Merchants in the Cigar, Hookah, Electronic Cigarette, and other tobacco accessory industries have been affected by many of the changes in the financial industry surrounding tobacco, including payment processing services that have become more expensive and merchant account solutions that are becoming increasingly scrutinized; finding tobacco credit card processing services has become one of the most difficult and expensive parts of running a tobacco business. Many times merchants have been forced to use offshore payment processing companies because of the difficulty and complexity they have encountered when trying to set up with a higher risk domestic merchant services provider.
The growth of tobacco sales is estimated to continue increasing in both the USA and throughout Europe, while growth rates are not expected to be as strong as from years past, a modest 3-4% compounded annual growth is expected in each market through the first part of the next decade. Younger users of tobacco are not using as many of the traditional products like cigarettes, cigars, smokeless and loose tobacco, but the evolution of tobacco usage has grown to include hookahs and vaporizers; giving merchants and customers alike a number of different choices when it comes to recreational smoking.
The use of credit cards by consumers has steadily grown year over year, making it almost essential for businesses that want to stay relevant to accept credit and debit cards in their stores. Acceptance of credit cards can open the door for new consumers to become customers while allowing existing customers the freedom to spend more per sale compared to cash transactions. For other merchants, opening an online storefront, setting up a tobacco credit card processing service will create a new revenue stream through their pre-existing business without significant infrastructure or other costs besides maintaining a website.
Tobacco Credit Card Processing Table of Contents
The History of Tobacco in the USA
A native plant to the Americas, the first tobacco plants are estimated to have begun growing around 6,000 BC, being used by Native Americans and other Indigenous Tribes for religious and medicinal purposes as early at 1,000 BC. Europeans were introduced to tobacco after the 1492 expedition by Christopher Columbus when sailors brought back leaves and seeds of the newfound plant to Europe, creating a frenzy of tobacco growing and consuming that is still strong over 500 years later.
As settlers began developing the future United States, the numbers of tobacco farms and plantations increased with the demand for smoking and chewing tobacco from both the American settlers and the Europeans abroad. The importance of tobacco to the global marketplace was so much that it had been known to been used as a commodity in lieu of currency and even used by the American government during the Revolutionary War as a means of repayment to the French government.
Starting in the 1800’s in the United States, tobacco was primarily sold as either chewing tobacco, loose tobacco for rolling and pipe smoking or pre-rolled as a cigar, cigarettes were available but not widely used due to the higher costs involved. After Spain allowed free trade with Cuba, the demand for Cuban tobacco began and lead to the start of nearly 40,000 cigar factories popping up in the USA with hopes of cashing in on the staggering demand of cigars that continued through the beginning of the 20th century. It was not until the beginning of the 20th century that cigarettes became the largest tobacco product being sold in the USA, after the invention of the cigarette rolling machine that allowed for faster production and lower costs compared to cigars did customers begin purchasing and smoking cigarettes.
The usage of cigarettes in the USA has been on a decline in recent years, with the growth of cigars and the introduction of electronic cigarettes, many tobacco users have opted for these alternatives. E cigs have been responsible for the largest part of the decline in cigarette usage by attracting younger users and also converting cigarette smokers to this alternative. Cigarette manufacturers have responded in large part by either purchasing smaller e Cig manufactures or by launching their own labels to take part in this shift from traditional cigarettes.
At the height of the tobacco age in the 1950’s, over 40% of the adult population in the United States smoked and while that number has dropped to less than half that number, the tobacco is still about a $50billion a year industry in the USA alone. Two tobacco industries that are expected to continue growing are the e cig and cigar industries, currently generating over $10billion combined and will help fuel future tobacco revenues with new products and technology to cater to the next generation of smokers.
What is Tobacco Credit Card Processing?
Credit card processing is a sophisticated network connecting credit card issuing banks to merchant locations, allowing customers of the banks to make purchases using either credit or by accessing funds in a bank account. There are many different organizations and a multitude of different types of software and hardware used throughout a transaction to ensure accuracy along with security. Businesses that set up a merchant account are tied into the network that is owned and managed by Visa/MasterCard and other networks owned by American Express and Discover, allowing merchants to accept payments from customers of every network using a single credit card machine or payment gateway account.
Merchants in the tobacco and tobacco accessories industries have experienced additional restrictions and government regulations over the last decade, starting with the PACT act that went into effect in 2010 and through today with tougher FDA controls over various tobacco products and accessories, both online and through retail storefronts. As a result, many credit card processing companies decided to focus on other types of lower risk businesses and exit the online tobacco industry, this included many payment processors that had a long history of processing transactions for tobacco businesses and were currently working with a number of the larger online tobacco companies.
Since many of the recent increases in government regulations were implemented, tobacco merchants have begun searching for reliable payment processing solutions that can process payments for tobacco businesses through financial institutions that specialize in these niche industries, limiting the risk of merchants losing their payment processing services in the future. This demand by existing tobacco merchants, along with the needs of new businesses for online tobacco merchant accounts has created a new segment of the merchant services industry specializing in all types of tobacco sales.
Working with a tobacco credit card processor has never been more important for merchants wanting to sell any type of tobacco or tobacco paraphernalia online, regardless if the business is currently operational online or through a retail storefront. Merchants unsure whether they want or need to partner with a tobacco merchant services provider are strongly suggested to speak to a tobacco payment processor and discuss the pricing and terms as many of the fees and rates are comparable with that of most other online merchant services companies.
Types of Businesses Using Tobacco Credit Card Processing Services
It is recommended that most businesses in the tobacco industry use the services of a tobacco credit card processing company to manage their payment processing services for both retail storefront and online sales.
Most common types of tobacco credit card processing industries
- Cigarette Credit Card Processing
- E Cigarette Credit Card Processing
- Cigar Credit Card Processing
- Hookah Credit Card Processing
- Drug Paraphanelia Credit Card Processing
The global demand for Cigarettes had made it the most popular and widely smoked tobacco product in the world today, with over 5.5 Trillion cigarettes smoked in 2016 alone. Sales of online cigarettes are minimal in the USA with strict regulations concerning the sale of these tobacco products through the PACT act and other such Federal and State legislation.
The fastest growing segment in the tobacco industry today, e cigs have been experiencing over a 20% annual growth and are expected to become an over $60 billion a year industry by 2025. The growth of the electronic cigarette industry has caught the attention of many lawmakers, potentially creating a more restrictive sales environment in the future.
One of the oldest tobacco products sold in the United States, cigars have been part of American tobacco history since the early 1800’s. While their popularity has given way to cigarettes, there has been a resurgence of premium cigar companies catering to the now $1 billion a year industry in the USA.
A fixture in most Middle Eastern cultures, the popularity of hookah as caught on in the USA with the introduction of hookah bars and a variety of shisha (hookah tobacco) types to suit the tastes of nearly all smokers. Similar to e Cigs, as the growth of hookah continues, legislation has begun regulating the sales of both shisha tobacco and hookah pipes.
A small industry in terms of size when compared to the cigarettes or growing e Cig industries, the demand for tobacco paraphernalia including various pipes, bongs, and other accessories has remained constant over the years. In recent years, many states have loosened their regulations on recreational marijuana continuing the interest in and demand for various tobacco-related products.
Common Types of Drug Paraphernalia Merchant Accounts
Even though many of these paraphernalia businesses are not selling tobacco, the accessories associated with these tobacco products might be restricted at various banks and payment processors due to their association with tobacco or marijuana use. These types of businesses might not be able to sell their products online without the use of merchant services from a tobacco credit card processor.
How does Tobacco Credit Card Processing Work?
For a credit card transaction to be processed, there are a number of different companies and networks involved in handling the nearly instantaneous transaction from start to finish. Payments can be accepted through a number of different methods, including online through a payment gateway, in a retail storefront with a credit card terminal or over the phone using a virtual terminal, regardless of the acceptance method the system for processing is relatively identical.
Most tobacco credit card processing services are set up using a merchant services company, but payment processing can also be handled directly by the acquiring bank, payment services provider (PSP) or aggregator. Retail tobacco sales in the United States can generally be handled by most merchants services providers, but e-commerce tobacco businesses will want to partner with either a merchant services provider that specializes in medium to higher risk businesses, including online tobacco sales.
Card account information that is captured by the business at either their retail storefront or through an online store is sent to the cardholder’s bank for payment authorization and the eventual funding of the transaction. From the credit card terminal, sometimes known as a Point of Sale (POS) system, the card account information is encrypted and sent through the merchant services provider to the acquiring bank for acceptance into the payment networks of either Visa/MasterCard, American Express or Discover.
Once the payment card information has reached the payment card network, card account information is deciphered to determine the cardholder’s bank and ensure the merchant’s authorization request is directed over to the appropriate bank for approval. Card accounts vary depending on the payment card network and the sponsoring banks that are utilizing those payment networks, with every bank having unique card account information used to differentiate between one another.
Card Account Numbers and the Payment Networks
- JCB – 35xx
- American Express – 37xx
- Visa – 4xxx
- MasterCard – 5xxx
- Discover – 6xxx
- China Union Pay – 62xx
Once the authorization has been received at the customer’s bank, a verification of the cardholder account’s available credit along with a multi-point fraud check will help the bank determine whether the transaction can be approved or should be denied for any reason. The result from the authorization request is sent back through the card association’s network to the merchant’s acquiring bank to be displayed at the merchant credit card terminal as either a printed receipt at the credit card machine or displayed on the POS system screen.
Transactions from e-commerce sales will go through an identical authorization process, utilizing many of the same networks and security protocols with the only difference being that instead of a credit card terminal, transactions will be sent from the website shopping cart in a secure format through a payment gateway to the acquiring bank. The payment gateway will encrypt and provide high levels of financial security that is needed to handle customer card account information in the most secure manner possible, limiting the liabilities of merchants and lowering the potential losses of the banking institutions.
Similar to credit card terminals, payment gateways are also required to be PCI Compliant in order to handle the sensitive card account information between the customer and the payment networks. Industry standards for encryption along with regular security checks and software updates ensure that the hardware and/or software being used by merchants can withstand security threats by any type of fraud or hacking attempts.
How Tobacco Credit Card Processing fees are determined
Fees that are charged to merchants for credit card processing services can be determined in a number of different ways depending on the payment processor that is being used and the solution that best fits the needs of the merchant and their business. Differences in pricing models and the types of sales received in the merchant locations can help determine the best pricing program for their business needs.
One of the original methods for charging customers was the tiered pricing system that was widely used during the first years that merchant accounts were beginning to be rolled out. As the industry became saturated with payment processors and sales organizations, the payment processors found new ways to sell their services and lower the costs charged to the merchants and businesses
The tiered pricing model offered merchants multiple different levels that customer cards would qualify for, with rates at or below 1%, the program appeared like a fantastic deal to most businesses. These low teaser rates became a selling point for businesses, but as transactions were processed, merchants began to realize that many of their sales did not qualify for these low rates, ultimately many transactions were downgraded to more expensive tiers due to the parameters surrounding the types of transactions and cards used by the customers.
One of the most common types of pricing models used by merchants today, especially larger businesses is the price plus, otherwise known as cost-plus pricing since it provides the most consistent and fair pricing structure. Unlike other price structures, the cost plus adds a set fee per transaction to the cost of the credit or debit card; and while the set fee from the payment processor will not fluctuate, the true cost of the debit or credit card can vary depending on what the payment card network and customer card issuing bank determine.
Another pricing system that has been gaining traction in the last few years has been the flat rate merchant account; whether it is a flat rate per card such is the PayPal bills merchants or an account that charges merchants a flat monthly membership fee with no transaction fees up to a certain transaction level. This type of billing model has been favorable for startup merchants, but as businesses start to grow it is generally cheaper to find a tobacco credit card processing service that can give merchants a direct account.
As tiered pricing has lost its favor with many merchant services companies along with retail or e-commerce businesses, the popularity of such gimmicks as flat fee pricing or a monthly membership fee might go the same way. For many merchants operating full time, the cost of using a flat fee pricing model is enough to send many fleeing to lower cost models that will not charge a premium for the simplicity of their program. Merchants shopping for merchant services are encouraged to check on a cost-plus pricing model when shopping around, the possibility for savings far greater than the other plans.
Compliant Tobacco Credit Card Processing
While some businesses selling tobacco accessories might not need to register with the card associations, merchants selling cigars, loose tobacco and other forms of tobacco products will have to become compliant in order to establish merchant services and remain in good standing. While the global requirements might vary, compliance in the United States requires merchants to undergo a review of their online policies and register with the MasterCard card association once their tobacco merchant account is approved.
Partnering with Tobacco Merchant Services, our agents make this process an easy registration for merchants that will need this added requirement and we will continue to provide ongoing monitoring to prevent any potential interruptions to the merchant services. If regulations or any other changes come to the tobacco merchant services industry, our team will work with the merchant to ensure that all businesses make the necessary changes to remain compliant, alleviating any risk or non-compliance, fines or loss of credit card processing services.
Benefits of Tobacco Credit Card Processing
Merchants that decide to accept credit cards are opening their business to greater earning and potentially better success by generating higher sales and profits than compared to only accepting cash or checks. Accepting credit cards will help build in-store and online sales, an important segment of commerce today as customers shop more and more every year online.
Accepting credit cards helps tobacco merchants:
- Attract New Customers
- Increase Average Ticket Prices
- Ability to Accept Payments Online
Consumers today carry less cash if at all any, making the need to accept payment card transactions more important than ever before in order to cater to the changing trends of customers. Having a tobacco merchant account in place will help ensure that the merchants have a reliable and secure payment processing solution to handle the needs of the tobacco industry.
Most customers tend to spend more money than what is in their pockets at a given time, whether due to impulse purchases or preferring to make larger payments with a debit or credit card, many customers will opt for payment card transaction instead of using cash, potentially separating merchants from other smoke and glass shops that only offer cash sales.
Though there are fees for accepting credit card and debit card transactions, more time than not the benefits of accepting payment cards outweighs any of the fees or other expenses that are associated with a tobacco merchant account.
Accepting Tobacco Credit Card Payments Online
Accepting credit card and debit card transactions online will allow for merchants to also reach a segment of the population they were unable to sell to in the past, paving the way for greater revenues and profits by simply offering product sales to a wider audience.
Accepting payments over the internet is essential for some merchants looking to start out in the industry, or for existing merchants looking for ways to increase revenues as more and more customers turn to the internet to do their purchasing. Working with a merchant services company that offers secure payment processing with PCI Compliant payment gateway services and ongoing fraud monitoring is essential for building a successful online business.
Operating online, businesses will need a payment gateway that works with most shopping cart programs and is able to accept a direct API integration to ensure that transactions are handled in a secure environment without the risk of interference from fraudulent programs or individuals. Within the payment gateway, having the ability to manage report, batching and other functions will help management and bookkeepers monitor the business and customers.
The Benefits of an Online Tobacco Credit Card Processing
Many merchants operating storefronts have realized that online tobacco sales can complement their current business and significantly increase sales. Partnering with a company that can provide online tobacco credit card processing services can ensure that the establishing of the e-commerce store and merchant account services is safe, secure and reliable.
Benefits Merchants experience with Tobacco Merchant Services
- Full PCI Compliance
- Fraud Monitoring Services
- Complete Reporting and Transaction Management
- Fast Payouts; Daily and Consistently.
- No need to require customers to use 3rd party payment software services.
Besides allowing merchants the ability to open their potential customer base to a nearly unlimited audience, using an online PCI Compliant merchant account will provide merchants the security and functionality to process transactions online and remotely in a secure environment. Many merchants have opted to operate solely online with all the security advances that are available for e-commerce transactions, allowing businesses to reduce overhead and remain profitable online.
Another important piece of any online tobacco merchant account is the payment gateway that is used to link a business website to the merchant acquiring bank and payment network. Most payment gateways will provide merchants an easy and robust reporting application to view transactions that have been processed, pending or have been refunded; allowing managers the ability to keep a tab on customer and employee transactions from virtually anywhere.
Starting an online business with many of the tools available to tobacco merchants today from Tobacco Merchant Services can provide a simple and affordable means to opening your doors. Our affordable online tobacco credit card processing services can help merchants get the start they need as they start growing their online tobacco business empire.
What is Required for a Tobacco Credit Card Processing account?
To set up tobacco credit card processing services different payment processors might require a few different documents, but most payment processors will require the same information for tobacco merchant services. These documents include, but are not limited to:
- Completed Application
- Social Security Number
- Copy of Drivers License or Passport
- Voided Check from Settlement Bank Account
- Legal Opinion Letter (for US-based tobacco merchants)
- Last 3-6 Months Bank Statements (if currently processing)
- Last 3-6 Months Payment Processing Statements (if currently processing)
For underwriters at payment processors, having a clear understanding of the merchant and their business is essential to make a decision on the business that is searching for tobacco credit card processing services. Without a complete application to answer many of the questions asked by underwriters, a merchant account will likely be denied until all of the information required by the payment processors is submitted in the format required by the underwriting personnel.
Proper KYC (Know Your Client) information is required by payment card networks along with the payment processors to ensure that the person listed on the application is, in fact, the person listed on the application and applying for the account, eliminating the risk of fraud or identity theft by a simple check of personal information and a government-issued ID.
One of the most important parts of the application used in the determination of the merchant account is the creditworthiness of the applicant and to verify the merchant is not present on the MATCH list. If there happen to be any questions or potential problems with a merchants credit or past payment processing history, underwriters are able to offer other solutions, such as smaller volumes or reserves to ensure that no funds are lost on the account.
Businesses that are currently processing transactions will usually require a recent copy of their payment processing and banking history to give the underwriters a good view of what their financials look like. Merchants operating with limited reserves or with excessive chargebacks will generally find that other banks will not want to work with them as enthusiastically as merchants with a stronger financial history.
Depending on the types of tobacco products being sold, some payment processors will require the submission of a legal opinion letter from a qualified individual familiar with the tobacco rules, regulations and laws. A check of the practices of the merchant against the guidelines set forth by MasterCard will either let the underwriters know that merchant is either in full compliance or not with the tobacco credit card processing regulations.
Partnering with Tobacco Merchant Services
At Tobacco Merchant Services, we understand tobacco merchant accounts and how to work with the various banks and payment processing organizations operating in the industry today. The fast application and quick integration process easily link tobacco e-commerce websites with our acquiring banks, allowing merchants to start accepting credit cards with a reliable payment processing service and low-cost structure.
It is important for tobacco merchants operating over the internet to work with a credit card processing company that specializes and understands the tobacco industry, though many online payment providers claim they can handle tobacco payment processing services, most banks will not accept that liability. With our ongoing Fraud Monitoring and our PCI Compliant gateway, customers and merchants can rest assured that all transactions have been handled and sent in a secure manner without the concern for fraud or theft.
The payment processing services through Tobacco Merchant Services is not limited to only retail cigar or hookah products, we provide credit card processing to all types of tobacco companies including manufacturers and wholesalers. Contact our offices with any questions and our team of payment processing professionals will help answer any questions or concerns tobacco credit card processing services and support. We look forward to hearing from you.