May 14, 2013

Credit Card Companies Barring Dispensary Owners From Opening Accounts for Other Businesses


Dispensary owners affected by credit card companies’ moves to cut ties with the medical marijuana industry in recent years could find it exceedingly difficult to open merchant accounts for other businesses – even ones that are not involved in cannabis.

In fact, owners could wind up on a blacklist that would prevent them from getting a merchant account ever again – a major hidden risk of doing business in the medical marijuana industry.

Kayvan Khalatbari, co-owner of the dispensary Denver Relief, found this out the hard way recently when he tried to open a new American Express merchant account for a completely separate pizza business.

American Express denied his application, saying he could no longer open new Amex merchant accounts going forward. The reason: Amex closed a previous Denver Relief account for “operating under illegal terms” because it deals with a federally banned substance, Khalatbari said, citing his conversation with an Amex representative.

In essence, American Express has blacklisted Khalatbari and possibly hundreds of other dispensary owners from opening new merchant accounts for side businesses simply because they are involved in the medical cannabis industry (regardless of whether they are following local and state MMJ regulations).

“Because my social security number is tied to Denver Relief, the gentleman on the phone said they won’t be able to open merchant accounts for any of my businesses now,” Khalatbari said. “It’s interesting because I’m a minority owner in the two companies, and I’m the only one who has a stake in both. But because my name is tied to Sexy Pizza LLC, that business is not able to get a new merchant account with Amex.”

American Express has not yet responded to MMJ Business Daily’s request for comment.

This is a prime example of how getting involved in the cannabis industry can lead to unexpected repercussions. Aside from federal and local crackdowns, unstable business conditions and other lofty challenges, dispensary owners face longer-term risks that could hinder their future business prospects in other sectors.

Over the past two years, Amex and other major credit card companies – including Visa and MasterCard – have distanced themselves from the medical marijuana industry, refusing to process transactions at dispensaries and closing merchant accounts for MMJ centers.

In some cases, the credit card companies have added dispensary owners’ names to the dreaded “merchant match list,” also known as the “terminated merchant file” list, said Lance Ott, a principal at Guardian Data Systems, Inc., which provides financial services to high-risk merchants including dispensaries.

Once your name is on that list, it can be almost impossible to open a new merchant account – though credit card companies and underwriters don’t always check the list right away, while others don’t discover it unless there’s an audit.

“When you’re added to the list – regardless of whether a financial institution, credit card processor or the credit card company itself adds you – you might not get another merchant account ever, no matter what type of business it is,” Ott said, adding that he’s seen this happen to a lot of dispensaries.

In fact, all owners of a given dispensary – regardless of whether they own a minority or majority stake in the operation – could be blacklisted, making it hard for them to open viable businesses in the future.

While some credit card companies will simply decline new accounts, American Express, it seems, is particularly aggressive in actually blacklisting dispensary owners.

To date, very few dispensary owners run other companies, so the impact has been limited. But that’s expected to change as the industry matures and new MMJ states with high entry barriers come online. In Massachusetts and Connecticut, for example, many potential applicants for dispensary licenses currently run other businesses – which isn’t surprising given that starting an MMJ center in those states will require a ton of capital.

“Everybody I know in Massachusetts and Connecticut who is interested in a license is also a previous business owner,” said Khalatbari, whose dispensary has a consulting arm that is working with potential applicants in those states. “One owns a yogurt franchise, and this may affect him down the road as well.”

Khalatbari said an Amex representative told him that his pizza company’s existing merchant accounts for its current locations won’t be affected. But he won’t be able to get one (and therefore won’t be able to accept Amex payments) for Sexy Pizza’s new online ordering app or any other locations he plans to open in the future. Khalatbari said he was able to open new merchant accounts for his pizza business with Visa and Master Card, even though those companies also closed Denver Relief’s account recently.

The situation is more of an annoyance for Khalatbari than anything at this point. American Express transactions currently account for about 10-15% of Sexy Pizza’s credit card revenue, but Khalatbari said most customers would simply use another payment option rather than go to a competitor who accepts Amex.

However, this problem could be a much bigger issue for dispensary owners who also run side businesses with higher-priced items or services, as customers might be more set on using Amex to earn reward points or for other reasons.

So how can other entrepreneurs avoid this problem going forward?

The only choice might be to set up a shell company that would technically own your non-MMJ firm so that your individual name is not tied to it. While doable, that involves a lot of paperwork, resources and some money.

Alternatively, you could just try to wait it out and hope the situation changes.

“This is a problem,” Khalatbari said, “but I have to imagine in the next 6-12 months we’ll see some change on the federal level with banking in general.” If that happens, credit card companies would likely rethink their positions on MMJ.

One Comment:

  1. You don’t need the credit card companies or the banks, when you accept Bitcoins. Bitcoins is a peer to peer digital currency that is widely used and accepted and can replace both your bank account and your credit card account.

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