Similar to glass pipe and hookah shops, head shop merchant accounts have become increasingly difficult to set up for CNP (card-not-present) transactions, coming under pressure from both government agencies and financial institutions alike due to their association with the drug paraphernalia industry. Merchant accounts set up for head shops that operate in retail storefront locations have been acceptable and rather easy to be approved at mainstream payment processors, but increasing regulations from government agencies and tighter restrictions on tobacco accessories from the payment card networks have made the mail-order and online industry much more difficult to obtain merchant services.
Head shops have thrived with a dedicated following ever since they first emergence out of youth oriented shops selling rock and roll posters to the baby boomer generation throughout New York City, San Francisco and Los Angeles as early as the 1960’s; blossoming into an industry of its own through the 1970’s. Like traditional smoke shops that sell cigarettes, cigars, loose tobacco and other tobacco smoking accessories; head shops carved out a niche of customers interested in buying glass pipes and other smoking accessories to use with flavored tobacco products and at times cannabis, paraphernalia that has either legal or illegal uses, creating many challenges for head shop businesses looking for reliable merchant account services.
Head shops looking to sell online have found out that it is difficult at times to find a payment processing company that is able to accept their business when they are starting up, whether its a retail storefront or selling online. Working with a payment processor that specializes in head shop merchant accounts can help businesses find reliable and affordable merchant services to get their business started, whether its in a retail storefront or online.
What are Head Shop Merchant Accounts?
A merchant account is a type of bank account managed by an acquiring banking institution that is part of the payment card network, providing merchants access to the payment card associations of Visa, MasterCard, American Express, Discover, JCB and China Union Pay. For a merchant account to be established, businesses are required to apply through a payment processor or similar merchant services company for acceptance and privileges to the payment card network.
Use of the payment card network will cost merchants more than accepting cash, with costs such as discount fees, transaction fees and other set costs charged to merchants for every merchant account transaction. Customer payments can be authorized nearly instantaneously, but funding of the credit card and debit card transactions will normally be settle me the merchant’s bank account in 1-2 business days.
The Advantages of using Head Shop Merchant Accounts
The head shop industry has many relations to the drug paraphernalia industry, creating uncertainty and difficulty for merchants attempting to establish head shop merchant accounts to be used for online transactions. This challenging business category requires merchants to insure they are partnering with a payment processor that fully understands the industry and is able to abide by all government and financial network regulations and laws, preventing the risk of any fines or sudden loss of merchant services.
Instead of using a merchant account in their own name, some merchants might opt to use a sponsored merchant account, otherwise known as an aggregated merchant account, such as an eWallet that is grouped together with other merchants and managed by a third party payment processor. Unlike the other payment account types, head shop merchant accounts will offer integration directly into the bank gateway, providing merchants fewer restrictions, faster authorizations, higher approval rates and generally lower fees than other types of payment accounts.
Merchants selling online will also want to make sure that the payment gateway company they are partnering with will allow head shops as an acceptable merchant type, providing reliable payment gateway services. A quality head shop payment gateway will provide merchants with full PCI Compliance for all sales, including online transactions and virtual terminal sales while simplifying the reporting process and providing a robust system to management of transactions processed through the gateway and virtual terminal.
Information about Head Shop Merchant Accounts
Some useful information the help head shop merchants better understand the process of a merchant account, the pricing models used to determine bank fees and the compliance standards that are required.
How do Head Shop Merchant Accounts work?
After a merchant’s application has been approved by the payment processor or merchant acquiring bank, the merchant services company will provide a credit card terminal, either a physical card terminal for the store location or set up a payment gateway account for online and card not present transactions. With a physical credit card terminal, customers can make payment authorizations by either swiping or dipping their credit or debit cards into the terminal; online purchases will require the customer to enter in their payment card information into the secure section of merchants website to send the transaction through the payment gateway.
After the payment card account information has been received by a payment terminal, the information is encrypted before being sent from the device to the next location; transactions occurring in a web browser are encrypted two times, once between the web browser and payment gateway and another time from the payment gateway to the payment processor while transactions originating in a virtual terminal are encrypted once before being sent out. Encrypted card account information is passed through the payment processor to the merchant acquiring bank where it is entered into the payment card network managed by the card associations of Visa and MasterCard; American Express and Discover operate their own closed loop networks.
Once the encrypted payment card information has been received at the payment network, it is deciphered to determine the customer’s card issuing bank and the other details of the payment authorization. After the card issuing bank is determined, the payment network will forward the payment request for the issuing bank to make a determination to either accept or decline the transaction. Authorizations being sent through the American Express or Discover closed loop networks are handled exclusively by each company since these companies not only acquire their own merchants, but also issue and manage their own customer card accounts.
Within a matter of seconds, a determination has been rendered by the card issuing bank, sending the the response back through the card network to the merchant acquiring bank and eventually through the payment processor to the merchant location, informing both the merchant and the customer as to the answer to the payment request. Approved requests will include a transaction ID while declined authorization requests will include a code used to explain the reason why the transaction was not able to be approved.
How are Head Shop Merchant Accounts fees determined?
Most head shop merchant accounts are priced using one of the two main pricing models, tiered pricing that sets various levels of fees or cost plus, also known as interchange plus, that adds a set fee per transaction on top the costs assessed by the payment card networks and card issuing banks. Other payment processors might offer slick gimmicks such as flat rates per transaction or flat monthly fees, but complicated government regulation has limited bank fees, thus making any type of flat fee scheme very profitable for payment processors and a much costlier program for merchants.
The tiered pricing model involves 3 or 6 different price levels are predetermined by the acquiring bank and usually have a starting fee at about 1%, a fantastic sounding rate for any business looking to save on payment processing expenses. The issue faced by many merchants in a tiered pricing structure is that most transactions wont qualify for that 1% rate, and the transactions that do qualify for that fee would would probably cost much less through an interchange pricing model, resulting in a migration of merchants away from the tiered model to the lower cost interchange plus.
The interchange plus pricing model relies on a simple fixed pricing structure that charges the same discount rates and transaction fees to the merchant for any transactions, whether its a credit card or debit card. This type of pricing structure insures that merchants are assessed the same fees for every transaction, regardless of the type of card or how the transaction was accepted; what was popular with larger businesses before has caught on with the smaller to medium sized businesses due to its costs saving features making the interchange plus pricing model the preferred method for head shop merchants of all sizes.
The flat fee merchant services pricing model is something relatively new to the payment processing industry, offering head shops a couple different pricing choices when payment card transactions are processed through their business. Flat fee solutions bill merchants the same fee for every card that is processed, regardless if its an Amex or Visa, Credit or Debit; an idea that sounds great but can be very costly to merchants accepting many debit cards as this pricing model is very lucrative for payment processors. Another version of this flat fee charges merchants a flat monthly fee for all of their credit card processing services, but this can prove to be costly for merchants when the companies recoup their lost fees in the following months.
Understanding the different types of pricing structures used for head shop merchant accounts can help merchants in the future when it comes to negotiating a merchant account for their business, understanding the different gimmicks and how to avoid making costly mistakes in the beginning can save a merchant time and money in the future.
What Compliance is needed for a Head Shop Merchant Account?
Most tobacco businesses are required to be registered with the card payment associations in addition to any local or federal government agencies. Currently, online head shops that are not selling tobacco are not required to register with the card associations, but they might be held to strict guidelines set forth by the payment processor or acquiring bank. Abiding by the current terms, including any future regulations by the processor, card network or government agency, will help insure that accounts are not fined nor terminated for non-compliance.
Partnering with a payment processor familiar with the tobacco industry will insure that all proper documentation is in order with the acquiring banks and payment card networks during application, providing a smooth and rapid application and setup. Experienced head shop merchant services companies will also monitor their merchants, staying on top of any potential future changes affecting compliance or registration will always be taken care of properly, avoiding the risk of any interruption or loss of service.
Along with maintaining compliance with the payment processor and any laws affecting the industry, it is also mandatory for merchants to be placed into the correct Merchant Category Code, otherwise known as MCC, that is assigned to their industry. MCC codes are used by the payment card networks to arrange businesses with similar industries, allowing for easy maintenance and monitoring of these merchants.
The most common MCC codes used by the payment card network for head shops are:
- 5194 – Tobacco and Tobacco Products
- 5993 – Cigar stores and stands
- 7389 – Business Services, Not Elsewhere Classified (Rarely Used)
What Compliance is needed for an Online Head Shop Merchant Account?
Similar to online glass and hookah businesses, the online head shop industry has fallen into an gray area that does not make the products themselves illegal, but many times the substances that are used with or associated with heads are illegal, thrusting these products into a tight place. While head shop merchant accounts for retail storefronts remain an industry that many payment processors can still work with, the inability of merchants to verify age and the risk that products being sold in addition to heads are illegal have created issues with many of the merchant services providers.
Working with a payment processor that is experienced in the online head shop industry can help merchants looking to expand into the online head shop industry by partnering merchants with high risk acquirers that regularly accept these merchants while providing the necessary assistance to get the account approved quickly. Merchants working with experienced head shop merchant account service providers can be assured that their accounts will remain intact and not experience any disruptions or cancellations of credit card processing services.
Why are Head Shop Merchant Accounts considered high risk?
Head shops primarily sell products surrounding the cannabis and smoking industries, including such items as hookahs, glass pipes, grinder, rolling papers and other non smoking items such as posters, incense and clothing. Federal regulations do not prohibit the sale of pipes and other accessories, but government guidelines for many different tobacco accessories have increasingly regulated how products can be marketed and sold.
Most head shops that are operating in a retail storefront have not had the difficulty that online retailers have faced, finding fewer and fewer payment processors willing to accept this CNP merchant category. The problem that many payment processors and acquiring banks have that affects many businesses when applying for online head shop merchant account services are the perceived risks that these business might sell products that are illegal, such as medical marijuana or other drugs that could result in significant fines.
Unless federal laws pave the way for marijuana laws to ease up and become illegal, the risk that many payment processor face outweigh any benefits that they might have by accepting these products. Some processors though that work in this niche have positioned themselves where pipes and other head shop items fit exactly into their portfolio.
Head Shop Payment Gateway
Working with a payment gateway provider that allows higher risk products, such as tobacco, vaporizers and other types of paraphernalia to be processed through their gateway is essential for a head shop looking to find a long term partner for their e commerce website.
Why businesses use the Tobacco Merchant Services Payment Gateway
- API Integration into over 100 Shopping Carts
- Simple Transaction Management Functions
- Complete Reporting Capabilities
- Full PCI Compliance
Benefits of Online Head Shop Credit Card Processing
Many businesses might not think about selling online while they are initially setting up their merchant services, but having the ability to sell online can be extremely beneficial by allowing the business to reach a larger audience that can help merchants increase their sales volume without having to do any different, other than managing their online transactions and shipping the sold products.
Merchants will want to make sure that the merchant services company they decide to partner with can handle online transactions and the payment gateway they decide on using is fully PCI compliant and can integrate into most shopping carts, making the setup process much faster and less troublesome than using a payment gateway that can not work with the merchants website.
How to get a Head Shop Merchant Account
Head shops, whether they operate online or through a retail storefront, will have to go through an underwriting process conducted by the merchant services provider the business decides to partner with; checking that the merchant qualifies for a merchant account by meeting the criteria of the acquirer and payment card network.
Payment processors accepting head shops will require roughly the same supporting documents to satisfy their underwriters and successfully set up a head shop merchant account.
- Completed Application including Social Security Number
- Copy of the Merchant’s Drivers License or Passport
- Voided Check from Business Bank Account
- Previous 3-6 months of Bank Statements (May or May not be required; Depends on Processor)
- Merchants currently processing; Previous 3-6 months Processing Statements are usually required
While the underwriting process might not be the same for every merchant services provider, the exact supporting documents they want will be made known during the application process, and the merchants that supply more documents will generally have accounts set up faster.
Providing an completed application is requirement of all processors, having the full details about the owner and the business is essential to having the proper KYC (Know Your Client) documents to perform a complete background check. Part of the background check will include a credit check of the merchant to insure that there are no current bankruptcies, any history of being on the MATCH list maintained by the card networks or any other issues that might land the bank in trouble.
Banking information of the business is required at some point during the setup process to insure that the funds are being sent to the business bank account, preventing any delays or errors in settlements from the transactions. Many times new businesses will not have a voided check to provide during the initial application process, so the use of a letter from the bank listing the company name and banking information will generally work in place.
Head shops that are currently processing with another company will usually need to supply a few of their last months statements to show the underwriters how their head shop operates and to insure that there are no problems. While some payment processors might not require this, it does help to supply them with the application to insure a quick and seamless approval.
Tips to finding the best Head Shop Merchant Accounts
In niche industries, such as head shops, merchants might not have much information on finding merchant services for their business, this lack of information leads most merchants to searching the internet for answers; whether its through a search engine or forum sites, there can be many payment processors advertising, but how does a merchant choose between all the options available.
What to ask Head Shop Merchant Account Provider
When merchants are ready to apply for payment processing services, there are a number of factors that should be kept in mind when comparing the different head shop merchant accounts available to businesses.
- Insure the processing can work with head shops
- CNP (Card Not Present) head shop transactions are accepted
- Payment Gateway integration using an API
- Fast Authorizations with a High Transaction Approval Rate
- Daily settlement of Transactions
- Full PCI Compliance in all areas
- Complete Customer Support for all products offered
- Insure a Interchange Plus fee structure is used
Merchants in the glass and hookah industries, both which can be challenging for a majority of payment processors, are suggested to ask similar questions when interviewing potential merchant services providers.
Head Shop Merchant Accounts from Tobacco Merchant Services
Tobacco Merchant Services specializes in head shop merchant account services for businesses of all types, including retail storefront and e commerce businesses. Our low priced merchant services products along with our advanced payment gateway have made us a leader in the head shop payment processing industry.
Tobacco Merchant Services offers merchants:
- Low Cost Head Shop Credit Card Processing
- Fast Authorizations for Debt and Credit Cards
- Secure Transactions and Fraud Protection
- Award winning Customer Service
For more information, including any questions or concerns about our services, or to get started processing transactions with a head shop merchant account today, please contact one of our agents.