Post Authored By: Kasim Carbide
While many states have legalized cannabis for recreational use, federal law continues to classify it as an illegal substance.[i] Despite this fact, legal dispensaries have become ubiquitous in states that have legalized cannabis. As a business, dispensaries encounter typical operational issues, but credit and debit cards present a unique challenge that have yet to be elegantly resolved. This is largely because federal law conflicts with state law. So, when a dispensary (“Merchant”) attempts to accept a credit card, the transaction is rejected by Visa and MasterCard.
One creative solution to this problem is the cashless automated teller machine (“ATM”) allowing a customer to “pay” for a cannabis purchase at a Merchant and “withdraw” cash, without ever touching money. It works like this: a customer requests, for example, $60, and the ATM dispenses a voucher to the customer. The customer presents the voucher to a Merchant cashier, the cashier deducts the cannabis purchase, applicable tax, and a substantial fee for using the ATM. The cashier then returns whatever change (if any) remaining to the customer.
Since all ATM machines – whether cash dispensing or cashless – use the same rails and networks to process payments, it follows that this would resolve the unique issue. Despite their widespread proliferation, however, the mere existence of a cashless ATM does not justify their legality, and has the potential of bringing serious consequences for a Merchant.[ii]
This article will cover the current Network Rules regulating cashless ATMs, applicable regulations and law, and demonstrate that cashless ATMs are not a viable or legal solution for processing cannabis payments.
Law & Regulation
The Controlled Substances Act of 1970 classified cannabis as a Schedule 1 drug and controlled substance, reasoning that cannabis has a high potential for abuse and has no acceptable medical usage.[iii] Since that time, regardless of the scientific information justifying medical usage for cannabis — it remains illegal.[iv]
When a customer goes to a Merchant and swipes their credit card into a point of sale device, the processing of the credit card must comply with Visa and MasterCard Network Rules (“Network Rules”). These Network Rules govern the how and when credit cards may be processed, and further provide certain merchant codes enabling the processing of a credit transaction. For example, MasterCard Section 5.11.7 “Illegal or Brand-Damaging Transactions” state: (1) a merchant or customer must not submit “any Transaction that is illegal, or in the sole discretion of the Corporation, may damage the goodwill of the Corporation or reflect negatively on the Marks.”[v]
Similarly, Visa Rules 18.104.22.168 “Submission of Illegal Transactions” state “[a]n Acquirer must not knowingly accept from a Merchant for submission into the Visa payment system any Transaction that is illegal or that the Acquirer or Merchant should have known as illegal.”[vi]
In short, processing a credit card payment for cannabis would be not only a violation of Network Rules, but it would be a violation of federal law as well. Further, a violation of Network Rules may result in disciplinary action against the Merchant, as well as a potential fine of $200,000 or $2,500 per day (which can be retroactively apply to and from the first day of noncompliance), and termination of the Merchant’s account.
Under the Obama administration, the distribution of the Cole Memorandum created a new federal policy that would not pursue or prosecute medical cannabis patients or businesses that complied with a comprehensive regulatory framework.[vii] This allowed cannabis patients and businesses a brief respite until the Cole Memorandum was rescinded by Attorney General Jeff Sessions in January 2018.[viii]
To complicate matters further, many states impose strict and onerous regulations for ATM operators because they are cash intensive businesses. This means that, a Merchant hosting a traditional ATM is subject to strict state and compliance regulations, or a merchant hosting a cashless ATM is subject to violating Network Rules, heavy fines, and termination.
While many Merchants are willing to tolerate the risk for immediate profits, most Merchants have too much invested in their business to jeopardize it for an illegal fad. Even recently, Merchants hosting cashless ATMs were terminate without notice, and left high and dry to pick up the pieces.[ix]
Only a few data and payment processors have legally solved the credit card transaction problem with proprietary technology. Merchants are encouraged to remove their cashless ATMs and seek out legitimate data and payment processors that are authorized to process these payments without violating Network Rules. One such Illinois processor is Track-n-Pay, which offers a proprietary and legal solution for merchant processing – removing the need for cashless ATMs. By relying on processor familiar with cannabis payment processing, Merchants remove the potential to rack up unnecessary fines and termination without notice.
About the Author:
Kasim Carbide concentrates his practice in Corporate Law, Bank Secrecy Act/Anti-Money Laundering Compliance, and counseling FinTech startups. When he is not reading or billing, Kasim enjoys cooking, watching the Office, and playing Catan with family and friends.
[i] 21 U.S.C. Chap. 13 §801 et seq.
[ii] Chris Roberts, Why Did San Francisco’s cannabis store ‘cashless ATMs’ suddenly shut down?, Leafly (November 15, 2019). Available at: https://www.leafly.com/news/industry/why-did-san-franciscos-cannabis-store-cashless-atms-suddenly-shut-down.
[iii] Supra, Note 1.
[iv] Peter Grinspoon, MD, Medical Marijuana, Harvard Medical School Health Blog (January 18, 2018). Available at: https://www.health.harvard.edu/blog/medical-marijuana-2018011513085.
[v] MasterCard Rules 5.11.7 (pg. 108) (Last Updated: August 4, 2020). Available at: mastercard.us/content/dam/mccom/global/documents/mastercard-rules.pdf.
[vi] Visa Core Rules and Visa Product and Service Rules 22.214.171.124 (pg. 93) (Last Updated: October 17, 2020). Available at: https://usa.visa.com/dam/VCOM/download/about-visa/visa-rules-public.pdf.
[vii] James M. Cole, Memorandum for All United States Attorneys, United States Department of Justice (August 29, 2013). Available at: https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.
[viii] Jeff B. Sessions, Memorandum for All United States Attorneys, United States Department of Justice (January 4, 2018). Available at: https://upload.wikimedia.org/wikipedia/commons/7/7d/DOJ_Sessions_memo_20180104.pdf.
[ix] Noelle Skodzinski, Dude, Where’s My Cash? Dispensaries Unplugged from ATM Service, Cannabis Business Times (October 23, 2014). Available at: https://www.cannabisbusinesstimes.com/article/dude-wheres-cash-dispensaries-unplugged-atm-service/.