Card Conundrum Develops in Colorado Over Marijuana Sales

Customers Use Visa and MasterCard to Make Purchases Despite Card Company Ban

Updated Jan. 6, 2014 8:48 p.m. ET

Buying marijuana for recreational use now is legal in Colorado—and paying for it with plastic is getting easier.

The official rules of Visa Inc. V -0.61% and MasterCard Inc. MA -1.11% prohibit the use of their debit and credit cards for marijuana purchases, but some Colorado merchants are allowing customers to use them anyway.

That is because the card giants, owners of the processing networks that handle electronic payments, have quietly decided not to enforce their rules, according to people familiar with their strategies.

Instead, the people said, the companies are following the lead of the federal government, which has said it won't challenge state laws that decriminalize the drug.

Visa said in a statement that it follows federal law and tries to prevent the network from being used unlawfully. But it added that "given the federal government's position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers are best suited to make any determination about potential illegality."

A spokesman for MasterCard said the company considers marijuana card purchases to be illegal and would work with the merchant processor if such transactions occur.

The card conundrum is just one of numerous issues that accompany the legal use of marijuana—from how to determine if motorists are driving under the influence of pot to whether an employer can fire a worker who tests positive for marijuana that was obtained legally.

It also underscores the complex nature of the card industry, which relies on a maze of companies each time a consumer swipes a credit or debit card. While major banks and other big processors refuse to handle marijuana transactions for merchants, a flurry of independent middlemen are stepping up.

The issue has been gathering steam in recent years as more states permit the use of medical marijuana. But it has taken on even greater significance since Colorado became the first state to allow recreational marijuana use on Jan. 1.

The banking industry has been pushing government agencies to provide guidance on how to oversee bank accounts for businesses that sell marijuana legally under state law. The Justice Department is drafting legal guidance for banks, according to people familiar with the matter, but the agency's planned memo won't draw clear lines about what banks can and can't do.

Instead, the Justice Department will emphasize that prosecutors' priorities will be to go after businesses that use local retail marijuana sales as part of a larger criminal activity, such as diverting pot to states where it is still illegal, according to a person familiar with the draft. The person said the language of the document is still being revised and could take weeks or months until it is finalized.

Such a general framework isn't likely to satisfy many in the financial sector, said some banking industry representatives.

In Colorado, mom-and-pop companies in some cases are circumventing the way traditional transactions are processed to avoid the Visa and MasterCard networks, even though customers are using cards with those brands. The transactions essentially take place as if it were a withdrawal from an automated-teller machine.

"It's like when salmon can't swim in one direction, they'll figure out another way to go up the river," says Chris Mills, who sells card-processing systems to marijuana merchants through his company called GreenHouse Payment Solutions.

One of his clients is Denver Relief, where about 30% of the customers pay for their medical marijuana with a debit card, said Andy Betts, general manager of the dispensary. The employee swipes the card and the customer enters the card's regular personal identification number. The customer pays a $2 fee to the merchant for the service.

"Some people just don't want to carry cash," Mr. Betts says. The shop is in the final stages of being licensed to sell recreational marijuana.

The card networks don't follow the same type of "know-your-customer" rules as banks. Instead, they set rules that are to be followed by the companies that process card transactions on behalf of merchants.

American Express Co. appears to be taking a tougher stance.

The card network, which also issues its own cards, recently blocked transactions from a provider that advertised its ability to set marijuana merchants up so they could accept all major credit and debit cards.

"We monitor websites to help make sure that the policy is being enforced," an AmEx spokesman said.

Companies that process marijuana transactions also can circumvent Visa and MasterCard rules by logging a marijuana purchase as a more innocuous-seeming transaction. Tinkering with the so-called merchant category codes is considered a severe violation of card-industry rules.

The broad acceptance of credit and debit cards could eventually be a big boost for the card industry, which is eager to convert everyday cash purchases into plastic.

Colorado marijuana shop owners estimated that they rang up $1 million in sales on New Year's Day, the first day recreational pot became legal.

Organix LLC, a store in Breckenridge, Colo., accepts debit-card purchases for medical and recreational marijuana. The store's manager, Tyler Cooper, said debit cards represent about one-quarter of the store's sales.

"People love the option of paying with plastic," he said.