Last week, Mastercard issued letters to payment processors and banks, directing them to disallow marijuana-related transactions on the company’s debit cards.1 This move results from the conflict between state-level cannabis legalization and ongoing federal policy of criminalization, creating a challenging, complex and constantly evolving situation for the industry. Even as cannabis has become legal under the laws of 38 states, payment options are dwindling, forcing cannabis companies to rely on the risky medium of cash or to improvise using less well-known solutions than debit and credit cards.
On July 26, 2023, Mastercard instructed financial institutions providing payment services to cannabis merchants to terminate such activities immediately. Mastercard explained that its rules require customers to use its services only for “lawful activities.” The United States federal government still considers cannabis sales illegal under the Controlled Substances Act, so cannabis transactions are not permitted under Mastercard’s rules.
Mastercard is not the first financial institution to take this step. In 2021, Visa issued a memo halting the use of cashless ATMs at cannabis dispensary checkouts. “Cashless ATMs are primarily marketed to merchant types that are unable to obtain payment services—whether due to the Visa Rules, the rules of other networks, or legal or regulatory prohibitions,” Visa’s memo stated. “Therefore, supporting this scheme affects the integrity of VisaNet and the Plus network, as well as the Visa payment system.”
Impact on the Cannabis Industry and Payments
The Visa and Mastercard policy directives create difficult challenges for the cannabis industry. The ambiguous status of cashless transactions means that a majority of marijuana businesses continue to operate cash-only models. This makes them highly susceptible to robberies, especially during the transportation of large sums of cash for deposits and the transfer of cannabis products.2 After a recent uptick in robberies, there has also been an increase in alternative payment forms such as ACH payments, e-checks using ACH rails, digital wallet purchases, Bitcoin exchanges, and debit card purchases made through non-Mastercard or Visa financial institutions. All of these alternatives come with their own security, compliance, and customer-convenience issues.
If you are a cannabis operator scrambling to figure out how to proceed or if you are a cannabis fintech company looking for guidance on how to comply with the fallout from this decision or to help mitigate risks, Prince Lobel Tye attorneys are experienced in navigating these complex matters and are here to help advise you. Please reach out to Max Riffin or anyone on the Prince Lobel Tye LLP Cannabis team.
With thanks to Alexander Hymowitz for his work on this alert.
1 Kary, T. (2023, July 26). Mastercard demands shutdown of marijuana purchases on its debit cards. Bloomberg. https://www.bloomberg.com/news/articles/2023-07-26/how-to-buy-pot-not-with-a-mastercard-ma-debit-card-company-says
2 The Associated Press. (2022, April 20). Pot shop robberies are fueling calls for a U.S. banking bill. NPR. https://www.npr.org/2022/04/20/1093841615/pot-shop-robberies-are-fueling-calls-for-a-u-s-banking-bill