Tobacco Merchant Services
Global tobacco sales combine to create a gigantic $750 billion a year industry. Counting over 20% of the world’s adult population as tobacco users, there is no expected slow down on the horizon. Annually, smokers consumer over 5.5 trillion cigarettes and estimates project that number to double in the next few years. Tobacco usage among Americans is down from over 40% in 1965 to about 15.5% today. As consumer purchasing habits shift towards e commerce, this is creating problems. Merchants struggle to offer online tobacco products to meet the demand. This is because most payment processors will not allow online tobacco merchant account or tobacco credit card processing services.
Government and banking regulations continue to make business in the tobacco industry difficult. Even with these challenges, the demand for tobacco payment processing services is met. Niche payment service providers have emerged offering online tobacco credit card processing. These providers include companies that specialize in various tobacco, paraphernalia, and herbal industries. Many options exist and it is important to understand the differences and how they work.
What is a Merchant Account?
A merchant account allows businesses to accept payments from debit and credit cards. Payment cards belong to either the Visa, MasterCard, Discover or American Express networks. Most banks do not have direct access to these networks and need to partner with a payment processor.
Retail tobacco shops can generally find payment processing for their business with ease. These transactions are ideal because the customer is present at the time of sale. Merchants experience resistance with tobacco credit card processing during card-not-present (CNP) transactions. These transactions include telephone order (MOTO) and online sales without the customer present.
Merchants can accept payments through a point-of-sale terminal or an online payment gateway. Using their terminal to capture customer account information, transactions can process quickly. Authorization request will inform the merchant if the sale is approved or declined. Through the merchant bank, approved funds are settled into the merchant's bank account. This process from start to finish takes between 24-48 hours to complete.
How does a Merchant Account work?
Businesses receive a credit card terminal or payment gateway from their payment processor. This allows merchants to accept payments in their store or through their website. At Allied Payments, our payment gateway works with over 100 of the largest shopping carts. We are compatible with WooCommerce, Shopify, BigCommerce, LimeLight, Magento, Opencart, and Prestashop.
Swiping a payment card allows the merchant to authorize the customer's card. Details of the customer account are encrypted and sent to the acquiring bank. There the card-issuing bank is determined and the authorization file is sent.
The bank performs various fraud checks and verification of the account's available funds. Once the account information is confirmed from the authorization request, the bank can make a decision.
The response is sent to the merchant location through the acquiring bank. Approved transactions will be returned with an authorization code. Declined transactions will return a response code explaining the problem.
A final payment request is sent to all the customers' banks at the end of the day. The card-issuers send the authorized funds to the merchant acquiring bank. In 24 to 48 hours, the funds will arrive into the merchant's bank account.
Types of Tobacco Products Available
Tobacco selling on the internet today consists of a variety of product types. Ranging from loose-leaf tobacco to electronic cigarettes, the industry encompasses various categories.
Some of the most common smoking products sold
The online sales of cigarettes are subject to strict monitoring in the USA. The Prevent All Cigarette Trafficking Act (PACT) requires merchants to register with state and federal tax offices. PACT also requires merchants to provide monthly reporting of shipments.
Roll-your-own and smokeless tobacco products; cigars have exclusion from the PACT Act. This allows some payment processors to offer merchant services to these stores.
Available as chewing, snuff or dip; smokeless tobacco products are highly regulated under the PACT Act. Online sales and card-not-present (CNP) transactions are rarely available due to federal laws.
- Shisha (Hookah)
Growing among new smokers with many choices of flavors and the popularity of hookah lounges. Many payment processors will accept shisha when in compliance with tobacco laws.
- e Jucies (e Cigarette)
The FDA has increased the regulation of e Cigs, placing bans on flavored eJuices. These changes have made e cig merchant account services increasingly difficult to find. Merchants operating card-not-present businesses are experiencing the most difficulty in finding payment processors.
The most popular tobacco accessories in demand
- E Cigarettes
- Glass Pipes
Some of the most common products sold using merchant accounts
Pipe Cleaning Products
Types of Tobacco Credit Card Processing Fees
Merchant account fees will vary between different payment processors for various reasons. Different types of fees make up the monthly bills; including set fees and sales based costs. Other fees can significantly affect the total costs of the merchant account.
When shopping for a new merchant account, most merchants question the discount rate. This cost is based on a percentage of sales. The rates for a tobacco merchant account can vary with great disparity. Depending on the payment processor and the merchant; rates will differ. Understanding the fee structure can help businesses save money on their merchant accounts.
Most merchant accounts today are using the Interchange Plus fee schedule. This model, also known as Cost Plus, uses the true costs of a consumer's card and tacks on a set fee from the processor. The additional fees are added to both the discount rate and the transaction fee. These fees are charged regardless of the customer using a credit or debit card. The straight forward pricing makes it the most common pricing structure.
Tiered pricing systems are less prevalent with merchant services organizations today. Transactions will qualify for one of the 3 to 6 different pricing tiers based on various factors. Type of card, how payments are accepted and when transactions are batched out can affect the tier. This confusing and often costly pricing structure is being phased out.
Merchants reviewing a fee schedule or processing statement will notice other fees. Some account fees are monthly while others only incur costs per occurrence. Authorizations, refunds, and daily batches are charged per occurrence. These costs will increase as sales and transactions increase.
Many of the fees, including the discount fee, are negotiable. Understanding the pricing models and fees will help merchants become vigilant. This will help reduce many of the high costs of merchant account services.
How does a Merchant become Compliant?
Compliance with the credit card processing associations is important for high risk businesses. This is important for tobacco businesses operating under intense government regulation. Violations can carry substantial fines for businesses and payment processors. To main compliance, payment processors require merchants to perform yearly audits. This includes detailed descriptions of their practices and yearly compliance regulation.
Tobacco merchants are required to submit a letter of compliance from an attorney. This confirms the merchant is compliant with the government guidelines for tobacco sales. Other requirements include verification of customer ages and packages ship with signature confirmation.
The security level of a merchant's payment gateway can affect a website's compliance. Integration into a PCI Compliant payment gateway is mandatory for merchants. Non PCI Compliant payment gateways leave merchants liable for any fraudulent activity.
The Merchant Category Code (MCC) used by the merchant is also important for compliance. This 4 digit code assigned to merchants differentiates the industry of the business. For tobacco merchant accounts the most common MMC codes include:
5194 – Tobacco and Tobacco Products
5993 – Cigar Stores and Stands
5999 – Misc and Specially Retail Stores
7389 – Business Services, Not Elsewhere Classified (Rarely Used)
Merchants using MCC codes not listed above should contact their merchant services company. Merchants improperly using MCC codes are “non-compliant” and risk fines or account termination.
Advantages of a Tobacco Merchant Account
Specialized merchant accounts give Tobacco Businesses many benefits, including:
- Easily accept payments in-store or online
- Larger sales when customers have more available funds
- Fast settlements of funds into merchant’s bank account
- Provide complete reporting of sales and transactions
- Offer extensive fraud control and monitoring services
Merchants processing payments through a merchant account have better terms than alternative services. This means higher monthly volume limits and fewer account restrictions. Merchant accounts provide faster authorizations and quicker settlements of funds to the businesses. Most merchant accounts provide daily funding without any holdbacks of funds. Sponsored accounts usually payout weekly and delay funding for weeks.
Merchants accepting credit cards will grow their revenue faster than cash businesses. The importance of e commerce for tobacco businesses has never been greater. Online sales will allow businesses to thrive into the future as e commerce continues to grow. The next generation of smokers prefer shopping online. This means merchants need to accommodate these changes to remain in business.
Businesses with a merchant account can choose the payment gateway for their website. Sponsored merchant accounts from aggregated payment processors only offer a single gateway option. Having the option to choose a fully PCI Compliant gateway can help a merchant's business. Providing secure transactions and a robust reporting system is very beneficial. This can help merchants manage and grow their online businesses.
Start your Merchant Account Services Today
As a tobacco payment processor, Allied Payments offers merchants reliable services. Being a leader in tobacco credit card processing has been our goal. Businesses can contact us with any questions about tobacco merchant account services. Existing merchants can also request quotes for their businesses. Our payment professionals are happy to take the time and speak with any merchant. Our goal is to help merchants achieve theirs.