In nearly 20 years in the payment processing industry, I have not seen an industry that has such dramatic growth, especially within the retail footprint as I have seen with Smoke and in particular Vape. Yet as with many retail businesses, accepting credit & debit cards are a business must have a form of payment for card acceptance The regulatory and rules enacted can stunt the growth and potentially set back the industry.
It is safe to say that 2016 has been an interesting year for the Smoke & Vape Industry. Between the Food & Drug Administration (FDA) and MasterCard’s (MC) new requirements, moving forward actions by both organizations will create regulatory and compliance hurdles to navigate.
The FDA enacted policies and more to potentially come that are yet undetermined and the impact on the vape industry is one that has caused immense concern. In addition to the FDA, the card payment brands, in particular, MasterCard have added assessments to those that sell Smoke or Vape products as a card not present transaction, meaning do not sell such across the counter.
MasterCard’s Updates Rules – Effective January 2017:
- Additional tobacco products are being added to the Business Risk Assessment and Mitigation (BRAM) program including e-cigarettes and vape pens.
- Effective January 15, 2017 – All merchants that conduct non-face to face (card not present) transactions of an electronic delivery system of tobacco, including but not limited to e-cigarettes and/or vape pens, must be registered with MC.
- The yearly assessment fee from MasterCard will be $500.00 per merchant identification number. This is important because if you have more than one merchant account, it is $500.00 per account.
- Merchants in this category will be processed the same as a card, not present (CNP) tobacco including agreeing and signing the tobacco CNP addendum, providing legal opinion, and MasterCard registration and fees.
What does this all mean? Essentially starting in January, card processors will be required to register each merchant and any applicable fees assessed by MC will be passed onto the merchant.
In simple terms, the actions taken by the FDA and MC have increased the risk assessment card processors and their clearing banks have on the tobacco and vape industry. The result – the underwriting terms have increased significantly to an extent where several banks will not accept any merchant who sells for example grinders & water pipes. Essentially water pipes, grinders, glass nails, and more are now deemed drug paraphernalia. The reclassification has put those items into unqualified and any merchant selling such is deemed selling illicit products.
Usually, I have constructive advice to provide within my articles. The current environment between the FDA and MC has created a sand-like foundation that is shifting as we speak. As mentioned earlier, I am seeing the underwriting of Smoke & Vape based merchant accounts becoming increasingly complex and tight.
What are the options moving forward? Those that are selling retail (across the counter) not via the web or other means have few domestic processing options. The processors and banks are scoping the business details when they underwrite. They will review whether you have a website, any information posted on social media sites – Facebook page for example or online comments about your store. Online ratings about your business can help but they can hurt if a customer says for example online – “ABC Vape has the best bongs at the lowest prices in town”. It sounds like a great comment but highly unlikely your business will get approved or receive a notice that the processor is terminating your merchant account and you have 30, 60 days, etc. to find another processor.
The alternative path is offshore processing. Most people get confused about offshore. To clear this up, your business does not change its location, registration status, banking. Rather instead of working with a domestic payment processor, for example, First Data or Vantiv and their clearing banks – Wells Fargo or Fifth Third, you’re working with a processor-based overseas and their clearing bank. In Europe and the Asia Pacific, some processors will enable card present, the card does not present Smoke & Vape businesses in the States to accept the major payment brands.
The offshore path opens up acceptance channels but it does come with some downsides as well. If your use to next day or two-day funding, going offshore is more likely 4-7 days. Some offshore processors will transmit via ACH but more common to be wire transfer deposits. Also, the discount rate will run higher offshore. Usually to the tune of 3-4% higher than what you are seeing onshore.
Why so much higher? Let me use lending as an analogy. You want to borrow money. Usually, the loan terms and rates are dependent on creditworthiness, business history, financials. Those that have had challenges pay higher rates. It’s called risk mitigation. Banks understand some loans will go bad, hopefully no more than the risk level they associated with losses. Back too offshore, the European and Asian processors & banks understand onshore options are not available, your business is not domestic to them, you’re doing business in a high-risk category, so risk mitigation plays a big factor.
I am not advocating for off-shore processing here. Rather than having spoken to several business owners in our space, it is clear plenty of concern exists. Your customers prefer to pay with plastic and having the means to accept such is vital to your business. I will say although, be careful of the misclassification of your business. I have heard from business owners that get set up with one processor and 3-6 months later they get terminated. Move to another and the same picture plays out again. Why? The short answer is your business could be classified as something it is not. A common classification I have seen is a Convenience Store. Okay, convenience stores sell some form of tobacco, maybe e-juice but they are more known for beverages and food. Once a processor gets wind of what your business type is and they do address checks, internet searches, you will be terminated from service. Eventually leapfrogging from one processor to another, being terminated repeatedly leads to being placed on the MATCH list which is the death to accepting payments. MATCH is the equivalent to being listed as Chapter 7 bankruptcy and trying to obtain credit again soon.
My recommendation is due diligence. If you are being terminated from your current processor or trying to get a new account for the first time, make sure your merchant representative is asking questions to you and please ask them questions. Make sure they understand your business and if they are suggesting a processor vet that processor out. You cannot be too careful; your business depends on you doing the proper due diligence. With immense regulatory actions going on, it added significant flux but navigating through such requires sound decisions. SVBS
Joe Radest started his career in card payments in 1998 working for the industry giant First Data. Since FDC, Joe has worked with other notable processors – TSYS, Global Payments, and Chase Paymentech. Over 5 years ago, Joe branched out on his own; providing complete end to end business process management and secured payment technology solutions, which affords business clients the ability to securely transact payments without having sensitive data touching their environment. He can be reached by phone at 770-731-0414 or by email at email@example.com.