With Marijuana Sales Now Legal in Colorado, Will the Smoke Clear on Pot Payments?

The smoke seemed to clear a bit this week on the status of electronic payments for Colorado shops selling now-legal recreational marijuana, but the nascent merchant category still remains in what effectively is a legal no man’s land between conflicting state and federal laws.

Some 20 states and the District of Columbia have legalized the use of marijuana (cannabis) for medicinal purposes, according to the Medical Marijuana—ProCon.org Web site. On Jan. 1, following voter approval of a 2012 state constitutional amendment, Colorado became the first state to permit the sale and use of small amounts of marijuana for recreational purposes. The state of Washington also has decriminalized recreational marijuana but has not yet begun legal sales, and an advocacy group is working for decriminalization in Alaska.

But ever since medicinal marijuana first appeared on the scene, sellers confronted a problem: few banks and payment processors wanted to provide them with financial services, including credit and debit card transaction processing. That’s because while some states were easing their anti-marijuana laws, the federal government and the majority of states continue their long-standing bans on the sale and/or possession of cannabis. And the payment card networks have rules banning purchases of illegal products with their branded cards. The reaction of banks and merchant acquirers has been mostly to shun the category entirely.

Change, at least limited change, could be in the offing. The Obama Administration has said it would back off on enforcing federal laws involving small amounts of cannabis in states where it is legal. Noting the federal stance and the onset of legal recreational marijuana sales in Colorado, Visa Inc. on Monday issued a statement it would leave to acquirers the decision on whether to sign a cannabis store as a merchant.

“In offering our payment service, Visa adheres to the rule of law and seeks to prevent our network from being used for unlawful purposes,” the statement says. “In this instance, the federal government considers the sale of marijuana illegal, but has announced that it will not challenge state laws that legalize and regulate marijuana sales. Given the federal government’s position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers are best suited to make any determination about potential illegality.”

MasterCard Inc. did not respond to a Digital Transactions News email requesting comment.

A few Colorado cannabis shops reported to local media this week that they have been able to get merchant accounts. Others apparently have installed ATMs in their shops and encourage customers to make cash withdrawals just before paying for their purchases.

Such direct card or ATM-funded sales would mark a turnaround from the early days of medicinal marijuana, when some independent sales organizations signed sellers but later canceled their merchant accounts because the federal government at the time publicly frowned on marijuana sales even if they were legal in some states, according to payments consultant Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group.

But cash-based industries face theft and loss issues, and in the wake of legalization the pendulum is swinging toward acceptance of cannabis merchants, he says. “With Colorado there’s become some legitimacy to these businesses,” says Ablowitz. “The mainstream and the cultural attitude toward these businesses—there’s a softening in attitude.”

Acceptance, however, still is limited, says Deana Rich of Los Angeles-based Rich Consulting, which advises ISOs on risk issues. She notes that large, national banks issue most payment cards, and transactions from Colorado cannabis stores invariably will flow across state lines during the clearing and settlement process. That means an ISO and any bank or processor supporting its recreational-marijuana payment services could be subject to a crackdown should federal government change its stance.

“Therein lies the issue, we’ve had inquiries from some ISOs that are interested in doing this but are unable to,” Rich says.

Both Ablowitz and Rich asked Digital Transactions News to note that they have never been in or purchased a product from a legal medicinal or recreational marijuana store.