Eighteen states and the District of Columbia have legalized medical marijuana, and some dispensaries enjoy millions of dollars in annual sales. However, such establishments may not be ideal clients for ISOs unless they and their sale agents exercise caution, say those who work with the medical marijuana industry.
Dispensaries are facing increased resistance from federal authorities and the major card brands, making maintaining banking relationships and obtaining merchant transaction services more difficult.
"Over the course of the last seven years, despite the fact that we are an excellent financial services customer, we've had our bank accounts closed four times and our merchant services processing closed more times than that. I don't even remember how many times it's happened," says Steve DeAngelo, co-founder and executive director of Harborside Health Center, the country's largest dispensary, which has locations in Oakland and San Jose, Calif.
"As of right now, we are unable to offer credit card services to our patients, forcing us to operate on an all-cash basis, which is obviously a serious problem, both from a public safety point of view and from a financial record-keeping point of view," DeAngelo says.
Although Alameda County recently awarded Harborside and DeAngelo a commendation of service, the Internal Revenue Service is "aggressively auditing" the dispensary, and the "Treasury Department is pressuring banks to close the accounts of not only Harborside, but just about every dispensary nationwide," he says.
At the root of this conflict is the fact that marijuana possession, cultivation and distribution remain illegal at the federal level. Federal authorities have shifted their stance on enforcement. In 2009, the U.S. Department of Justice stated that prosecuting patients or caregivers who comply with existing state law "is unlikely to be an efficient use of limited federal resources." However, two years later, the department clarified the term caregivers to mean "individuals providing care to individuals with cancer or other serious illnesses, not commercial operations cultivating, selling or distributing marijuana." In the 2011 memo, officials say that those operations, "and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law," and that "those who engage in transactions involving the proceeds of such activity may also be in violation of federal money laundering statutes and other federal financial laws."
Dispensaries don't just draw scrutiny from the federal government but also from banks and the card brands, says Kris Krane, managing partner at 4Front Advisors, a Phoenix-based consulting firm that serves dispensaries.
"Banks are incredibly reluctant to do business in this space," he says. "The major banks have all said unequivocally that they're not going to do this. They won't open bank accounts. They won't service merchant services processing."
Banks working with dispensaries could face money laundering charges or lose their Federal Deposit Insurance Corporation insurance, Krane says, so those dispensaries that do have bank accounts often have them with small, local banks or credit unions. Even then, he says, within a year or two, a high-ranking bank employee typically begins worrying about the risks of doing business with the dispensary and shuts down the accounts.
The card brands aren't eager to deal with the industry, either, he says: "American Express has made it clear that they will not do business with dispensaries."
Visa and MasterCard have issued statements indicating they do not allow their payment systems to be used for illegal activities, says Blair Thomas, co-founder of Los Angeles-based eMerchantBroker.com LLC, which specializes in payments processing for high-risk industries. Thomas says such statements create confusion because most dispensary owners comply with all applicable state laws.
Still, that fact hasn't encouraged ISOs to continue offering services to dispensaries.
"In July of 2012, the last major ISO that provided processing for a majority of the market closed down all of the dispensaries in its portfolio," Thomas said in an emailed message. "This move came after pressure from the ISO's sponsor banks and threats of hefty fines."
To avoid such problems, some ISOs mislead both the dispensaries and their processors, says Joe Altieri, owner of Best Point of Banking, which is located in Riverside, Calif., and serves dispensaries wherever they're legal. ISOs intentionally miscode the dispensaries to hide the true nature of the business and get the account approved, he says.
But that practice very easily backfires.
"Somewhere along the way, somebody disputes a charge and draws attention to that particular dispensary," he says. "At that point, the dispensary is looked at a little closer and the account is shut down."
To avoid blame, ISOs and agents may then claim the dispensary misled them, Altieri says, which may cause the dispensary to have its funds held up or to be put on the terminated merchant list.
Best Point of Banking responds by offering point-of-banking services, also known as cashless ATM services.
"The transaction is rung up on the point of sale system," Altieri says. "The patient offers up his credit card, and it's swiped through the terminal device. It has to go out in five-dollar increments. If you ring up a $21 transaction, it goes out for as much as the patient wants, but for a minimum of $25. The money is given back to the patient, and the patient uses it for whatever he wants. It works for credit cards. On a credit card, it's considered a cash advance."
Point-of-banking is the only card processing method that sidesteps the card brand restrictions and does not require miscoding accounts, he says. He also says it can benefit dispensaries and ISOs.