Even under threat of thousands of dollars in daily fines, some marijuana merchants still use a form of checkout that's designed to hide the nature of the payment from card companies and the authorities.
Called cashless ATMs, the payment option resembles a normal terminal placed at the point of sale and enables merchants to indirectly support debit card payments. Visa and Mastercard explicitly prohibit cashless ATMs, with
"Even after the most recent
To use a cashless ATM, a consumer requests an amount of money at the machine, normally the cost of the cannabis product rounded up. The consumer provides their PIN, and obtains a receipt. The merchant deducts the purchase, fees and taxes and gives the product and change to the consumer. For example, a $55 purchase would appear as a $60 withdrawal. The retailer subtracts the cost of the weed from the rounded up value, and gives the difference to the consumer (in this case, $5 change). The consumer may also pay an ATM fee on top of the purchase price. On a bank statement the payment appears as a withdrawal and not a payment at a dispensary.
Legal weed merchants for years have used this system to reduce the risk of carrying cash at their stores, to track sales tax liabilities and to indirectly access a financial system that largely does not support cannabis. But it's illegal in most or all cases. Cashless ATMs potentially violate money laundering laws, add extra fees for consumers and are the bane of the ATM lobby and card networks.
In an email, Mastercard's public relations office said "an ATM by definition is a machine that dispenses cash. The concept of making a transaction appear as a 'cashless ATM' in order to sell an illegal product is deceptive in nature and does not meet Mastercard standards for legality and transaction transparency."
Cash out
Merchants and other sellers using cashless ATMs are subject to fines of up to $200,000 per day under a
"At present, it is very difficult to police these violators and it creates a great deal of frustration to both ATM and [point of sale] industry stakeholders," said David N. Tente, executive director of USA and the Americas for ATMIA, an ATM trade group.
Cashless ATMs are "very harmful" to the ATM industry, Tente said. "These are point-of-sale terminals that are handling retail sales transactions as if they were ATM withdrawals. All of which violates network and processor rules."
These transactions can also cause headaches for the consumer's bank, according to Cassandra Ingram, general counsel for CanPay Debit.
"Because cashless ATM transactions appear on the customer's bank statement as a "withdrawal," the issuing institution does not know that a cannabis purchase was made," Ingram said.
In this case the issuing financial institution is unable to meet its obligations under the Bank Secrecy Act and anti-money laundering regulations, she said.
"Sponsor financial institutions face more risk because they provide the cashless ATM operators an account to process these transactions," Ingram said. "These reasons, among others, are why it is important to operate within a compliant cannabis banking program."
A search in early June revealed about a dozen firms that offer direct or indirect access to or information about cashless ATMs. These firms did not return requests for comment.
"My advice to cashless ATM users, just as to those that operate in genomics, crypto, cannabis and fintech, is to coordinate with legacy banking institutions and regulators, and embrace best practices to avoid litigation, administrative action or fraud," said Yuri Vanetik, legal advisor for
In traditional retail, merchants are not expected to know the differences, or nuances, between different payment options, but those in compliance have the responsibility of ensuring what is being offered works within the law, Ingram said, adding that in avoiding a banned payment practice knowing who is the "'operator" and who is the "owner" of the "ATMs" is crucial.
"Each role has its own compliance requirements. If your contract is silent on this issue, then that's your first red flag," Ingram said.
Cannabis merchants need to understand the parties that make up the payment ecosystem, Ingram said. If working with an Independent Sales Organization, the merchants need to ask who owns the underlying cash machine and check for lawsuits or other legal issues.
Funding timelines could also be a red flag, Ingram said. "In a traditional retail setting, settlement funding should take no more than two banking days. If settlement funding takes any longer than that, then ask which other entity is receiving the funds before it arrives in your bank account, and the name of the entity involved."
Not yet SAFE
The sometimes-legal status of cannabis in the U.S. indirectly contributes to the continued use of cashless ATMs.
The lack of federal legalization has kept
"Cannabis is a highly regulated market in so many ways other than payments, which allows for noncompliant methods to coexist alongside compliant solutions," said Stuart Larkins, a general partner at Chicago Ventures, which has invested in technology firms that operate in the legal cannabis industry.
This sets a precedent that doesn't exist in many other industries where financial regulations and rules are clearly set and enforced, according to Larkins. Cashless ATMs and other card-based options operate in this "gray area," Larkins said.
"As an investor, we're going to look for and support companies that do things the right way, with compliance as a priority, and adhere to existing regulatory framework," Larkins said.
The growth of legal cannabis has created a market for firms that provide legal payment choices outside of the mainstream banking and credit card industries.
But despite the surge in digital payments and various innovative technologies entering the market, cashless ATMs provide a unique and viable solution to the challenges posed by the federally illegal status of cannabis in the United States, said Vanetik.
Golden Ark, which launched in 2020, uses a blockchain and a metaverse. Consumers join a virtual world to sell cannabis, make social connections and sell cannabis-related NFTs that serve as a form of currency to pay for real weed.
All of that is legal in most states, but many sellers still opt for prohibited payment methods, either out of inertia or to avoid the more tangible danger of selling cannabis.
"Until traditional banking services become readily accessible for cannabis-related businesses, cashless ATMs will likely continue to play a significant role in cannabis payments," Venetik said. "The cashless ATM system is not a perfect solution. It can come with higher transaction fees and complexities in implementation and operation. But for now, it represents a key tool in the financial toolkit of the cannabis industry."
Regulatory clarity on cannabis could come from the
"These payment workarounds are critical and will continue to be the only alternative for the foreseeable future until the passage of the SAFE Act," said Gilles Ubaghs, strategic advisor for commercial banking and payments at Aite-Novarica Group, noting that Visa and Mastercard quickly supported
"Once the regulatory burdens and legal risk lift in the U.S., the card companies [likely will leap] into it with immediate effect and really solve this cash problem in an instant," Ubaghs said.
While it appears the text of the SAFE Act would provide the card networks and processors a safe harbor to operate openly in the cannabis industry, it depends on each entity's internal policies. Cannabis will still be a Schedule 1 drug and facilitating the sale of cannabis would be a violation of the Controlled Substances Act, according to Ingram.
"The safe harbor provisions that financial institutions, card brands and processors would rely on don't seem protective enough and could discourage them from operating in the cannabis industry," Ingram said.
"With respect to the purchase of marijuana, Mastercard's rules require customers to conduct lawful activity where they are licensed to use our brands," said the card network's PR office. "The federal government considers marijuana sales illegal, but is currently not challenging state laws that legalize marijuana sales," Mastercard's PR office said. "Given this complexity, we continue to monitor the situation, seek guidance from regulators and inform merchant acquirers of any new developments."
