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The medical marijuana business is booming in states where it’s legal, but dispensary owners still haven’t found a large-scale solution for processing credit card transactions. Eager to profit from the fast-growing, legal cannabis market, some entrepreneurs are offering new approaches, but it is too soon to tell how they’ll hold up in the long term. With medical and recreational marijuana still federally illegal — and banks and merchant processors shying away from doing business with firms that clearly identify themselves as dispensaries — many business owners continue to operate on a cash basis.

For instance, former Morgan Stanley investment banker Derek Peterson, co-owner of the Blum Oakland dispensary in Oakland, California, says the dispensary, which serves 700 to 800 patients a day, does not accept credit cards. It doesn’t have a merchant account — the standard bank account businesses use to conduct credit card transactions. Instead, it offers customers the convenience of an on-site ATM, a solution that is common for medical dispensaries, and conducts all of its transactions with customers in cash.

“I have come across dispensaries that take credit cards. I don’t think they are being honest with the merchant services company,” says Peterson, who is also CEO of Terra Tech, a publicly traded firm that, through its subsidiary GrowOp Technology, builds greenhouses and other agricultural technology. “They’re jumping from merchant processor to merchant processor. That’s how it’s done from a temporary standpoint.”

Twenty-three states, plus the District of Columbia, have passed medical marijuana laws. Two, Colorado and Washington state, allow marijuana for recreational use.

The payment processing situation for dispensaries could change quickly if marijuana becomes federally legal. Many industry players and observers know that keeping a lot of cash on hand puts dispensaries and recreational shops at risk of record-keeping snafus, internal theft and robbery. Meanwhile, new businesses eager to tap into the growth of the exploding cannabis industry are offering workaround solutions.

One such player is GreenStar Payment Solutions, based in Denver. In May, it announced it had set up a cashless ATM system that allows dispensary customers to pay with a debit card. The solution works because the ATM network does not use the same processing system as the credit card networks. Debit card users at the dispensaries pay a $2 fee, like they would at a many ATMs.

“The customer just swipes his card on the terminal, puts in his PIN code, and the funds go from his cash account to the dispensary’s cash account,” says Greg Lambrecht, founder and president of Singlepoint, a publicly traded mobile application service provider and marketing firm based in Phoenix that teamed up with two other companies to launch GreenStar. The other partners in the joint venture are Advanced Content Services, a publicly traded company in Fort Wayne, Indiana; and GreenHouse Payment Solutions, a payment processing provider in Denver.

So far, GreenStar reports it has more than 100 accounts in Arizona, Colorado and Washington state. “We haven’t had any problems,” says Lambrecht.

The bitcoin alternative

Some in the marijuana industry hope that offering dispensary customers the option of paying with bitcoin will make transactions easier, but at least one major bitcoin processor has reportedly been reluctant to handle such transactions. Specialized services are stepping in to fill the gap.

PotCoin, a decentralized crypto currency similar to bitcoin, entered the marketplace in January, hoping to become a standardized form of payment for the cannabis industry. It lists 38 merchants on its site as accepting the digital currency. Merchants can accept PotCoin for in-person sales or online through an e-commerce site integrated with its system.

BitMD, a service created by Bitcoin Brands, offers ATMs and point-of-sale terminals to medical providers who want to accept bitcoin for transactions. “We offer a payment solution we’ve tailored for medical payments specifically targeting high-risk clients that can’t get merchant accounts — one of them being the medical marijuana and recreational cannabis space,” says Peter Klamka, CEO of BitCoin Brands. “The product exists and has been offered. I haven’t sold a single one yet, but I expect to, soon.”

BitMD charges $200 to set up merchants to accept bitcoin through their own websites. The company also offers point-of-sale terminals. Customers who want to pay that way hold up their smartphone to an iPad, terminal or laptop on which the system is running. “The wallet is on your phone,” explains Klamka.

The cost of accepting bitcoin may be lower than other payment solutions. “There are no ongoing transaction fees,” says Klamka. Merchants will, however, probably still want to use a bitcoin processor that can immediately convert the virtual currency to U.S. dollars, and may pay transaction fees to the processor. Those fees are lower than traditional credit card transaction fees, though.

Credit cards on the sidelines

Initially, the major credit card companies resisted processing transactions for state-legal cannabis businesses. Then, in August 2013, the U.S. Justice Department announced it would not try to challenge state laws that allow for the medical and recreational use of marijuana, provided the laws didn’t conflict with eight new federal enforcement policies, such as preventing the distribution of marijuana to minors.

I have come across dispensaries that take credit cards. I don’t think they are being honest with the merchant services company. — Derek Peterson

Co-owner, Blum Oakland dispensary

Some players in the industry took hope in January, when the Denver Post published a statement from Visa. The credit card giant noted that it adheres to the rule of law and seeks to prevent its network from being used for unlawful purposes. It went on to point out that the federal government has announced it would not challenge state laws that legalize and regulate marijuana sales. “Given the federal government’s position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers (banks) are best suited to make any determination about potential illegality,” Visa said.

When CreditCards.com contacted Visa in August, a representative sent the same statement. MasterCard responded to an initial inquiry about its policy, but did not make a statement by the time of publication.

American Express has taken a firmer stance. “American Express prohibits the use of the card for medical marijuana transactions. We adhere to federal law in such matters,” a spokeswoman said in a statement sent in response to a query from CreditCards.com.

Banking a problem, too

Besides the credit card companies, banks have also been a sticking point for the marijuana industry in accepting noncash payments. While some cannabis-related businesses use their personal bank accounts to conduct business, it’s not an ideal situation — for the companies or the government.

Federal and state officials have a powerful incentive to regulate the industry: the chance to collect more taxes. “The funny thing is they are inviting tax fraud,” says dispensary owner Peterson. “They are giving people another mechanism to hide sales, revenue and income. It’s a better situation, from an accountability standpoint, to provide the banking regulations and credit card transactions.”

The U.S. Department of Treasury issued a memo in February saying it would allow banks to serve cannabis businesses under certain conditions and rules — such as verifying that the business is licensed and registered as required — but few banks are doing so.

Meanwhile, in Colorado, where medical and recreational marijuana are state-legal, Gov. John Hickenlooper in June signed legislation that would allow the creation of a co-op banking system for marijuana businesses. The law would let dispensaries pool their money and receive basic banking services, if the Federal Reserve OKs it.

At least one firm says it hopes to offer traditional merchant services. Vincent Mehdizadeh, founder and senior strategist at Medbox, a West Hollywood, California, consultancy, hopes to turn the company into the Amazon of the marijuana industry through offerings such as merchant services and armored cash transportation. “We are looking at partnerships with smaller banks that would be open to processing merchant services for dispensaries and opening deposit accounts,” says Mehdizadeh. “That’s what we’re pursuing right now in partnerships with some banks we’re vetting right now.” If marijuana becomes federally legal, he’s likely to find he has plenty of competition.

See related:Credit cards: our moral guardians, Buying legal marijuana with a credit card still banned