It’s almost amazing that the same institutions that brought us the 2008 financial crisis have a problem with selling glass pipes. Almost.
The truth is that an industry’s past sins are only held against it when the money isn’t right. Big banks were willing to risk cratering the U.S. housing market because the profits were too good to ignore. But the cannabis industry rolls a different kind of paper, so instead of a slap on the wrist, it gets a surcharge.
Smoke shops and dispensaries are caught between a banking system that doesn’t want them and a political process that ignores them. We’ve been waiting on the Great Pumpkin and gotten bupkis. We’ve come to accept that our industry pays more to process credit cards than the florist down the street. But why is that the case?
Them’s the Rates
If you’re running a smoke shop, you’re part of what banking companies call the “high-risk” basket. That includes industries such as gambling outlets and pornographers, which experts believe present a higher risk of chargebacks and fraud. And, because there’s extra risk for credit issuers, they pass the cost onto you, typically in the form of a 1% markup on fees.
The average rate for credit processing services at a smoke shop falls between 3.49% and 3.95% (plus a 25-cent flat fee) per swipe, according to the high-risk processor Payment Cloud. However, it’s possible to lower your rate to less than 3%; it just requires doing extra work and saving receipts.
The first move is simply shopping around. The proliferation of high-risk operations has created a demand that a new breed of creditor is going after. Most of these outfits specialize in providing financial services to high-risk clients, but a few focus specifically on cannabis and canna-adjacent businesses, and they tend to offer lower rates than more traditional providers.
But no matter who provides your service, it’s worthwhile to see if it can go lower. Your best bet is to flaunt your record, assuming it’s clean. Credit servicers typically flag shops if their chargeback rate reaches 1% (audits occur when it climbs to 1.8%). If your rate falls well below that threshold and your monthly volume is high, it’s worth your time to ask for a rate adjustment.
Where the companies are less likely to budge is the rolling reserve, the money creditors hold onto as a safeguard against chargebacks. For clients in the high-risk category, this usually ranges from 5 to 10 percent. But just because it’s standard doesn’t mean you should ignore it. If you prefer to hold onto as much of your cash as possible, be sure to inspect your contract for the exact percentage and length of your rolling reserve. Some creditors add an absurdly long wait (up to a year) before they’ll release the funds back to you. You can usually ratchet the timeline down a bit if you ask nicely. The standard is 3-6 months (which is admittedly still a long time to tie up your working capital).
The other often-overlooked variable to ask about is the settlement time. High-risk accounts tend to settle at a slower clip than standard retailers, but tend to vary from 48 to 72 hours. While that may seem like a short time to wait to access funds, it can produce a gargantuan headache at the most inopportune times. These rates may not be negotiable, but it’s smart to know them. Don’t get caught bouncing a payroll check because the big sale from Friday hasn’t gone through when the direct deposit hits.
Why Rescheduling Doesn’t Matter
The industry has been promised a brighter future for years. For many dispensary and smoke shop owners, that begins with banking reform, and banking reform begins with rescheduling. Once cannabis is no longer at the highest level of federal risk, the thinking goes, big banks will open up.
If only it were that simple.
The trouble comes on two fronts. First, the rescheduling process is slow and uncertain. President Joe Biden asked the HHS and DEA to reconsider the issue in October of ’22. Two years later, the agencies announced they would propose that cannabis move to Schedule III, the category for drugs that have “less potential for abuse” and an “accepted medical use.” They scheduled a hearing on the proposal, but before it could take place, President Donald Trump issued an executive order instructing the attorney general to expedite the process. That would be great, except it’s unclear whether the president and AG can do that. Unsure of what to do, the agencies canceled their hearing, and the process has been in limbo ever since. As of press time, there was no clear path forward and no urgency from Washington to create one. Go figure.
The second problem with rescheduling comes from banks themselves. Even if cannabis were to become suddenly less problematic to the feds, it still might not be palatable to the banks. Congress has long barred the DOJ from using federal funds to go after those engaged in legal medical marijuana activities, but that hasn’t led to an influx of available credit to those outfits. It’s not clear that rescheduling would change how banks view the riskiness of the industry.
The Tech Won’t Save Us… or Will It?
Techno-optimists insist the industry will innovate itself out of the mess. But promises of simple solutions, like cashless ATMs and ACH transfers, are proving to be workarounds that don’t work out long term. Other ideas, like cryptocurrency and stablecoins, have a bevy of their own legal issues and face serious customer onboarding issues.
Despite their issues, those ideas show some potential. But perhaps the easiest one to envision takes inspiration from a Seattle coffee chain. Recently, some dispensaries began piloting closed-loop payment systems that operate like a Starbucks card. Customers download a store-specific app, load it up with cash, and then use it to shop. The idea holds appeal for multi-store dispensaries and smoke shops with loyal customers, but may not be viable for everyone else.
While the industry feels its way toward a solution, it’s easy to get discouraged. There are no great options, tons of downsides, and all the talk about a bright future sounds crazy. But in the counterculture world, that passes for industry standard.
Want to learn more about navigating a payment processor as a “high-risk merchant”? Click HERE to check out one of our previous articles on this topic.
