Most banks and payment processors are in no hurry to help marijuana sellers accept credit card payments where the substance can be legally sold, despite a clear opportunity to modernize what is largely a cash-based market.

Some companies have tried creative alternatives such as cashless ATMs, which treat each card swipe as a withdrawal or cash advance rather than a direct payment to the marijuana dispensary. Recent guidance from the Financial Crimes Enforcement Network would seem to embolden financial institutions, but experts say that guidance is as much cautionary as it is comforting.

"Banks do not think those rules are sufficient to protect them," says payments industry analyst Todd Ablowitz, who has watched the process closely in Colorado, where his Double Diamond Group, LLC is located.

The signals coming from the major card networks are just as conflicted.

Visa has told merchant acquirers to decide for themselves what to do, while MasterCard is advising its acquirers to wait for more guidance. American Express says it blocks transactions associated with marijuana businesses and categorizes medical marijuana dispensaries as ineligible for a merchant contract or funding. Discover prohibits its cards from being used to buy marijuana, considering all such purchases illegal under federal law. PayPal did not respond to inquiries about its policy for marijuana transactions.

"This will change over time as the legalities over medical and recreational marijuana in certain states has become more codified," Ablowitz adds.

Fincen director Jennifer Shasky Calvery says her agency's guidance was meant to help financial institutions legally establish relationships with marijuana merchants, rather than scare them off.  Fincen "is focused on trying to get the cash off the street and the dangers that that could bring," Shasky Calvery said in an earlier interview with PaymentsSource.

So what are the risks for banks that choose to work with legal marijuana merchants, and who is most likely to test the waters?

Banks may run afoul of money laundering violations and other issues stemming from what is largely a cash business, according to the Colorado Bankers Association. The recent federal directive serves as warning to banks thinking about working with marijuana merchants, says Don Childears, president and CEO of the association.

"At best, this amounts to ‘serve these customers at your own risk’ and it emphasizes all of the risks," Childears says in a statement issued in response to the Fincen guidance. "This light is red."

Fincen told banks last month that it is critical to conduct thorough due diligence in evaluating every aspect of a marijuana shop's operations. Banks must verify and review licenses, request information related to the business and its partners, as well as understand "the normal and expected activity for the business, including the types of products sold and customers purchasing those products," Fincen states.

In addition, financial institutions would be required to file various reports, particularly if they suspect some illegal activity at these business.

Washington Bankers Association president Jim Pishue notes that while federal guidelines don't change the law regarding marijuana, they are a sign of the times.

"It can change from administration to administration," Pishue says in a statement. "These guidelines may give some a little bit of confidence, but I don't think it will give them enough to bank these folks."

Smaller banks in Colorado or Washington may be the first to offer marijuana merchant accounts, with others possibly following their lead. Nonbanks are also likely to work with these merchants, and Oceanside, Calif.-based Citadel EFT Inc. has already indicated it will help businesses establish merchant accounts in the marijuana trade.

"We plan to offer solutions that are bank independent which don't require use of credit or debit cards or ACH transfers," Citadel president Gary DeRoos says in a prepared statement. "We are joining this market with a real solution for the burgeoning legal marijuana industry."

DeRoos did not respond to inquiries for further details.

Payment providers like Citadel and others will likely have a difficult time without sponsoring banks behind the accounts, says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

"The bottom line is that when you apply for a merchant processing agreement, they are the ones applying directly and they have to have a sponsoring bank," Crone says.

Some providers have utilized payment schemes in which a risky merchant is not cited as the merchant of record on a transaction, Crone says. The merchant of record would be the payment provider, he adds.

A sponsoring bank would have to decide if it would allow those types of transactions to go through for processing, Crone says.

"The federal government is really looking the other way now," Crone says. "Some state interpretations of the law say it is legal, so it's left for the banks to decide their risk tolerance for how far they want to push it and accept this merchant category."

The risk for banks is different in the marijuana scenario because "it comes in the form of a regulatory cloud that comes from the national level, and card processing is no longer regionalized, it is nationalized," Crone says.

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