by Todd Glider, MobiusPay, Inc
This is Part II in a series of bog posts entitled Payment Processing in the Cannabis Space. Part I can be found by clicking here.
America is a federation. As such, individual states have innumerable sovereign rights that supersede federal law. This may seem obvious, but in most countries, that’s not how it works. Whether they are democracies or not, often all rights emanate from the central government. When the central government says marijuana is illegal in such a place, specific regions or territories aren’t permitted to go their own way.
However, as a federation, the 50 states in the U.S. get to make up their own rules on a lot of material issues.
That’s why cannabis products containing more than .3% THC by volume can be legal in your state, but illegal, federally. And it is also why cannabis products containing .3% THC by volume or less can be legal, federally, but illegal in your state.
All this ambiguity gives the banks and card associations the vapors. And it goes a long way toward explaining why, nearly four years after the landmark Farm Bill, so few banks are willing to provide CBD businesses with merchant accounts.
Parenthetically, it’s also why, if you walk into your local Chase branch to open a simple checking account for your CBD or cannabis business, they will give you a lollipop and show you the door.
A Colorado Resident Walks into a Colorado Dispensary with a Credit Card…
Here’s a fair question: “If cannabis is legal in my state, and I operate a cannabis business in my state, why can’t I accept a credit card from a customer who is not only a resident of my state, but also somebody who got a credit card from a bank in my state?”
On those terms, it defies logic how any intrastate cannabis purchase would be a federal issue. Unfortunately, the movement of money from a Visa or Mastercard, or any U.S. credit card, occurs on a card association’s network, or rail. These rails are nationally interconnected, not siloed to a specific state or territory. So, even if a cannabis consumer lives in the apartment above a dispensary, heading downstairs to make a purchase with a credit card is a national transaction, and not a local one. And on those terms, it violates federal law.
Regional rails do exist outside of the card association networks. They connect banks to one another, and these are the rails that are leveraged for the non-cash transactions taking place at dispensaries around the country. Whether or not these rails are truly siloed, and not part of a national network, is, to say the least, the source of much legal, financial, and philosophical debate.
But Do I Even Need a Merchant Account?
It would be disingenuous to say that you need a merchant account to accept credit card payments. You don’t. There are several FinTech companies out there with names we all know and, generally speaking, trust to process payments on our behalf.
In the payments space, we refer to these third-party organizations as PSPs, or Payment Service Providers, or Payment Aggregators. With a PSP, a commercial enterprise doesn’t need its own merchant account. The PSP is allowing you, and thousands of other merchants, to share in the processing power of its merchant accounts and accept credit card payments on your behalf. In this case, you are what is called a ‘sub-merchant.’
However, the big PSPs, by and large, have been reticent about hopping aboard the CBD express. And there is little surprise there. These FinTech giants we associate with banking are, at their core, just software companies. To offer credit card processing, they need merchant accounts from Acquiring Banks, just like the rest of us. So the dearth of Acquiring Banks willing to work in the cannabis space affects them the same way it affects everyone else.
To date, only Square has thrown its hat in the ring, and an overwhelming number of CBD and hemp retailers have opted to go the Square route. Square is the most popular processing solution for CBD merchants for a couple of reasons. First, it’s easy to find. Searching “How do I begin accepting credit cards CBD” on Google nets mostly ads and review sites, but Square appears prominently. Parenthetically, I just entered that very search term, and Square appeared twice on page one.
Square, we always tell CBD merchants, is low-hanging fruit. Low-hanging fruit, by definition, should always be, and usually is, eaten first.
The near-universal recognition of Square also makes integration easier. The technologists that entrepreneurs hire to code their digital storefronts and websites have plenty of experience integrating the Square plugin for all manner of eCommerce businesses.
However, for the CBD retailer, there are important reasons to approach Square with caution, or, at a minimum, not to use Square without a backup processing option. Backup processing, or redundancy, is a must for everybody in a high-risk business, especially for CBD merchants using Square. It’s a bell we, at MobiusPay, sound often, as Square’s Set It and Forget It value proposition has proven a fiction for numerous CBD retailers.
The horror stories, reductively:
“Square shut me down.”
“Square is holding my money.”
“Square shut me down and is holding my money.”
When Square’s underwriters identify a compliance issue in a CBD retailer’s digital storefront, their processing is halted, and their funds are frozen — sometimes, indefinitely. Most problematic is that, owing to their size and dogged commitment to automation, Square does not excel at communicating with clients — even when it’s of vital importance.
Often, Square doesn’t disclose the cause of the account shutdown. This omission of details turns a precarious situation for the merchant into an existential crisis, and the larger the digital storefront, the bigger the problem it is. This is because, frequently, the compliance issue is a small one, like a broken link or an expired Certificate of Analysis. Depending upon the number of products in your shop, identifying the one problematic COA may be like finding a needle in a haystack. That’s doubly damning. Not only has processing stopped, but work has stopped, too — because now, it’s all-hands-on-deck. Everyone in the office is on a frantic scavenger hunt, trying to track down the one compliance issue (and for all you know, maybe there are two) that has caused all sales to halt.
That doesn’t happen when you have a merchant account.
Even without the threat of a halt in processing, though, merchant accounts will always be the smarter choice for CBD retailers. They simply offer greater flexibility, better rates, more stability, better throughput, and, perhaps most important of all, the marketing and strategy flexibility that a business needs to grow successfully.
This is not an indictment of Square. They deserve points for throwing their hat in the ring. They are good at what they do, and what they do good is provide a turnkey processing solution for low-risk brick & mortar and eCommerce merchants. The pet store, down the street from me, here in Philly, uses Square. When I’m picking up cat litter at the shop, I never think to suggest that she consider a merchant account. She doesn’t need it. Square was made for businesses like hers. It is ideal for low volume businesses operating in a routine business environment.
However, if you’re reading this, your business is facing challenges somewhat different from those faced by the pet store down the street — unless you specialize in CBD for pets, of course.
CBD businesses, as with all individuals and organizations in the cannabis space, stand at the vanguard. They are the tip of the spear in an inevitable plant medicine revolution.
Like square pegs — pun intended — in round holes, they don’t fit easily into Square’s steady-as-she-goes ecosystem.
On the other hand, establishing a merchant account is no picnic. Merchant accounts do not open like elevator doors. At their most reductive, merchant accounts are lines of credit, and lines of credit are established with a paper trail. There is an application to fill out. There are KYC protocols to follow. There are document requests and compliance checks. There is waiting for activation.
However, as someone who has spent many more years acquiring merchant accounts as a high-risk merchant than offering them to high-risk merchants, I can promise you that they are worth the wait and the effort, and that depending upon a PSP like Square for something as important as processing makes growth and success more difficult than it needs to be.
MobiusPay, Inc. is a U.S.-based global financial services organization that is committed to empowering individuals and businesses. For more than a dozen years, MobiusPay has leveraged state-of-the-art secure billing technology, long-standing relationships with financial institutions and award-winning customer support to provide merchant processing and payment solutions to brick and mortar and digital businesses around the world.
Todd Glider has been an e-Commerce leader since the start of the Internet age. He has an MFA in Creative Writing from the University of Miami, and has served as CEO for small and medium-sized technology companies in Spain, Austria and the United States. As our Chief Business Development Officer, Todd introduces MobiusPay’s suite of award-winning financial services to new industries, and implements the development strategies and key partnerships needed to bring value to new customers.