Probably the biggest domino to fall in the last year for cannabis payment shutdowns was digital wallet workarounds. So, what went wrong here? The issues are two-fold.
1) They lost their back-end banks.
2) Chargebacks got too high.
If you were a merchant who used a digital wallet workaround over the last two years, you probably noticed that your chargeback management/disputes went absolutely nowhere beginning in August 2023.
The digital wallet workaround providers did move to a new back-end bank in August 2023 and with that change in systems, chargebacks and retrievals went ignored for months. The result? The merchant account for the digital wallet workarounds – the foundation for the entire system – was blacklisted due to high chargebacks.
When the digital wallet workarounds lost their merchant account, the dispensary’s sub-merchant account was also terminated.
Peer To Peer solutions have been around in some shape or form for a decade. Often referred to as “PayPal for Pot,” their true believers assert that these systems sufficiently remove risk from card brands and other financial institutions who do not permit cannabis transactions on their property.
Moreover, because the systems are closed loop, the prohibited transaction also does not occur on this property. That last statement is more up for debate, as a Peer To Peer system must always have backend banks funding the merchants and facilitating the transactions. If the back-end banks do not know they are involved with cannabis transactions, Peer To Peer systems clearly commit money laundering, bank fraud, and wire fraud.
These systems – particularly in cannabis – are often more complex in nature, typically requiring an ID scan or opt-in by text. This can give the false appearance of compliance, but can also simply be used to empower bad actors to more easily obfuscate the nature of transactions to the banks being used on the back end. Chargebacks are always lower with these solutions and compliance is more easily performed. However, by the end of 2023, all legitimate Peer To Peer solutions had lost their back-end banks.
These solutions were usually more regional in nature, and as a result, presented insufficient profits to counter the risk assumed by the back-end banks.
2022 and 2023 saw the rise of a once powerful cryptocurrency workaround. This workaround allowed for all cards to be used, as well as, Tap To Pay, and Buy Now Pay Later. Moreover, merchants were afforded same-day funding. As this cryptocurrency workaround began to gain significant market share, they moved from one back-end bank known for facilitating super high-risk transactions to Stripe.
This decision was likely to lower their hard costs. A legitimate back-end bank facilitating cannabis transactions comes with a sky-high cost for compliance, in addition to constant demands on the payment processor in order to maintain compliance. However, you cannot integrate with the industry’s largest POS company and begin to board their alleged 6,000 doors with that barrier to entry. Enter Stripe. Stripe gave the wink and nod to crypto currency purchases.
However, this POS’s portfolio was loaded onto a single merchant account. Stripe is a Payment Aggregator – essentially a payment processor middleman – best utilized for businesses processing under $50,000.00 per month due to the lack of pre-approval underwriting. However, when volume exceeds $50,000.00 per month, risk reviews are performed, and businesses who do not pass, have their merchant account terminated, and owed funds held.
In the case of this cryptocurrency workaround, in just a couple weeks, tens of millions of dollars were loaded onto a single merchant account, resulting in an immediate closure of account, and an eye watering amount of money being held as Stripe investigated the transactions.
One POS company has been pushing the compliance of their gift card workaround hard in 2024. There are a few unscrupulous sales offices as well that are affiliated with this offering. This gift card workaround has dealt with, at least, two occasions of significant downtime and other occurrences where one major card brand would not clear.
However, gift card workarounds have numerous fatal flaws. Let’s get to them. First and foremost, utilizing a gift card schema to facilitate debit and/or credit transactions is fundamentally not how gift cards are meant to be utilized. This is a violation of numerous card brand, bank, and regulatory rules. More glaringly however, is that gift card platforms receive an audit by the card brands once they surpass $10,000,000 per month gross in transactions.
Gift card platforms, limited by their own simplistic infrastructure and architecture, are unable to obfuscate that these transactions are tied to cannabis, and ergo are lying to the banks and card brands. Lastly, by being a gift card workaround, funds owed to merchants are NOT FDIC insured. These workarounds are easily identified and shutdown.
You, the merchant, will always be left chasing money you were told belongs to you, and you will never receive.
One of the oldest tools in the shed for facilitating cannabis credit and debit transactions is when a payment solution either contracts with a PayFac or is a PayFac themselve. On paper, this can appear more compliant, as PayFacs do hold some authority within the Financial Infrastructure hierarchy.
However, since cannabis does not have an official MCC code for the United States of America, all these workarounds end up doing is cycling through many MIDs. Depending on the size of the PayFac, this game can be played for a long time. As whenever one MID gets shut down due to being tied to cannabis, or having excessive chargebacks, the PayFac will just move merchants or a merchant, to another MID. However, doing so is simply miscoding, which is a form of Money Laundering, Bank Fraud, and Wire Fraud.
The Team at Get Cannabis Payments has never seen a single provider gain much traction in the market.
This is due to the following reasons:
1) the platforms are often clunky. Terminals that are multi-MID are often slow and littered with glitches and errors.
2) Staff and customers become dizzy by the sheer number of descriptors utilized.
3) Chargebacks get VERY high and this always results in additional fees passed onto the merchant.
4) Processing fees are high and there are always additional monthly fees.
As the cannabis industry continues to navigate complex landscapes, recent disruptions in payment processing systems underscore the vulnerabilities that cannabis businesses face. With multiple recent shutdowns impacting operations and threatening revenue streams, the need for reliable, compliant payment solutions has never been more pressing. These shutdowns often stem from legal constraints and banking hesitance, reinforcing the urgency for businesses to adopt more secure alternatives.
At GetCannabisPayments.com, we recognize these challenges and offer a superior solution tailored specifically for the cannabis industry. Our innovative payment processing platform is designed to facilitate seamless, compliant transactions, ensuring that businesses can operate efficiently without the constant fear of shutdowns or financial instability. With advanced encryption, user-friendly interfaces, and dedicated support, we provide the tools that cannabis businesses need to thrive in a rapidly evolving market.
In a time when other payment methods fall short, GetCannabisPayments stands as a beacon of reliability. If you’re looking to secure your financial future and streamline your operations, consider partnering with us. Together, we can navigate these turbulent waters and build a more prosperous cannabis market for everyone involved.
For more information, visit us at GetCannabisPayments.com.
You must be logged in to post a comment.
