Choosing the right credit card processor is one of the most important decisions that a smoke shop can make.
Here’s why: Smoke shop credit card processing rates vary wildly.
Some smoke shops are prone to high-risk credit card processing fees. This cuts into profits and may place limits on the volume of processing the shop can do.
But why are smoke shops considered high risk?
Generally, smoke shops fall under the high-risk label. This is due to the nature of the products they sell (e.g. tobacco, vape devices, hemp-based products). However, every card processing company assesses risk differently, and therefore, there are numerous factors that can influence a smoke shop’s processing rates.
Ultimately, credit card processing for smoke shops is complex. This guide explores various factors that affect rates and provides tips for what new headshops and smoke shops can do to secure the best rates.
Why Are Smoke Shop Merchant Accounts Different?
Processing companies assess risk for all new applicants. If a processor considers a new client “high-risk,” the shop may need to use a high-risk merchant account and be subject to higher smoke shop credit card processing rates.
A high-risk merchant account is a specialized account designed for businesses that are considered to be at a higher risk of financial instability, legal issues, or chargebacks. These accounts are offered by specific payment processors, and they often include higher fees and limitations on processing volume.
But why are smoke shops considered high risk? And why does that matter to credit card processors?
Here are a few specific risks for tobacco shops and smoke shops:
Regulations related to smoke shop products like hemp, CBD, kratom and paraphernalia change constantly. And these compliance issues are even more complicated for cannabis, as cannabis is still illegal at the federal, and therefore, dispensaries cannot accept credit cards.
Because of this higher compliance risk, a processing company may be more hesitant to work with the business, as it exposes the processor to potential fines. For example, a product like kratom may be subject to differing local laws. If a shop were to continue to sell kratom, even if it had been deemed illegal locally, the processor may be subject to fines and/or held partially accountable for the sale of an illegal product.
Age verification is required for tobacco and hemp products, as well as for smoking accessories. Therefore, there’s a risk that the business doesn’t meet age verification requirements and sells its products to underage customers.
A processor could be held partially accountable for enabling transactions to underage buyers, resulting in fines and the loss of revenue (if the shop were to permanently close or lose its license). This can also cause reputational harm to the card processor or bank.
A chargeback occurs when a customer disputes a transaction and files a claim with their credit card issuer. There may be a higher risk of chargebacks in smoke shops. For example, say a customer purchased a vaping device, but found it was defective. Unhappy with the purchase, the customer contacts their credit card company to file a chargeback.
Chargebacks are costly for processors. Therefore, smoke shops with a high potential for chargebacks may be subject to higher credit card processing rates. Smoke shops can counteract this by having clear refund polices in place.
Head shops, vape stores, and stores selling hemp products may carry a social stigma. Negative public perception can influence financial institutions to categorize them as high-risk businesses. This stigma may impact the willingness of traditional institutions to provide standard merchant services.
Ultimately, this social stigma presents a reputational risk to the bank or credit card processor. If there’s an issue with compliance, or a product is deemed unsafe, this could result in a loss of trust from clients and negative publicity for the processor.
High-Risk Credit Card Processing: What Can Smoke Shops Expect?
So, what does “high-risk” mean for smoke shop credit card processing rates?
Generally, for a smoke shop, a high-risk merchant account includes features like:
1. Higher Fees: The processing rate the shop pays per transaction will increase. Rates typically include a percentage of the transaction, as well as a flat rate. A high-risk smoke shop would pay a higher percentage, as well as a higher flat rate.
2. Reserve Accounts: A high risk merchant may be required to hold a percentage of their processing transactions in a reserve account. Some processors may require upfront reserves or charge a fixed or rolling rate. This limits risk for the processor.
3. Payout Cycles: A high-risk smoke shop merchant may be subject to longer payout cycles. For example, next-day payouts are common, but a high-risk merchant may have to wait up to 72 hours for payouts.
4. Strict Underwriting: A processor may conduct additional due diligence for a smoke shop or tobacco shop. This may include a closer look at financials, processing volumes, and the business’s compliance processes.
5. Specialized Risk Management – A high-risk account may be subject to stricter oversight, including compliance, chargeback rates, and transaction volumes.
This is why a new smoke shop should work with a specialized credit card processor. FTx POS offers an industry-leading smoke shop POS system with integrated payments. We don’t high-risk fees for hemp, kratom or smoking accessories, and we offer next-day fund transfers.
What Can Smoke Shops Do to Get Lower Card Processing Rates?
Risk classification for smoke shops is typically done on a case-by-case basis. Therefore, the specific business practices and products sold can influence how a credit card processor assesses the risk.
In other words, there are some ways a smoke shop can position itself to secure better credit card rates:
- Shop for Processors – Research processors that specialize in high-risk industries and have experience working with smoke shops. Compare rates, terms, and services.
- Negotiate Based on Performance – If a smoke shop can demonstrate low chargeback rates, consistent adherence to compliance, and financial stability, they may be able to negotiate better rates.
- Reduce Chargeback Rates – Offer a clear, hassle-free return policy, check for defective products at register, and develop a customer service process to resolve issues faster.
- Enhance Compliance Measures – Follow the latest legal regulations. Use age verification software at the POS to prevent underage sale. And track the latest product regulations, especially related to smoking accessories (bongs, rolling papers and pipes), kratom, CBD and hemp-related products.
- Financial Stability – A strong financial record, including consistent sales, healthy cash flow, and responsible financial management, will help mitigate risk concerns with credit card processors.
- Business Reputation – A shop that actively works to establish its reputation and separate itself from industry-wide concerns may been seen more favorably. Engage in community initiatives, promote responsible use of your products, and build strong online brand visibility.
Why FTx POS Is Best for Smoke Shop Payment Processing
At FTx POS, we’ve been around the block in the industry, so we know what your business needs and the risks involved. Recently, we saved a chain of vape shops a whopping $35,000 per year in processing fees.
Here are some of the benefits FTx Card Payments can offer your business:
- Seamless and secure transactions
- We guarantee to beat or match your payment processing rates
- Sell CBD and kratom without high-risk fees
- Get your credit card sales funds the next business day
- Initiate transactions online and finalize them in-store to steer clear of elevated card-not-present interchange fees while also activating chargeback protections
How much can your business save on processing fees? Contact FTx POS today for a quote on credit card processing fees, as well as to learn how our POS platform can help you stand out and stay compliant.
Never pay high-risk fees and get next-day transfers with FTx Card Payments!
FAQs: Smoke Shop Credit Card Processing
High-risk fees may apply to specific products such as tobacco, vaping items, and accessories associated with controlled substances like cannabis. The risk level can vary based on the nature of the products offered.
Engaging in online sales can elevate the risk for smoke shops. Online transactions require strict age verification, compliance with diverse regulations, and the management of potential chargebacks. This added complexity contributes to the high-risk nature of online transactions.
Chargeback fees are additional charges incurred when customers dispute transactions. High-risk businesses, including smoke shops, may face higher chargeback fees due to the increased likelihood of transaction disputes.
Delayed fund transfers are common for high-risk merchant accounts, like those for smoke shops. Establishing reserve accounts and withholding a percentage of transactions is a standard practice to mitigate chargeback risks. While this may cause delays, it provides financial security for both the business and the payment processor in the volatile high-risk landscape.
Smoke shops can manage delayed fund transfers by maintaining a proactive approach to financial planning. Understanding the reserve account requirements and ensuring compliance with regulations can help mitigate the impact of delayed transfers on cash flow.
Note: FTx Card Processing includes next-day transfers.