What risks do gun shops bring to banks and payment processors?

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With the First National Bank of Omaha severing its credit card deal with the NRA and Bank of America reevaluating its connections to gun sellers, it would seem that gun shops should be scrambling to keep their bank accounts open.

After all, other perfectly legal but high-risk businesses — such as cannabis sellers — have been forced to stick to cash or use creative workarounds like "cashless" ATMs, so banks are clearly willing to turn down business if they worry about reputational or political pressure.

But even as the push for gun control reaches unprecedented levels, gun sellers already have their own processes in place for accepting payments that don't rely on traditional bank-issued cards. And they are also scratching their heads as to why banks see their businesses as high-risk in the first place.

At Central Texas Gun Works in Austin, Texas, owner Michael Cargill had to get creative after banks kept closing his accounts or otherwise placed hurdles in the way of his doing business with them.

“At the time, we were having issues with different credit card processors who wanted to charge higher fees because we’re a gun dealer,” he said. “We had issues with some of them canceling our accounts because we deal in gun sales.”

The dealer began accepting bitcoin, litecoin and ether in 2013. His store has had a cryptocurrency ATM in its lobby since 2014, allowing customers to purchase bitcoin and litecoin using cash. Cargill is quick to note that this process only addresses the store's issues with banks; it doesn't serve as a workaround to regulations that require it to know who is buying its guns.

“When you walk into a gun store to purchase a gun, we’re actually going to do a background check on you,” he said.

Indeed, this makes Cargill question the banks' thought process when cutting ties with his business, since all federally licensed gun dealers are required to get background checks on potential buyers.

“You would think that the majority of your credit card processors would actually love gun stores because you get an FBI background check before you complete the transaction,” Cargill noted. “I could sell knives, I could sell other things and there’s no background check when it comes to that stuff, but with a gun store, you’re going to have a complete FBI background check."

Sam Ditzion, CEO of Tremont Capital Group Inc., a company that specializes in the ATM industry, said the shaky relationship between banks and firearms is not new.

In 2013, the Department of Justice and the FBI launched Operation Choke Point, putting bank and merchant relationships came under a microscope. This led to many banks cutting ties with porn stars, gun shops and even foreign diplomats.

“What I think happened is that a lot of the banks basically used that as an opportunity to conclude that certain merchant types were too high risk from a broad perspective,” he said.

Alternative payment companies are no different. PayPal, Square, Stripe and Apple simply don’t allow customers to sell guns using its services; PayPal used to work with casinos, but eBay put a stop to that when it bought PayPal in 2002 (PayPal spun off from eBay in 2015).

Ditzion said it is possible that credit card companies could follow suit.

“I think that’s much more of a business and/or political decision that could be made at some point,” he said. “Similar to in recent weeks, you see certain airlines no longer giving discounts to NRA members, which caused some controversy.”

But as with any business relationship, the size of the client matters.

“It would be surprising for banks or credit card networks to no longer be willing to work with Dick’s Sporting Goods, and that’s very different than a very small private business that only sells firearms,” Ditzion said. “It becomes very complicated and will become very controversial.”

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Compliance Risk management Payment processing Bitcoin Cryptocurrencies Texas