As the tobacco industry has evolved, classic products have met newer versions while different cultures have exchanged local smoking traditions with one another, creating a continual growth and demand for tobacco products and accessories across the globe, but this never stopped with just the consumer, tobacco merchants and stores have experienced their own changes and growth with new products and the shift to an e-Commerce society. Making payments online has become easier for customers while it has become more difficult for merchants in the tobacco industry, a combination of changes to bank acceptance standards along with federal and local laws restricting the sale of tobacco products, the need for reliable tobacco merchant accounts has never been more.
The tobacco industry is enormous; generating an estimated $750 Billion a year in global revenue from the over 20% of the world’s adult population that smokes and consumes over 5 and half trillion cigarettes annually and there is no expected slow down in the near future as predictions are pointing for those numbers to potentially double in the next few years. Add the anticipated growth in the tobacco industry to the robust and ever-increasing global e-commerce industry, it’s apparent that merchants will need a way to satisfy their online customers in addition to any retail customers they currently serve.
While many merchants and businesses have emerged and expanded to meet the growing demand of the tobacco industry, many have been met with difficulty in finding tobacco merchant accounts, changing bank guidelines and business models have forced many to payment processors to shy away from accepting tobacco merchant accounts, leaving a large void for tobacco merchants in need of a reliable payment processor. This need for tobacco payment processing services has been filled by many niche payment service providers, including companies that specialize in tobacco and other high-risk merchant account industries but with so many options available, how can merchants differentiate between different tobacco merchant accounts and providers?
Tobacco Merchant Accounts Table of Contents
History of Tobacco in the USA
Tobacco is a native plant to the American continent and has been cultivated and used for thousands of years, with the earliest estimates placing the first crops growing between 1400-1000 BC in the Americas and used by Native Americans for ceremonial and medical purposes. At the end of the 15th century, explorers to the Americas were first introduced to tobacco and return with it back to Europe, but the usage of tobacco began exploding in popularity throughout Europe after the return of the Conquistadors from the Spanish Inquisition of the Americas during the 16th century.
The Americas became one of the largest regions for the tobacco industry in the world with the growth of the United States and Caribbean during the end of the 17th century and on into the 18th century, experiencing robust economic expansion and vast trading with European and other global markets until the Revolutionary War when British embargoes created significant problems for American farmers. By the end of the War of 1812, the demand by Europeans for American tobacco resumed and the United States answered with large farms and plantations providing a seemingly endless supply of tobacco for export to all point throughout the globe.
Cigars, loose tobacco, and chewing tobacco were the main tobacco products sold throughout the world up until the 1900’s after the invention of the cigarette rolling machine, allowing manufacturers to quickly and efficiently rolls thousands of cigarettes a day verse hundreds a day prior to the rolling machines. The demand by Americans has also tailed off during the latter part of the 20th and up until today, with the CDC reporting that approximately 15.5% of US adult smoke, down from over 40% in the 1960’s.
Starting in 1978, the export of tobacco from the United States began declining, and through the manufacturing of cigarettes continued to grow during that period, ultimately government intervention through price support programs increased the demand for cheaper, foreign tobacco. Today, the tobacco industry continues to remain strong with an interest in flavored hookah smoking and newer products, such as electronic cigarettes, that have caught on with younger smokers and is the fastest growing segment for many tobacco manufacturers.
Types of Tobacco
Today in the United States there are a few popular forms of Tobacco products, ranging from loose leaf tobacco products through smokeless e Juices used by the growing segment of e Cigarettes smokers. Some of the most common types of tobacco seem today are
- Shisha (Hookah)
- e Jucies (e Cigarette)
As developed countries have enacted and continue to pass legislation to curb the usage of cigarettes, they remain one of the most common forms of tobacco products with manufacturers producing nearly 6 trillion annually. In the United States, the sale of cigarettes is strictly monitored through the Prevent All Cigarette Trafficking Act (PACT), requiring merchants to register with state and federal tax offices along with filing monthly reports detailing the previous month’s shipments, making cigarette merchant accounts difficult to establish in the USA.
Cigars have been staples of society since the 1800’s in the United States, with the explosion of Cuban cigars and many of their cigar makers moving the USA, the demand continued to grow. Unlike cigarettes, roll-your-own and smokeless tobacco; cigars were excluded from the federal PACT Act, thus remaining an industry that some banks and payment processors will allow as a restricted merchant type.
Smokeless tobacco products are available in a number of different variants, including chewing, snuff (inhalation) or dip (placed between the lip and gum) and similar to cigarettes, smokeless tobacco products are regulated under the PACT Act, thus making the online sales and card not present (CNP) transactions more difficult than the other forms of tobacco not as heavily regulated by federal and local laws.
The flavored tobacco smoked in hookahs, sometimes referred to as shisha tobacco, has caught on with the younger population in the USA and helped grow its popularity with new hookah lounges popping up and endless varieties of flavors, including tobacco-free alternatives. Though it is classified as a tobacco product, many banks accepting other tobacco products are able to accept hookah merchants as long as all the businesses remain in compliance with all federal and local laws regarding tobacco sales.
The e cigarette and vaporizer industry have been operating in a grey area with the card networks since their inception, and though they are regulated by the FDA, many businesses operating online or through a retail storefront can do so with only a local business license. It is to be seen if these products in the future will come under increased scrutiny or be included under such legislation as the PACT Act, for now, many merchant account providers require only an age verification program to control online sales in a CNP environment.
What are Tobacco Merchant Accounts?
Merchants that want to accept credit cards at their business need to establish a type of bank account that allows for the processing of debit and credit card payments through the card networks of Visa, MasterCard, Discover, American Express, JCB and CUP. Many banks, especially smaller banking institutions, are unable to work directly with the merchant, requiring the services of a payment processor that has partnered with a bank, known as a merchant acquiring bank, that has access to the payment card networks.
Merchants in the tobacco industry can generally find payment processing services for a retail location without much trouble, most payment services providers and merchant acquirers consider these types of swiped or dipped transactions, referred to as card present, to be acceptable within their terms of service. Tobacco merchants sometimes run into difficulty with certain products when the business wants to accept mail order and telephone sales (MOTO) or online e-commerce transactions.
Payments can be accepted by a merchant a few different ways; most commonly through the use of a credit card terminal similar to a Point of Sale (POS) system or credit card machine found in nearly every retail store today. Merchants operating an e-commerce website will use a payment gateway to capture and send payment card transactions detail from their website shopping cart to the acquiring bank, similar to how a credit card terminal transmits the payment card information from the store location.
After the authorizations for the transactions have been approved, the merchant acquiring bank begins the process of collecting the approved funds from the various customer banks on behalf of the merchant and deposits those funds into the merchant’s business bank account. The complete process between all participating organizations, from the transaction authorization to the payment settlement normally takes between 24 to 48 business hours to complete.
Other types of Tobacco Payment Processing
The financial industry is constantly going through changes, whether it is trying to keep with new products, staying on top of new laws and legislation or finding ways to minimizing risk while increasing profits, the industry is always evolving. Since the late 1990’s, payment processing became an industry that began to change, new companies offering new services to streamline the customer experience while providing merchants with new solutions and functionality to help grow their businesses.
One of the biggest changes has been with e-commerce merchants having new options for payment acceptance; the ability to use either a merchant account or a sponsored payment account. Both types of payment accounts will allow for the acceptance of online payments, whether it’s through a payment gateway or virtual terminal, but each account does have its benefits and drawbacks that are important for merchants to recognize and choose between when setting up merchant services.
Sponsored merchant accounts are similar to other types of tobacco merchant accounts, providing businesses access to the payment card network through either a PSP (Payment Services Provider), Payment Aggregator or Payment Facilitator while not allowing merchants direct bank integration. Many higher risk payment processors provide services as one of these 3 business models, allowing for greater flexibility and tolerance of merchants that might be otherwise ineligible for a merchant account if they were to work directly with a merchant acquiring bank.
All of these payment services work with an acquiring bank, but the level and extent of their association with the merchant’s business will vary depending on their banking relationship. A PSP will set the merchant up at the bank and provide a bank MID (Merchant ID), but the PSP will not handle any of the settlements, rather they come directly from the bank to the merchant. A Payment Facilitator will also set the merchant up direct and provide a MID, but bank funds will be settled to the Facilitator who will disperse to the merchant. A Payment Aggregator has a single MID they control from the bank and allow merchants to integrate into their payment gateway, all transactions are sent to the acquiring bank under the MID and funds are sent back to the Aggregator for settlement individual settlements to each merchant.
Depending on the needs of the merchant, whether it is their payment processing history that is troublesome or the industry they are in, any one of the sponsored payment account types might be a good solution. Many times these sponsored tobacco merchant accounts are able to absorb higher chargeback rates by grouping merchants together to neutralize the effects while providing faster underwriting since many times its the payment processor that is taking the risk on the accounts.
How do Tobacco Merchant Accounts work?
After the merchant application has been approved and finalized by the merchant acquiring bank, a MID will be issued for use with either a credit card terminal, payment gateway or both. Once installed in a storefront or integrated into a website shopping cart, customers are able to make payments by either dipping or swiping their card in the credit card machine or by entering their information online into the payment gateway.
Once the customer card is accepted by a merchants’ credit card machine or payment gateway, the card account information is captured along with the information of the authorization requested, encrypted and sent through the merchant acquiring bank to the payment card network. Once the encrypted file is received at the card network, the information is deciphered and passed along to the appropriate card brand based on the account number provided.
The first number determines the card brand:
- 3 – American Express and other Entertainment/Travel Cards
- 4 – Visa
- 5 – MasterCard
- 6 – Discover
Since American Express and Discover are their own closed loop networks, they handle all aspects from the Merchant to the Customer. Visa and MasterCard, on the other hand, operate solely as service providers, so the first 6 numbers of a credit card will determine the cardholder’s issuing bank.
Once the card network determines the card brand and the payment authorization request is sent to the proper institution for a response to the customer request of payment. Credit card issuers will check the transaction against a number of the safeguards they employ to ensure that the transaction is indeed being initiated by the customer and that the customer does have the ability to make the purchase.
One of the most important checks done by the credit card issuer, but is also one of the most difficult to determine is fraud. By viewing past spending habits for anything that appears suspicious or abnormal; including geographic location, amount of the sale, stores or websites used, credit card issuers will make a decision to the best of their knowledge as to the validity of the transaction. If the transaction does not pass the fraud test, a response will be sent and the credit card will be frozen pending confirmation from the customer as to the transaction.
Authorizations that pass the card issuers fraud test will be checked for the financial status of the account by verifying the monetary amount of the authorization request and confirm that amount against the available credit remaining in the customer’s account. If there is a sufficient amount of available funds, the authorization can be approved versus a denial if there are not enough available funds to cover the cost of the transaction.
Once a decision has been determined by the card issuing bank, that response is sent back through the card network to the merchant location, whether in the form of a printed receipt at the credit card terminal or a web response within the payment gateway. This answer can be determined in a matter of seconds, a truly amazing piece of technology with you realize how many checks are performed and how many other authorization requests are being made simultaneously.
How Does Tobacco Merchant Account Pricing work?
The fees charged to a merchant account will vary from month to month and from account to account, merchants are charged fees consisting of transaction fees, discount fees and other monthly fees due to the acquiring banks, cardholder issuing banks and the payment card networks. Though all tobacco merchant accounts will carry costs and other expenses for the use of their services, the amount charged and how these fees are collected will vary based on the agreements with the payment processors.
When discussing the cost of a merchant account with merchants, the most common question is about the discount rate or percentage of the transaction that is charged by the payment processor for acceptance of a customer’s credit or debit card. Rates can be all over the board, depending on anything from the merchant, the bank or the business itself, any or all of these factors can drastically affect the discount rates, but understanding the fee structures can help merchants control costs while building their business.
Tobacco merchant accounts in the USA are set up using one of the most common billing structures offered today with the most popular choice being the interchange plus fee schedule. Interchange Plus, also known as Cost Plus, shows merchants the true cost per can and then tacks on a set discount (percentage) on every transaction, regardless if the customer uses a debit or credit card. A combination of its simplicity and low cost has led to the charge in recent years making interchange plus the go-to fee structure for merchants and sales organizations.
What was the most common structure, but has lost popularity to the Cost Plus system is the tiered pricing model that generally establishes from 3 to 6 different price points for transactions to be charged. The tier that the cards qualify for can vary for a number of reasons; the type of card used by the customer, how the payment was accepted by the merchant and when the transaction batched out. This complex, confusing and often costly pricing structure has fallen out of favor is generally not a recommended pricing structure to use when it can be avoided.
Looking at a credit card processing statement or a fee schedule from the initial merchant agreement, merchants will notice the other fees and costs associated with the merchant account that widely go unnoticed, but can become costly. The usual types of fees associated with tobacco merchant accounts that are billed to a merchant include transactions fees, compliance fees, monthly account maintenance fees, chargeback fees, and possible set up fees during the initial month of service.
Nearly every merchant account, beside some flat fee programs, charge fees on every authorization, refund and payment gateway transaction sent through to the merchant account. Monthly account maintenance fees and now compliance fees are regular costs that most merchants are charged while chargeback and retrieval fees are billed on a per occurrence basis when the merchant experiences any of those events. Some merchant accounts, including tobacco merchant accounts from a high-risk payment processor, might charge one time fees for the account underwriting and set up of the new services.
Are Tobacco Merchant Accounts Compliant?
As a higher risk merchant account category, businesses in the tobacco industry are required to follow strict rules and regulations set forth by state and federal governments when selling tobacco products. In addition to the strict legal guidelines required by the government, the card networks also require merchants to follow their regulations by performing a yearly audit of their practices and to pay a yearly compliance fee to the payment card network.
Merchants operating in the USA with a US based merchant account are required to file yearly compliance audits carried out by a qualified lawyer or tobacco professional confirming that the practices and safeguards the merchant has in place will prevent any potential legal liabilities. Most audits confirm that the merchant websites have an age verification program and require signature confirmation of delivery by people over the legal age in that jurisdiction to consume tobacco.
The MasterCard yearly compliance fee of $500 is used for the annual audit of the tobacco business; validating that the business is selling the authorized products, that all federal and local laws for tobacco sales are being followed and that the business is operating in a PCI Compliant manner. Constant changes to the Federal and local laws for the sale of tobacco products has forced MasterCard to require these yearly audits to prevent any potential legal problems for themselves or their acquiring bank partners.
Merchant operating online will also need to confirm that the payment gateway along with the web hosting they are using is fully PCI compliant. Most tobacco payment gateway applications will be compliant, but its essential for merchants to always confirm that the tobacco merchants accounts and other merchant services are compliant, elevating any risk of fines or penalties from the card networks or merchant acquiring banks.
Part of the payment card network compliance requires merchants to be properly categorized within the Merchant Category Code (MCC) to help the card networks regulate and manage the merchants using the network. The 4 digit code assigned to each merchant relates to the industry that the business operates within, for tobacco merchant accounts, the most common MMC codes used for tobacco merchant accounts are:
- 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 set up with MCC codes other than any listed above are recommended to contact your merchant services company to inquire about being incorrectly coded, failure to do so can cause a merchant to become “non-compliant”.
Advantages of Tobacco Merchant Accounts
Merchants processing payments through a merchant account generally have a higher volume limit along with fewer restrictions than the sponsored accounts of many of payment service providers and aggregators. Working with a merchant account also provides merchants with faster services, meaning transactions will authorize quicker and settlements of funds will reach the merchant’s bank accounts faster, normally occurring daily without any hold-backs verses sponsored accounts that might payout weekly and be delayed for weeks.
Merchants with the ability to accept credit cards can grow their customer base and revenues by reaching more people than ever before when only accepting cash and checks. As the tobacco marketplace evolves into an e-commerce world, a merchant account allows businesses the ability to keep up with their evolving customer base while accepting payments from new customers that could have never previously connected.
e-Commerce businesses using a payment gateway with their merchant account will benefit by having a direct API integration into the acquiring bank and provide merchants a fully PCI Compliant transaction environment for transactions originating from a shopping cart or virtual terminal. Most payment gateways will integrate into the largest shopping cart programs, providing quick and reliable transaction services along with robust reporting and transaction management functions.
Merchants accounts give businesses the ability to:
- 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 in the online tobacco industry that partner with a merchant services provider capable of providing tobacco merchant accounts have an upper hand verse other merchants that are operating through a merchant services companies unfamiliar with the tobacco industry. Tobacco is generally classified as a medium to higher risk industry and merchants operating in a CNP (Card Not Present) environment are regarded as the highest risk within the industry.
As regulations continue to change and become more stringent, merchant acquiring banks and payment processors that are unable or not willing to take on the added risk might decide to change their guidelines and possibly leave the industry. Working with a merchant services partner that specializes in the tobacco industry will ensure businesses have the most reliable payment processing services and merchants will always be prepared for any changes to the industry, eliminating the risk of a merchant accounts being restricted or shut down.
Types of Tobacco Merchant Accounts
Some of the most popular tobacco products and accessories that are for sale today are classified as medium to higher risk by many of the merchant acquiring banks and will require a payment processor specializing in tobacco merchant services. Products, such as pipes and hookahs, might not contain any type of tobacco, but will still require the use of a tobacco merchant account if they are to be sold online.
The most common tobacco products being sold online today
- Electronic Cigarettes
- Hookahs (including shisha and hookah tobacco)
- Glass Pipes
- Smoke Shops (including loose leaf and pipe tobacco)
- Head Shops
Smoke shops and other online stores selling a variety of tobacco accessories that are not federally regulated will want to utilize the services of a tobacco merchant account to prevent any potential restrictions or terminations of services.
Some of the more common products being sold using tobacco merchant accounts, but not limited to:
Pipe Cleaning Products
Apply with the Best Tobacco Merchant Account Services Provider
Many of the businesses that start working with Tobacco Merchant Services take advantage of our strong payment processing network within the banking and merchant services industry and while many merchant services companies and banks are unable or prefer to not work with tobacco businesses, our deep ties with multiple banking partners and payment processing companies continue to allow us to provide low-cost credit card processing solutions.
As an industry leader in tobacco merchant accounts, 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 merchants.