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The cannabis industry is one of the fastest growing industries in the United States. Beginning with California’s legalization of marijuana for medicinal use in 1996 and kicking into overdrive when Colorado and Washington legalized marijuana for personal use in 2012, state-level legalization and decriminalization of marijuana has spread prodigiously in recent years. Recreational marijuana use has been legalized in 17 states and in the District of Columbia. Medical marijuana use has been decriminalized to one extent or another in more than 20 additional states. More states are expected to follow these trends in the coming years.

 

This ongoing spate of laws legalizing marijuana use has produced a burgeoning legal cannabis industry. According to Grand View Research, the United States legal marijuana market was valued at nearly 23 billion dollars in 2020 and is expected to reach more than 70 billion dollars by 2027.

But marijuana is still classified as a Schedule I substance under the Controlled Substances Act of 1970 and is illegal for any purpose at the federal level. This conflict between state-level and federal legality produces significant complications for the nascent legal cannabis industry, including issues relating to accepting payment.

In fact, this legal murkiness can have a sort of reflexive, feedback effect in which it leads to a higher volume of chargebacks, which causes greater conflict with regards to the legal contradictions, and so on. This article will explore how those complications function and what cannabis businesses can do to try to reduce their susceptibility to chargebacks and their negative consequences.

Payment Card Issues In the Cannabis Industry

Because mariijuana is still illegal at the federal level, card brands generally block payments to merchants for cannabis purchases that are allowed by state law. For brick and mortar merchants, this often means cash transactions. But this is a less viable solution for the online cannabis industry.

Some merchants have tried to circumvent these restrictions by taking advantage of the fact that merchant category codes (MCC) are not specific enough to necessarily identify purchases as cannabis products. Until 2019, online marijuana marketplace Eaze allowed merchants on their platform to accept credit and debit card payments thanks largely to the merchants selling their wares under vague MCCs that didn’t clearly identify them as cannabis products. However, the risks of this approach are evident in last year’s arrest of two cannabis merchants who were charged with bank fraud for selling products that were labeled with MCCs for such items as dog toys and soda.

As if this weren’t complicated enough, it’s possible that this effort by the Department of Justice (DOJ) to prevent the use of payment cards for cannabis transactions may violate the Rohrabacher-Farr Amendment. The Rohrabacher-Farr Amendment is federal legislation that prevents the DOJ from interfering with states’ medical cannabis laws. Because of the unusual political dynamics surrounding cannabis, it has never been passed into law on a permanent basis but is, instead, introduced every year as an amendment to some other legislation, usually a spending bill.

There is federal legislation, the SAFE Banking Act, that was passed by the House of Representatives in 2019 but was never put up for a vote in the Senate. This bill would clear up a number of the complications and contradictions surrounding payment processing for the legal cannabis industry. Perhaps it will be reintroduced and passed by the 117th Congress and signed into law by President Joe Biden. Until that happens, however, legal cannabis merchants will have to operate within grey markets with regards to card payments.

The Cannabis Industry’s Susceptibility to Chargebacks

All merchants have to worry about excessive chargebacks to one extent or another. But legal cannabis merchants are particularly at risk due to specific attributes of the industry itself.

Similar to other “high risk” industries that operate under a geographically variable legal status, such as adult entertainment and gambling, the cannabis industry could find itself as an enticing target for criminal fraudsters. There are also examples of criminal fraudsters who incorporate their own cannabis businesses into their fraud schemes. These associations with crime are unfair for the vast majority of the legal cannabis industry but they do still increase the risks for those businesses.

The fact that the cannabis industry is an emerging industry full of many new businesses also makes cannabis merchants at potential risk for criminal fraud. This is exacerbated by the unclear and frequently changing legal status of payment policies and regulations for legal cannabis businesses as described above. The confusion created by these policies and regulations affords opportunities for fraud. Additionally, this shifting, legally indistinct payment framework could potentially make merchants who have been victimized by fraud wary of or barred from pursuing the standard avenues for recourse.

While both the medical and social consensus toward cannabis use has been shifting toward acceptance, there are still potentially adverse elements of cannabis as a drug that can lead merchants toward higher rates of chargebacks. Marijuana does have addictive qualities, which can lead to circumstances in which consumers make purchases that they later regret, causing them to file chargebacks. This is a common form of chargeback fraud found with other products that have similar tendencies toward addiction, including video games.

Additionally, the fact that legal cannabis products are generally age restricted necessarily lends itself to a form of friendly fraud known as family fraud. In a hypothetical example, a teenager, who is not legally old enough to purchase cannabis products, uses their parent’s payment information without the parent’s knowledge in order to make a purchase. The parent sees this purchase, does not recognize it, reports it as fraud, and requests a chargeback.

Another possible source of friendly fraud for cannabis businesses relates to the aforementioned strategies of using vague MCCs and billing descriptors. This can lead to chargebacks because customers may not recognize their own legitimate purchases due to circumspect language in their billing statements.

While this potential susceptibility to fraud is exacerbated by the unsettled and ambiguous payment card regulations for legal cannabis businesses, it will still exist in the future even if the legality of payment card purchases is standardized thanks to the SAFE Act or something similar. Chargebacks are an inevitability and legal cannabis businesses necessarily face a higher risk of chargebacks. As a result, every cannabis business should have procedures in place to reduce their risk of chargebacks.

Six Easy Ways Cannabis Merchants Can Reduce Chargebacks

As a cannabis merchant, you might find yourself in the paradoxical situation of being in an exciting, potentially lucrative industry while also facing challenges such as the aforementioned problems with processing transactions with traditional payment cards and being at risk for excessive chargebacks. While there are limited options (for now) with regards to the payment card issues for the cannabis industry, there are a number of business practices that you can adopt to protect your business, including:

Clearly Explaining Your Billing Descriptors to Consumers

It is important to describe your merchandise clearly to your customers. If you choose to use circumspect terminology to protect consumer discretion, communicate that with your consumers in order to reduce instances of friendly fraud.

Choosing Your Business Partners Carefully

There are merchant account providers who specialize in the cannabis industry. They may have effective legal strategies for managing the contradictions and confusion relating to cannabis transactions. However, as with anything else, there are certainly merchant account providers who oversell their knowledge and expertise. A good merchant account provider can help your business thrive while a bad one can sink you. Do your research and choose your partners well.

Monitoring Your Affiliates

Affiliate marketing can be an especially valuable tool to emerging businesses such as those in the cannabis industry. But shady or poorly run affiliates can cause a wide variety of problems for you and your business. A comprehensive fraud prevention program includes in-depth affiliate application reviews, regular communication with affiliates, and abuse monitoring.

Emphasizing Customer Service and Communication

Every business has cancellations, unsatisfied customers, and other similar sorts of conflicts. Do not let these inevitable issues turn into a bevy of chargebacks. A refund is always preferable to a chargeback and well trained, easily accessible customer service representatives can help reduce the frequency of consumer issues becoming chargebacks.

Making Cancellations Easy to Process

No business wants to lose a customer. But a cancellation costs less and produces significantly fewer headaches than a chargeback. Let your customers know how to request a cancellation, particularly if you operate on a subscription model. And do not impose onerous requirements about returning unused merchandise in the event of cancellation.

Making Use of Chargeback Management Tools

The best chargeback-reducing policy changes are the ones that come from an understanding of what is causing the most costly chargebacks. Chargeback management software that allows you examine your payments ecosystem at both the macro and micro level is essential. It allows you to spot broad trends while also focusing in on the fine-grained details. Any good chargeback management strategy necessarily begins with an analysis of the data generated by this kind of software.