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April 20 — or 420 or 4/20 — has become an unofficial day of celebration on which pot smokers gather in events across the country to call for marijuana’s legalization. But those who already sell the drug legally under state laws allowing medical marijuana are often finding that the federal ban on the drug puts their access to financial services at risk. The legal gray area they’re in makes big banks wary or downright hostile to them, so their bank accounts can sometimes go up in smoke.

Alpine Herbal Wellness in Denver has been open just 10 months, and co-owner Sue Harank has already switched banks four times. Two banks and a credit union closed her account with just a couple of weeks’ notice.

“It’s been one heck of a nightmare,” says Harank, who recently opened a bank account and switched her credit card account to Colorado Springs State Bank, the only bank in the state now openly offering accounts to those in the medical marijuana industry.

She’s far from alone. “People have gotten their credit card accounts shut down without them even knowing it,” Harank says.

And it’s not just Colorado that’s been hit. Don Duncan, California director of the advocacy group Americans for Safe Access and a member of the board of the medical marijuana collective Los Angeles Patients and Caregivers Group in West Hollywood, says his own account was shut down about a year ago, He’s heard many similar stories around the state. “They just summarily close accounts. Banks are very unsure if it’s OK to do business with medical cannabis organizations. It ripples out to credit card and merchant services accounts.” Merchant services accounts let vendors accept credit cards.

Federal, state laws conflict

The main sticking point is the clash between federal and state marijuana laws.

According to the lobbying group NORML (the National Organization for the Reform of Marijuana Laws), 16 states and the District of Columbia have legalized marijuana for medical use. But the U.S. Drug Enforcement Agency classifies cannabis as a Schedule 1 drug, meaning it has a high potential for abuse and no currently accepted medical use.

California and Colorado are far ahead of the pack when it comes to establishing medical marijuana dispensaries, with hundreds of these facilities in the two states.

Last spring, Rep. Jared Polis, D-Colo., and 14 other members of Congress sent a letter to Treasury Secretary Timothy Geithner seeking reassurance for financial institutions. Among the letter’s signatories were Barney Frank, D-Mass., and former presidential candidate Ron Paul, R-Texas.

The two are co-sponsors of a bill to repeal the federal law that makes marijuana use a crime and instead allow states to decide whether to legalize the drug.

The letter to Geithner asks his office to “issue formal written guidance for financial institutions assuring that Department priorities do not include targeting or pursuing institutions whose account holders are involved in a business ostensibly operating in compliance with a state medical marijuana law.”

No response has been received, Duncan says.

In contrast, U.S. Attorney General Eric Holder issued a memo in October 2009 telling federal prosecutors they “should not focus federal resources in your states on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”

Big banks back away

Yet many banks are either hesitant to enter the fray or have backed away after initially offering accounts to medical marijuana dispensaries.

A representative of Wells Fargo, which previously offered accounts to such businesses, said in a statement to CreditCards.com: “In view of the complex, inconsistent legal environment relating to medical marijuana dispensaries, Wells Fargo Regional Banking has opted not to bank these businesses.

While medical marijuana dispensaries are legal in some states, they are still illegal under federal law. Wells Fargo representative

“While medical marijuana dispensaries are legal in some states, they are still illegal under federal law. The policy extends to all medical marijuana dispensaries, and based on our customer information, we have advised all such businesses that bank with us that they will need to close their deposit accounts. Additionally, it has been our policy not to provide merchant card processing services to businesses of this type.”

Entrepreneurs see budding opportunity

Instead, smaller companies are stepping in to fill the merchant card processing gap.

In January, MarijuanaPOS.com, based in Los Angeles, announced it was offering merchant account services, with a focus on providing debit and credit card processing services to the medical marijuana industry.

Jesse Cretaro, marketing director for MarijuanaPOS.com, said the company has been in business around six months and has about a dozen medical marijuana collectives signed up for its services.

He said his company works with banks that accept high-risk clients, even though he thinks the higher risk is “going into a (medical marijuana) collective and paying cash,” which can be a lure for robbers.

Martin Khemmoro, executive vice president of Direct Bancard of Livonia, Mich., which also provides services to the medical marijuana industry, says some of the merchant services processors his company works with are overseas.

He’s found some medical marijuana dispensaries bill themselves as a vitamin shop or herbal shop in order to get financial services.

Khemmoro says his business processes credit card payments, handles gift cards and rewards cards, along with point-of-sale systems to keep track of inventory, patients and sales.

Smaller banks better prospects

Lance Ott, chief executive officer of Guardian Data Systems in Thousand Oaks, Calif., says smaller domestic banks and credit unions may be more likely than larger financial institutions to service the medical marijuana industry. Though in some cases, bigger banks will essentially grandfather in existing accounts, but not accept new ones. “There’s a huge stigma associated with the industry.”

Don Duncan, Americans for Safe Access

Guardian Data Systems offers services such as credit card and debit card processing, gift and loyalty card programs, online payment processing for merchandise — such as clothing — financial reporting and inventory tracking.

For the past three years, Ott’s been “trying to offer honest, secure services to an emerging industry,” and he says he only works with those businesses that are licensed and set up properly under state law.

That matches the desire of people like Duncan and Harank. Duncan says clinics that are on the up and up want to “operate with transparency.” But all the controversy over financial services “forces banking into the shadows.”

Merchant service accounts often are administered through third parties and tend to come under less scrutiny than banks, he says.

Harank says when she switched her bank account to Colorado Springs State Bank, she also brought the bank her credit card business, rather than remaining with a third-party processor.

“Accepting credit cards is critical for our business,” she says, as they serve as a convenience for customers. One recent day, every transaction at Alpine Herbal Wellnessx was done via credit card.

Duncan says, “We just want to obey the law and do what’s normal. At the end of the day, we’re all going to be better off if the cash is in the bank and not tucked under a mattress somewhere.”

See related: 2010 gift card comparison chart, Video: How a credit card is processed