Tobacco Merchant Accounts

Tobacco Merchant Account

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 in the near future. Smoking over 5 and a half trillion cigarettes annually, estimates are these numbers will potentially double in the next few years. While about 15.5% of Americans use tobacco today, down from nearly 40% in the 1960s, online sales have continued to grow. The shift in consumer purchasing habits towards e commerce shopping has required merchants to offer tobacco credit card processing services. Here in lies the problem, most payment processors will not offer online tobacco merchant account services to businesses.

Countless banking and government regulatory changes have made tobacco a complex and hard to navigate industry to own a business in. Even with these challenges, the growing need for tobacco payment processing services has been filled by niche payment service providers. Many of these providers include companies that specialize in various tobacco, paraphernalia, and herbal industries. With so many options available, it becomes important to understand the different options and how they work.

What is a Merchant Account?

Merchants wanting to accept debit and credit cards at their business will need a service that can handle these transactions. Merchant accounts allow businesses to access the networks of Visa, MasterCard, Discover, American Express, JCB and CUP. Most banks do not have direct access to the card networks, requiring a payment processor and merchant acquiring bank.

Merchants operating retail stores can generally find payment processing for their business without much trouble. These transactions are viewed as acceptable because the customer is present in the store and transactions are processed in front of the merchant. These are called card present sales. The difficulty begins when merchants want to credit card processing with card-not-present (CNP) transactions. These types of sales include mail order/telephone order (MOTO) and online sales where the customer never steps foot in the store.

Merchants can accept payment using a few different methods; either through a credit card terminal/Point of Sale (POS) machine or an online payment gateway/virtual terminal. Merchants use their terminal to capture customer account information during authorization and display the bank response codes.

Responses to the authorization request will inform the merchant and customer near instantaneously, approving or declining the sale. The merchant acquiring bank will request funds from the authorized transactions and settle them into the merchant's bank account. The process from authorization request to the settlement of a merchant account normally takes between 24-48 hours to complete.

How do Tobacco Merchant Accounts work?

After the business is approved for a merchant account, the payment processor will set up a credit card terminal and/or payment gateway. Once completed, merchants will be able to actively accept payments in their storefront or through their e commerce website.

When a customer card is processed through a merchant terminal, the card account information is initially captured for the authorization request. The details of the customer file are encrypted and passed along to the merchant acquiring bank through the payment processor. The acquiring bank enters the customer's authorization file into the appropriate card network for secure decryption.

Once a determination by the card network as to the customer's bank, information from the merchant's authorization request for approval or denial. A series of fraud checks are run to verify the validity of the request. A final check of the customer's availability of funds against the authorization amount is performed and a decision is determined.

The response is sent back to the card network and onward to the merchant location through the acquirer and payment processor. Approved transactions will have an authorization code while declined transactions will display a different code explaining the reason.

At the conclusion of the day, the merchant sends a final request informing the customer's bank of the total amount. The customer's bank releases the funds to the merchant's acquiring bank who arranges the settle to the merchant.

Types of Tobacco Products Available

There are a variety of different types of tobacco products being sold on the internet today. With products ranging from loose leaf tobacco to tobacco-less electronic cigarettes, the tobacco industry covers a broad range of categories.

Some of the most common smoking products in use

    • Cigarettes

The online sales of cigarettes are strictly monitored in the USA. Through the Prevent All Cigarette Trafficking Act (PACT), merchants are required to be registered with state and federal tax offices. The PACT also requires merchants to provide monthly reporting of shipments, making online sales of cigarettes difficult in the USA.

    • Cigars

Unlike cigarettes, roll-your-own and smokeless tobacco products; cigars were excluded from the PACT Act. Their popularity and limited restrictions are why some payment processors will extend credit card processing services to cigar stores.

    • Smokeless

Available in different variations including chewing, snuff or dip; smokeless tobacco products are heavily regulated under the PACT Act. Online sales and another card-not-present (CNP) transactions are rarely available due to federal and local laws.

    • Shisha (Hookah)

This trendy form of tobacco is growing among new smoker with its many choices of flavors and the growing popularity in hookah lounges. Many of the payment processors accepting other forms of tobacco will accept shisha products, requiring full compliance with tobacco laws.

    • e Jucies (e Cigarette)

While e Cigs are regulated by the FDA, they continue to operate within a grey area of the law.

As is with many new products, regulations remain unclear and this uncertainty can add difficulty to the payment processing services. Finding an e cig merchant account is becoming increasingly difficult. Acceptance for card-not-present merchants is limited as many payment processors are not interested in accepting this industry.

The most popular tobacco accessories in demand

  • E Cigarettes
  • Hookahs
  • Vaporizers
  • Glass Pipes

Some of the more common products being sold using merchant accounts

Bongs
Detox
Lighters
Roach Clips
Bubblers
Grinders
Pipe Cleaning Products
Rolling Papers
CBD
Hydroponics
Pipe Screen
Rolling Machines
Cigar Cutters
Incense
Pipes
Water Bubblers

Different types of Credit Card Processing fees

Merchant account fees will vary between different payment processors for a variety of reasons. A number of different types of fees are figured into monthly bills; including set fees and sales based costs. Discount fees and transaction fees are the most commonly discussed costs, but many times the other account fees can figure significantly into the overall costs.

When shopping for a new merchant account, most merchants question of the discount rate, otherwise known as the percentage per sale. Rates for higher risk industries, such as a tobacco merchant account, can vary with great disparity. Depending on the business model, the payment processor, and even the merchant; rates might not be the same between businesses or processors. Though some of the factors cannot be changed, understanding the fee structures can help merchants control costs and save money.

Most merchant accounts are set up 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. These additional fees are usually attached to both the discount rate and the transaction fee, regardless if its a credit or debit card. The simplicity and straight forward pricing of this system has made it the most common pricing structure used for businesses.

In contrast, the tiered pricing model was the most commonly used by merchant services organizations. Usually establishing between 3 to 6 different price points, transactions were qualified for a tier based on various factors. Tiers were decided based on the type of card, how payments were accepted and even when the transaction batched out. This created a complex, confusing and often costly pricing structure that has been phased out with relief from merchants.

When merchants review a fee schedule or a credit card processing statement, they will quickly notice a number of other fees. Some of these fees are billed once monthly while others are only incurred on a per occurrence basis, such as chargeback and retrieval fees. Other fees are billed per transaction including authorizations, refunds, and daily batches; costs that will increase as sales increase.

In conclusion, many of the fees, including the discount fee, can be negotiated by the merchant before establishing their payment processing services. Understanding the best type of pricing model to use and the various fees are essential for business owners. Becoming a vigilant merchant can help reduce many of the unnecessary or overpriced costs associated with many merchant accounts.

How does a Tobacco Merchant Account become Compliant?

Compliance with the card associations is important for medium to high risk businesses when it comes to credit card processing. This is none the more essential for tobacco businesses under intense government regulation that carries substantial fines for violations. To main compliance, payment processors require merchants to perform yearly audits of their practices and pay yearly compliance fees.

One of the most common requirements for tobacco merchants in the USA is a legal letter of compliance. This letter is usually required from an attorney confirming the merchant is in full compliance with the card association guidelines. Payment processors are concerned that websites require age verification to purchase, signature confirmation for delivery and follow all legal regulations.

In addition, MasterCard charges businesses a $500 yearly compliance fee; used for auditing the operations of the merchant. This helps prevent any potential fines or regulatory problems for themselves or their partners from non-compliant merchants. Confirming products, practices of the business and the status of their PCI Compliance; MasterCard performs these checks annually.

Another factor in the compliance of a merchant is the security of payment gateway being used with their shopping cart. Integration into a PCI Compliance payment gateway is mandatory for e commerce merchants trying to avoid any potential liabilities. Non PCI Compliant payment gateways leave merchants liable for any losses stemming from fraud on their gateway.

One of the final compliance measures has to do with the Merchant Category Code (MCC) used by the Card Association's network. The 4 digit code assigned to merchants differentiates the industry of the business. For tobacco merchant accounts the most common MMC codes:

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 other than any listed above are recommended to contact your merchant services company. Incorrectly coded merchants are considered “non-compliant” and risk fines or account termination.

Advantages of a 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

Businesses processing payments through a merchant account will generally have higher monthly volume limits and fewer restrictions than other types of payment services. These merchant accounts can also provide faster authorizations and quicker settlements of funds to the merchant’s bank account. Most merchant accounts provide daily funding without any holdbacks while sponsored accounts usually payout weekly and delay funding for weeks.

Merchants accepting credit cards can reach more people and quickly grow their customer base and revenues than only accepting cash or checks. The importance of e commerce for tobacco businesses has never been greater for businesses looking to thrive on into the future. Since the next generation of smokers overwhelmingly prefers shopping online, the need for merchants to accommodate these changes is essential today.

Businesses that are using a merchant account have the ability to choose the best payment gateway for their needs. On the contrary, other sponsored merchant accounts from aggregated or offshore payment processor might only offer merchants a single gateway solution. Having the option to choose an advanced and fully PCI Compliant gateway can help a merchant's business. Providing secure transactions and a robust reporting system can help merchant manage and grow their businesses.

Start your Merchant Account Services Today

Many of the businesses working with Allied Payments do so because of our strong ties to various tobacco banks and financial institutions. Being the leading low-cost payment processor has been our goal since entering the industry. Businesses can contact us any questions concerning a current tobacco merchant account or for a rate quote from a new tobacco payment processor. Our payment professionals are happy to take the time and speak with any merchant about their business' needs or goals.

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