Visa Inc. has issued a warning that cashless ATMs used by many cannabis dispensaries violate its service rules in a move that may force legal pot businesses to operate more in cash.
Cashless ATMs allow customers to use their bank cards to buy pot instead of cash. The buyer puts their ATM card into a point-of-sale device, money gets taken out of their account and goes to the store, and the customer gets the cannabis.
The method skirts the U.S. ban on using the federal banking system and Visa Inc. V, -1.98% to pay for cannabis by miscoding the purchases as cash withdrawals, which disguises them. Amounts are taken out in even numbers to make them more closely resemble ATM withdrawals. So for a $58 purchase, a customer will withdraw $60 from their account and then receive pot plus $2 in change from the dispensary.
Visa’s statement does not mention cannabis companies specifically, but zeroes in on the overall practice of using cashless ATMs for transaction.
“Visa is aware of a scheme where point-of-sale devices marketed as ‘Cashless ATMs’ are being deployed at merchant outlets and are operating in violation of the Visa core rules,” Visa said in a memo, as initially reported last month by cannabis publication Marijuana Moment.
A Visa spokesperson did not reply to an email from MarketWatch.
The Visa memo threatens “compliance enforcement” actions but does not provide any specifics.
Executives in the cannabis business said the Visa memo amounts to a big threat to banks that issue ATM cards and process transactions.
While banks issue the cards, the big credit card companies own and operate the credit card networks. Visa owns the Plus network, Mastercard MA, -1.59% operates the Cirrus network and Discover Financial Services DFS, +0.78% owns Pulse.
Dispensaries don’t join these exchange networks. They do transactions through a bank, which has the relationship with Visa or Mastercard.
“The memo was addressed to banks to warn them to get rid of this practice or you will be fined and kicked out of the network,” said Tom DiGiovanni, CFO of Harborside Inc. HBORF, +0.73%, the California-based dispensary company. “It’s tremendous. Imagine a bank that can’t issue Visa or Mastercard. You’re getting kicked out of the payment business.”
As a result, many dispensaries may be forced back to using cash for all of their transactions. This will increase the cost of security and boost the risk of robberies.
To reduce that risk, lawmakers on Capitol Hill have proposed the SAFE banking act to open up the U.S. financial system to legal cannabis companies. While the measure has passed the U.S. House of Representatives, it has died in the Senate, including in an effort last year to include the measure in the annual defense budget.
Harborside’s DiGiovanni speculated the Visa memo may encourage more banks to lobby Congress to pass the SAFE measure, or to remove cannabis from its status as a Schedule I drug, that classifies it along with heroin.
For its part, Harborside does not use cashless ATMs. The company instead processes debit card transactions with a local bank that does all the compliance work to show the money is being spent on legal cannabis. Harborside’s bank uses seed-to-sale tracking that allows regulators to watch product transactions through the supply chain. The data is then submitted to the state.
The debit cards charge customers a $3 transaction fee to help pay for compliance costs, but Harborside does not make any money off the fee, he said.
He said he knows of only about 50 banks nationwide that process transactions for cannabis companies, much fewer than people think.
“Banking is not easy to come by,” he said. “Businesses don’t have access to growth capital through traditional bank loans. That helps the illegal market.”
Cathy Iannuzzelli, co-founder and chief payments officer for KindTap, said being forced to conduct business strictly in cash adds a major expense to dispensaries.
“The dispensaries have a problem, but you can’t solve it with a product that’s fundamentally illegal,” she said. “It’s defrauding the credit card association and it has the potential to be considered money laundering.”
In one high profile case, Ruben Weigand and Hamid “Ray” Akhavan last year were sentenced to 15 months and 30 months respectively in federal prison for handling $150 million in credit card and debt card purchases for marijuana by disguising the transactions as creams and dog products and other goods, U.S. prosecutors said in June.
“People have ended up in jail because of the miscoding of point of sale terminals,” Iannuzzelli said. “It has gone from being a murky area to being outright dangerous for them to flout the rules. People will still do it. You’ll find bad actors who convince dispensaries that it’s OK. Cannabis operators will believe some of what they’re being told but they are being told lies.”
For its part, KindTap has been building its own payment network through direct relationships with merchants and consumers for its debit card and line of credit products.
KindTap either lends consumers the money for credit purchases, or it helps move money to the merchant through its network. Everybody in KindTap’s network has to have a bank account. The company moves money between the merchant’s bank and the consumer bank.
KindTap is coming out of its soft launch in Massachusetts and offering its credit and pay now products in more markets.
“You will see products such as KindTap picking up more steam as the most convenient alternative to cash as cashless ATMs are being ripped out,” she said. “You’ll see a lot more ATM transactions in dispensaries until electronic payment products such as KindTap gain enough market share.”