The 2021 Guide to Cannabis Payment Processing Solutions
This post was first published in April 2020 and updated September 2021 to address the current state of cannabis payments.
Calls for legalization, while still a thorny issue at the federal level, continue to gain momentum as more states awaken to the significant economic impacts of legal cannabis. There's a big opportunity for new or expanding marijuana dispensaries — if you can do it well.
Roadblocks remain, with one of the biggest questions still being... Why can’t people use credit cards to pay for cannabis?
In this age of convenience — constant connection, one-click purchase, fast and free delivery — consumers expect hassle-free payment options, no matter what they’re buying.
But cannabis isn’t like every other industry.
In this guide, we’ll explain how to get cannabis payments right.
First, you’ll learn about the cannabis payment processing services currently available, including why you can't take credit cards. Then, you’ll see how accepting bank or ATM cards can positively impact your business.
Finally, we’ll outline the future of cannabis payments and steps you can take to get started with accepting non-cash payment methods in your dispensary today, including how to choose a payments partner.
Read on for the full guide, or click the links at left to jump to a section.
Current cannabis payment options
Dispensaries have relatively few choices for processing cannabis payments.
Here are your most likely options and some considerations with each, plus our thoughts on what we think is currently the best option for marijuana payment processing.
Seems simple, right? There’s no argument cash is the most widely available and direct payment method. But only accepting cash comes with other considerations and limitations.
From the sales perspective, being cash only limits your ability to upsell customers, and cart sizes are limited to the cash someone has in their pocket.
Physical cash also presents a logistical and security challenge. Collection at point of sale becomes more prone to mistakes and inaccuracies as humans are responsible for counting and processing thousands of dollars in cash every single day.
Closing the books at the end of the day also becomes more complicated, as managers will have to revisit every transaction to figure out discrepancies. Transactions are also slower when you need to count cash and supply change.
Perhaps most impactfully, having cash around greatly increases security concerns and costs to transport cash. Then there’s the issue of access to banking to deposit that cash. You will need to have large and costly vaults, and this puts profitable dispensaries at higher risk for crime.
While having an ATM in-store mitigates a few of these concerns, they often carry hefty fees and create a disjointed check out experience for customers.
If you’re planning to do delivery at your dispensary, you’ll also have to contend with the fact that drivers might end up carrying around thousands of dollars in cash on a daily basis. This puts them and your revenue at risk.
Beyond security and logistical cash management considerations, there’s also a component of personal safety. As COVID-19 reminded us, cash is dirty. A physical dollar bill can carry pathogens and disease. This is another reason why there’s a renewed desire for touchless, mobile ways to pay for cannabis products.
Despite the risks with being a cash-only business, cash is an unavoidable reality. Even if you offer other forms of payments, some people will still use cash so make sure you understand best practices for dispensary cash management and have rock-solid SOPs for dispensary safety and security.
Read this next
17 Cash Management Tips for Cannabis Retailers
A middle ground for dispensaries who don't want as much cash to manage, but who don't have a point of banking solution (more on that in the next section), is accepting electronic funds transfers from their bank account.
This process uses ACH, which stands for Automated Clearing House, and refers to the process of transferring money between banks without checks, wire transfers, or cards.
Since these transfers are electronic, businesses can immediately verify that the funds exist and the funds go directly from customer account to your bank account. ACH or bank transfers are a simple, secure, legal, and reliable.
The challenge with accepting ACH from your customers is the need for third-party solutions.
With these, customers have to first register through the third-party system and download the mobile app, and then check in at the dispensary through the app. If your POS is integrated, the customer simply enters their four-digit code to check out.
Point of banking
Still relatively uncommon in cannabis, and rarely used in other industries, is point of banking. (Note: some people call this "cashless ATM", but that term isn't widely accepted or recognized. "Point of banking" is the more legal terminology).
Point of banking is a payment method which allows the consumer to access their bank account at the point of sale. Instead of dispensing cash, the payment is forwarded directly to the dispensary bank account.
Point of banking functions similarly to traditional ATMs, where a customer inserts a bank card and enters their personal identification number (PIN).
However, instead of spitting out cash, the point of banking solution is entirely electronic, providing proof that the cash has been debited from the customers’ bank account and deposited into your business bank account.
Because point of banking is actually just an ATM transaction at the point of sale, customers can only pay in increments of $5. Additionally, consumers are charged a convenience fee on top of the rounded total. The fee amount varies depending on the merchant.
This process — especially when it’s integrated with your point of sale — feels like a traditional debit card transaction for customers and streamlines checkout for dispensaries.
Point of banking has emerged as the most stable middle ground for cannabis businesses because it’s reliable, widely-used, increases basket size, satisfies customers, and has the benefit of being a touchless/cashless transaction.
However, it is important to follow strict guidelines when offering point of banking to ensure the solution is not misrepresented and consumers are made fully aware of the fees and the fact that the transaction functions as ATM.
If you’re using a standalone, non-integrated reader, the budtender will need to key in the amount before the consumer runs their card. This sounds simple, but the risk of human error is great.
Traditional PIN debit cards may seem like a viable option because on the surface, they are similar to point of banking or ACH (because all three use a bank card).
But debit transactions run on a different rail. This payment rail is the same one credit card processing runs on, which is not ok for cannabis (more on that in a second).
You read that right: traditional debit card processing is not ok for cannabis.
With debit, you can only pay with the money you have available in your account. It's an instant charge. So many people think debit is a compliant way to pay for marijuana products, but it's risky.
Learn more about the risks of taking cards.
The future is digital, right? Using crypto as a payment solution in your dispensary seems like a win: all digital, anonymous, and seemingly secure.
Perhaps someday there will be a reliable, easy-to-use, and industry-wide crypto for cannabis. The truth is we’re still far from that reality. Only a handful of stores have gotten this tech up and running, and the uncertainty surrounding the financial future of cryptocurrencies is still a risk.
Plus, it’s a lot to ask for customers to download something, put their money in there, and trust that it’s above-board. On top of all that, there’s little to no support or recourse when something goes wrong.
While trust in digital currencies is slowly growing, it’s simply too early to rely on crypto as a primary cannabis payment solution.
Credit card payments, of course, are what consumers are asking for. Paying by card is easy for the customer to understand since that’s such a common payment option.
In fact, 83% of Americans between 30 and 49 years old own a credit card. 70% of consumers prefer card payments (either debit or credit) over cash and only 10% make all their purchases with cash. It’s obvious why dispensary owners are desperate to accept cards.
But you currently can’t take credit card payments. The unfortunate fact is that the federal-level illegality of cannabis prevents credit payment processors, like Visa, Mastercard, or AMEX, from knowingly participating with any marijuana businesses.
This means you simply cannot accept credit cards. Credit card processors won’t work with cannabis businesses. Period. If anyone is claiming otherwise and offering you a solution, you should turn it down as it could expose your business to legal risks.
And this is also why traditional debit card processing isn't a compliant option.
The federal stance on cannabis will need to change dramatically before credit card companies recognize us as a valid, legal form of business. And even then, we will continue to be a high-risk industry and will continue to have credit and banking challenges.
Some dispensaries are taking the risk and accepting credit cards as a workaround because they are so desperate to accept other forms of payments.
Though it’s tempting to accept credit cards, even as a stop-gap measure, it could be a business-ending mistake. We’ll go into more detail on the risk of credit card processing in cannabis in the next section.
Takeaway: Point of banking
The best current option for cannabis payment processing is point of banking.
As of now, it’s the safest, most reliable, and consumer-friendly solution for seamless payments.
Consumers want an easy way to pay and dispensaries want to be able to accept multiple forms of payment.
The risk of credit and debit card processing in cannabis
We’re still in the Wild West of cannabis right now, which might lead some to believe that anything goes. Perhaps you’ve considered using credit or debit card processing — an appealing option many will tell you is safe. We’re not trying to spread unnecessary fear, but you need to be aware of the risks.
You may be looking for payment solutions, even temporary gap options until federal legalization allows other options, but credit or debit card processing at your dispensary puts your business in jeopardy, even as a short-term solution.
Here’s a scenario that continues to play out across the country: A dispensary starts accepting credit cards through traditional retail credit card processing avenues and experiences significant sales increases. A few weeks in, they get a knock on their door, or more likely, an email alert or phone call. In some cases, it’s the credit card company shutting down their merchant account. Seems harmless, but in doing that, they can also freeze all credit card payments processed the previous day (because they hadn’t yet been fully processed and transferred to the cannabis merchant account).
Even though dispensaries are deemed essential in many states, debit and credit card companies still won’t work with cannabis businesses or other industries they consider “high-risk.”
They have built algorithms to flag transactions or merchants selling cannabis. They may not identify you immediately, but they will eventually.
And it’s not just the loss of the prior day's revenue and shutting down the merchant account that’s the problem, it’s that your merchant account will be blacklisted. Thinking ahead, this could mean that you aren’t allowed to accept credit cards even when the rest of the industry is.
The risk of accepting debit or credit cards isn’t limited to the card company. The state may also get involved; inquiring why your business is not compliant with their regulations. Sometimes, it’s both. Those weeks of missing income can easily end a young company, and running afoul of regulations can mean a lost license. Just like that, a dispensary could be out of business.
Takeaway: Think long-term
While it’s tempting to turn to debit or credit cards to make it easy, it’s worth doing it by the books from the beginning. The risk (shutdown, loss of profit, loss of license) is simply not worth the reward.
Don’t go for short-term profits and jeopardize the long-term health of the business. Luckily cannabis software providers and legislators are hard at work to resolve this issue and solutions are coming.
The benefit of point of banking on marijuana-related businesses
There’s now more than 7,500 dispensaries across the U.S. As both consumers and entrepreneurs embrace cannabis, and more states become legal, that number will continue to increase.
Just being a place that sells cannabis is no longer enough though — customers and patients have choices and high expectations. Dispensaries need to differentiate on customer experience, and that includes how easy it is to check out. Just a quick look at keywords on Google shows that consumers are actively looking for dispensaries near them that take cards. Having a point of banking or ACH solution will instantly separate you from the competition.
The best part? Point of banking can increase revenues and satisfy customers with little to no cost to you.
It’ll make you more money almost immediately because customers aren’t limited by the cash they have in their pocket.
With a point of banking solution, customers are no longer limited by the physical money in their wallet. All in all, it’s a better experience and customers are more likely to return. And for you, the retailer, enabling all these conveniences for the consumer also makes it easier to run your business.
Here's the proof: Data from Fundera found that the average cash transaction (across all transactions and industries) is $22. However, the average non-cash (or card) transaction is $112. That’s a huge difference.
A large California-based dispensary (one of our customers), immediately saw a 27% increase in total sales when they started using point of banking.
Consumers spend nearly 30% more on average at dispensaries with point of banking.
To maximize the positive business impact, look for an integrated solution. Integrated means that the transactions process within your cannabis point of sale software (rather than being a separate process where you manually key in the transaction amount).
Integration reduces human error and automates the accounting, which cuts down on administrative work and manager reconciliation.
Takeaway: Details matter
Customer experience is an important factor in the competitive landscape of cannabis dispensaries. Integrated point of banking solutions make for the smoothest shopping experience and make consumers more likely to give you even more of their business.
The future of cannabis payment processing
It may seem like cannabis payment options are limited, because they are. However, the future of payments will be different.
As legislative action on cannabis picks up around the United States, and government officials are talking about cannabis banking solutions, the tipping point may be coming.
Federal authorities are watching the scales tip and legislative easing around federal-level financial services for the cannabis industry is already on the table.
But that doesn't mean banking and payment processing will suddenly be easy for the cannabis industry. Even with new legislation, banking will still be a challenge.
Here’s what you need to keep your eye on:
SAFE Banking Act
This act would allow the major financial institutions to become fully involved in legal cannabis sales without fear of federal action or penalty. The bill has strong support in the House and was passed in September of 2019. It now faces an uphill battle in the Senate. However, the domino effect of state-level legalization will make a difference in the coming months/years. With the impact of COVID-19 and dispensaries getting “essential business” status, it appears the nationwide opinion on cannabis is changing. That could impact the SAFE Banking ACT going forward.Learn more
Reclassification of Schedule I status
The reclassification of cannabis’s Schedule I status has been a legal issue since 1972. The United Nations’ World Health Organization has already begun removing and rescheduling cannabis and cannabinoids, putting increased pressure on U.S. federal authorities to at least consider similar actions. The issue is fraught, but any movement here will have a huge significance for the marijuana industry across the country and unlock traditional banking services.Learn more
This specific section of federal tax code effectively prevents any cannabis seller or producer from ever claiming business expenses to reduce taxable income. Various cases have been tried around 280E, setting the precedent for certain company structures that avoid the disadvantages of this rule. The best way to deal with this is simple: find a great accountant who is familiar with the cannabis industry and has the experience you need. As cannabis becomes a more and more legitimized (not to mention extremely profitable) industry, we predict this specific rule will come under increasing scrutiny.Learn more
Takeaway: Regulations are changing
Things are changing, slowly but surely. In the meantime, navigating all these rules can be a huge headache, especially for someone new to the space or new to small business ownership. Lean on partners to help you build your business and give customers what they want without taking on unnecessary risks. If you’ve got a strong foundation, this evolution will be much easier for your business to take on.
How to choose a payment processing vendor
Before adopting any cannabis payment option, be sure to thoroughly vet the solution, the vendor, and the contract. The payment processing oligopoly has become predatory.
Here are areas to watch:
- Contract terms - Many providers will lock you into long-term contracts with expensive early termination fees. Look for vendors with flexible agreements, no exclusivity rights and no early cancellation fees.
- Fees - Look for partners with transparent pricing and fees. Some payment providers will charge additional fees to the dispensary such as monthly statement and platform access fees, annual compliance fees, decline fees, support fees, termination fees, etc. For reference, with point of banking, a good customer convenience fee is $2.95 with no additional cost to the dispensary.
- Deposit timelines - Find a partner that offers next-day deposits into your bank account. Don't settle for 2-3 day wait times or longer for deposits.
- Integration - Using a non-integrated solution increases the risk of human error and reconciliation challenges. Seek a partner with an existing native integration with your point of sale solution to relieve yourself of operational hassles.
How to get started with point of banking processing
Dispensary owners and managers are looking for ways to streamline business, grow profits, and satisfy customers. The answer is in cannabis payments, specifically point of banking.
This gives you the most flexibility to adapt as the market changes. In fact, that's how we've built our solution.
Flowhub allows you to easily and quickly process point of banking payments through an integrated wireless terminal solution. Book a demo to learn more!
Disclaimer: Flowhub is not in any manner providing legal services or legal advice. You are solely responsible for consulting with legal counsel to ensure your business complies with all applicable laws, and we recommend you do so.