banking partners not governed by US federal banking regulations. Logically, it holds that overseas solutions provided by Visa and MasterCard’s global processing networks are the best choice until US federal laws and banking regulations clearly take a stance.