Mastercard Demands Shutdown of Marijuana Buys on Its Debit Cards

Mastercard Inc. has told payment processors and banks to stop allowing marijuana transactions on debit cards, in a blow to the struggling cannabis industry and a boon to transparency in the banking system.

“As we were made aware of this matter, we quickly investigated it,” a Mastercard spokesman said of the use of PIN debit cards on the company’s network for pot purchases. “In accordance with our policies, we instructed the financial institutions that offer payment services to cannabis merchants and connect them to Mastercard to terminate the activity.”

Following cease-and-desist letters sent by Mastercard last week, companies that facilitated PIN debit payments for marijuana have been struggling to offer other solutions to dispensaries who use them, said a person familiar with the issue, asking not to be identified discussing private information.

It remains unclear whether other digital options exist for marijuana shoppers. Visa Inc., which has also made efforts to shut down cannabis purchases on its networks, didn’t immediately return a call for comment. Nationwide card networks are reluctant to allow marijuana transactions because the drug remains federally illegal, despite being legal in many states.

The crackdown means cannabis consumers will have fewer convenient ways to buy marijuana without cash. It’s a hard-won victory for banks and credit-card companies, which have fought to stay ahead of technologies that present a risk to their controls against money laundering and fraud.

Second Wave

The shutdowns mark the second wave of problems for the digital payment solutions that have sprung up to serve cannabis consumers. The first wave affected cashless ATMs, a solution that becamea $7 billion loophole in the banking system. That segment was dominated by a company run by two individuals recently charged in a federal indictment with insider trading related to Donald Trump’s media company. They have pleaded not guilty.

The current wave of shutdowns affects the use of PIN debit solutions. Commonly used at gas stations and grocery stores, they had also become an alternative to cashless ATMs to purchase marijuana.

Dispensaries often struggle to figure out whether the payment solutions they buy from little-known processing companies are legal. Consultants on compliance in the US cannabis industry, where the drug is illegal at the federal level but legal in 38 states, said the shutdowns were already causing tumult for clients.

“My phones are ringing off the hook — people are asking for payment alternatives,” said Peter Su, director of specialty banking at Hanover Bank. Su has run cannabis banking programs and consulted on payment solutions in the industry. Calls started coming in last week and have intensified this week, Su said.

Hefty Surcharges

While dispensaries can operate in cash, cashless-ATM and PIN-debit systems are easier for customers, who have been willing to pay hefty surcharges for the convenience of paying with a card. Those surcharges gave rise to hundreds of millions of dollars in revenue for an opaque industry of payment processors. The surcharges also hurt large banks that cover out-of-network ATM withdrawals; many were reimbursing customers for $2 or $3 transaction fees that looked like ATM withdrawals rather than marijuana purchases.

While smaller, regional banks will serve cannabis companies, major institutions and credit-card networks like Visa and Mastercard don’t want weed transactions on their networks because of the federal illegality. Banks are also supposed to “know their customer” and be able to trace transactions in order to prevent fraud and money laundering.

“Our rules require our customers to conduct lawful activity where they are licensed to use our brands. The federal government considers cannabis sales illegal, so these purchases are not allowed on our systems,” Mastercard said in an emailed statement.

Little Headway

The development will be a blow for the cannabis industry, where stock prices have been depressed due to a lack of headway with national legalization. Efforts to pass legislation that would give cannabis companies more access to banking services have also failed so far.

Following the crackdown on cashless ATMs, some businesses turned to PIN debit, and the current shutdowns leave them with even fewer options.

“More people have migrated to PIN debit in the last year and a half as the cashless ATMs have had issues. If the PIN debit solutions go away, it leaves people back with ACH or cash,” said Tyler Beuerlein, chief strategic business development officer of Safe Harbor Financial Services, which provides banking and lending to cannabis nationwide.

While automated clearinghouse, or ACH, payment solutions seem to provide less compliance risk, they are unwieldy for customers, requiring them to provide a bank routing number and account number. Cash, while a mainstay of the industry, is said to be riskier for dispensaries because it exposes them to potential theft.

To contact the reporter on this story:
Tiffany Kary in New York at tkary@bloomberg.net

To contact the editors responsible for this story:
John J. Edwards III at jedwardsiii1@bloomberg.net

Tonya Garcia

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