A smoke shop merchant account is what your business needs if you are looking to accept credit and debit card transactions. To be fair, this is the best way to accept payment and grow your profits. But what is a smoke shop merchant account? And what do you need to know about it? Let’s find out.
A smoke shop sells tobacco and smoking products such as rolling papers, hand pipes, and so forth. Although in most states, a smoke shop cannot actually sell marijuana. Its sale of marijuana-related products like glass pipes and glass bongs may earn it the name of the head shop. And if this store is all eCommerce, it would be an online headshop. Together, there are about 380,000 of these tobacco retailers in the United States.
No matter how you roll it, tobacco shops dwell in somewhat of a gray space in the world of retail—poised between an industry that is legal but acknowledged as possessing health risks (e.g. straight tobacco) and an industry that is just barely crossing the cusp of legality (e.g. the cannabis industry). And because of the products they sell, smoke shops may attract criminal activity, which includes fraudulent payments.
For these reasons, as we’ll see, smoke shops need some unique payment solutions when it comes to collecting debit, credit, and mobile payments.
Social Smoke Shops
A smoke shop might also be a social venue. For instance, if a smoke shop specializes in selling cigars—or sells cigars in addition to a full spectrum of other smoking accessories—they might have a smoking lounge for customers to sample the merchandise. Think of wood-paneling, comfy leather chairs, and lots of conversation about sports, politics, and the best way to cook meat (not necessarily in that order).
Smoke Shops and CBD
Laws about marijuana vary by state, but many states allow retailers to sell CBD products even in a pharmacy or grocery store. In case you’re wondering, CBD is a chemical extracted from marijuana, which may have therapeutic properties.
That said, a smoke shop may also sell CBD oil or other cannabinoid products. But in most states, CBD smoke shops will not sell exclusively marijuana-related paraphernalia like dab pens, dab rigs, and other dab tools (and if you care to dabble in what that means, you’ll have to do some Googling). There’s a wide array of smoke and smokeless products available in these spaces.
Other Smoke Shop Products
But nonetheless, they do sell paraphernalia that could be used for tobacco, giving rise to a sort of pervading cultural view that smoke shops are often serving a customer base of—how do we put it politely—individuals on a journey that might involve lots of tie-dye apparel. Perhaps one clue is the fact that nobody really needs to smoke tobacco out of a glass pipe shaped like an octopus. Or maybe they do.
The Rising Popularity of Smoke Shops Around the United States
Most American consumers don’t know this, but once upon a time, the smoke shop was a fixture of Main Street. Just like the barbershop had its tricolor pole out front, the smoke shop had a wooden Indian out front. The usage of these figures dates back to the 17th century when King Charles I of England forbade overhead signage so pedestrians wouldn’t bump their heads (seems reasonable, we suppose).
A statue of a Scotsman, for instance, signified that Scottish snuff was available within. Across the pond (as they say) in the colonies, a Native American was a symbolic representation of the tobacco industry.
Although such ethnic signage may have fallen out of vogue, the smoke shop is back in business…with a little bit of a different look. There are a few factors driving the increase in smoke shops. One is the increasing legalization of marijuana around the country. Another is the rise of e-cigs and vapes.
The global e-cigarette and vaporizer market is already valued at $22 billion and is expected to grow at a CAGR of more than 30% over the next seven years. Similarly, domestic cannabis sales are already on track to reach $57 billion in 2030 but might surpass $72 billion if 18 additional states on the radar of potheads everywhere activated their market by legalizing Mary Jane.
Decrease in Cigarette Sales
Contrasting trends include a decrease in traditional cigarette sales. PMI or Philip Morris International (the brand behind Marlboro) acknowledges that their cigarette shipment volume has decreased from 847 billion in 2015 to 625 billion in 2021, for a 25% total decrease.
Somewhat surprisingly, Phillip Morris writes that their “aim is to ultimately replace cigarettes with smoke-free alternatives.” Or perhaps it’s not so surprising because, during that same time period, shipments of heated tobacco units increased from 7 billion to 95 billion—a whopping 1,258% increase. With numbers like that, PMI is probably not worried about the end of paper cigarettes impacting their bottom line.
Increase in Hookah Sales
One curveball in the mix is hookah, a trend that is gaining some popularity with young adults. The CDC estimates that about 12.3% of young adults aged 19-30 years had smoked hookah at least once in the past year.
A hookah is a type of water pipe that is used to smoke flavored tobacco. It’s a social activity, typically done in groups as a mouthpiece is passed around or multiple mouthpieces are connected to the same water pipe. And the place where people get their hookah, hookah accessories, and flavored tobacco is none other than the smoke shop.
So, in summary, while traditional cigarettes are on the wane—probably due to the concerted effort of health experts and politicians to legislate and tax them out of existence—vapes are on the rise, as is marijuana and hookah use. The smoke shop is the one-stop shop for all these tobacco and hemp-related pursuits.
Do Smoke Shops Facilitate Any Health Risks?
This question pretty much answers itself. At this point, everyone is fully aware of the fact that smoking cigarettes are bad for your health. It is highly addictive, and many of the ingredients are extremely carcinogenic. And while Phillip Morris may tout electronic cigarettes as a viable health alternative…let’s be honest with ourselves: they’re not.
Vape Health Risks
Research has shown that vaping exposes the vaper’s respiratory system to greater levels of nicotine, carbon monoxide, and other toxic chemicals than cigarettes. Vaping has also been shown to result in acute, chronic, or even fatal injury: there were 64 deaths and 2,758 hospitalizations from vaping in 2020 alone, for example.
Hookah Health Risks
Hookah is not much better. While it seems like a healthier alternative to cigarette smoking (with some apple flavor as well), hookah smokers may inhale 150 to 180 times more smoke than from a cigarette, as they engage in roughly 200 puffs per hour—about ten times more than one cigarette.
Users are also at risk for other diseases like oral herpes because they may share a mouthpiece—and asking everyone at the hookah sesh to show proof that they’re clean is decidedly…not chill.
Hookah users may believe that hookah is healthier because it’s a mix of tobacco, fruit, and molasses as opposed to tobacco and synthetic carcinogens, as well as the fact that the smoke is filtered through water. The fact of the matter is that smoke is still smoke, and hookah sessions produce a lot of secondhand smoke, which is known to be problematic.
Marijuana Health Risks
Marijuana (which goes by several other names, including pot, grass, weed, head, Mary Jane, doobie, bud, ganja, and insert your local codeword here) is a little bit harder to pin down in terms of direct risk.
In fact, studies have shown that marijuana has incredible therapeutic benefits for those suffering from chronic pain, anxiety, cancer, and depression. And yet, all the same, marijuana can become (contrary to popular protestations) a gateway drug.
Or maybe it isn’t—you’ll find an incredible amount of ink spilled on this topic. In any case, a smoke shop does not necessarily sell marijuana unless it’s also a dispensary or if it’s completely legalized in that particular state.
One thing is for certain: legal marijuana is definitely a new frontier, as are e-cigs. Hookah is fairly old, going back all the way to Mughal India. But hookah as a trend in the United States is fairly recent. And the related product with a mutual ingredient of tobacco (cigarettes) is known to be a health risk.
As such, the nature of this industry means that liability insurance will probably be a little bit more expensive (but ask your local insurance broker). And it also means that payment processors will regard a smoke shop as a high risk merchant account.
Are Smoke Shops Dangerous?
But wait…it gets better (or worse). Smoke shops may possess dangers beyond health dangers. Studies have shown that smoke shops attract crime, especially in urban neighborhoods, just like liquor stores (in case you’re wondering, other so-called nuisance properties include motels, check-cashing payday lenders, and vacant buildings).
To be more precise, the 100-foot radius around smoke shops exhibited a higher violent crime rate than the average violent crime rate within the same size area surrounding convenience and grocery stores (just to use two similar venues for the purposes of the study).
Criminal Cash-incentive Risks
There could be a number of reasons why smoke shops attract crime. Smoke shops are cash-intensive businesses. And sometimes, cash-intensive businesses can become focal points for money laundering and even terrorist activity because cash is very difficult to trace. Aside from these very serious forms of criminal activity, cash also attracts robberies.
Product Health Risks
Then, of course, there is the product itself. Tobacco paraphernalia may sometimes be used for harder drugs. And sometimes, those using harder drugs also habitually use tobacco or marijuana. And hard drugs can become a nexus of criminal activity between “the game” of their conveyance and the behavioral and psychological disturbances they can cause.
In some locations, smoke shop owners have been selling some really dank weed…and by dank, we mean weed contaminated with salmonella and pesticides—leading some customers to say: Bro, you won’t believe where this took me (the hospital). Some smoke shops are also circumnavigating state rules about marijuana.
Of course, there might be a friendly chef at your local KFC doing the same (ask for those extra biscuits, apparently), but the risk of illegal drug sales is much greater at a place selling octopus-shaped bongs at affordable prices than it is at a place selling chicken, coleslaw, and extra biscuits (real biscuits, we mean).
The crime-related risk—in addition to the health risks—that smoke shops generate means additional risks for payment processors…so much so that a smoke shop is almost always going to be labeled a high risk merchant.
What is a High-Risk Merchant Account?
A high-risk merchant is one that traditional payment processors are weary of working with. Many of these payment processors are actually aggregators that collect merchant accounts and put them under their own merchant ID—things like PayPal, Square, or Shopify Payments (which is actually Square). These aggregators don’t want any problems, and risky businesses can cause them complications they’d rather avoid–hence, they do not provide any high-risk merchant accounts.
Even payment processors that don’t focus on mobile or web-based payments and instead service POS systems are weary of working with these high-risk businesses. While there is no universal list of what constitutes high-risk, definitions will be pretty similar for each payment processor.
Industries that pose health risks, attract crime, and create potential legal complications are not attractive to customers. Smoke shops fall into all those categories because of their product, patterns of behavior around smoke shops, and certain products they sell that are brand new or just barely legal. Thus, a smoke shop merchant account must be found through a high-risk payment processor.
A high-risk merchant payment processor may charge slightly higher fees than a normative payment processor. They may also require a business to keep a rolling reserve (of cash on hand with the payment processor) to cover chargebacks.
As you may lamentably know, chargebacks are when a customer doesn’t call you for a refund—they just call their creditor and open a dispute, which results in you losing a sale and having to pay up to $200 (or more) to clean up the backend mess between banks and card networks.
Collect Payment For Your Smoke Shop Merchant Account
Before anything else, you need procedures in place to avoid identity theft because smoke shops tend to attract credit card fraud. This process might include something like requiring customers to show ID when they make a purchase so you can match the name on their ID to the name on their credit card.
Of course, your state probably has laws about selling tobacco or tobacco-related products that require you to examine an ID to make sure the customer is 18. But in addition to following these rules to stay on the good side of the law, you should follow them to avoid chargebacks from stolen credit cards.
It’s unlikely that you’ll want to avoid collecting cash because that might turn away a significant percentage of customers in your particular business. You can, however, encourage customers to pay with plastic by offering a reward program: there are a number of software options that can integrate with your payment processor.
Even if you can’t find a digital solution, you could do something as simple as a punch card (and make sure it’s a uniquely shaped hole punch). And for the cash you collect, you should keep the register at the back end of the store, empty it regularly, and post signage that your store register does not have more than $100 in the register and that employees do not have access to the safe.
Taking steps like these can actually help you get better rates with a payment processor because they will see that you are making an attempt to reduce your chargebacks and attract less crime. Of course, in the case of tobacco and smoke shops, you can’t really get around the dangers associated with the product and some of the crime it inherently attracts.
What About Online Smoke Shop Merchant Accounts?
An online smoke shop may sell some of the same products as a brick and mortar. But a smoke shop online will also entail other risks, such as a greater likelihood of card-not-present fraud and identity theft.
Of course, there are ample reasons to explore opening up something like a CBD oil store or an eCig smoke shop online. The industry is booming, the products are popular, and the inventory costs are reasonable.
Note, however, that things like CBD online stores face additional regulatory challenges from both the public and private sectors. For instance, Shopify will let you open a CBD store, but it probably won’t manage its payment processing. You can use the Shopify platform to design a very good-looking Hemp CBD oil store, but you’ll need to find a high risk merchant payment processor to collect payments.
High-risk payment processors will be far more able to assist in credit and debit card processing online and in-person. So, all your payment needs are met with one service provider. Although, keep in mind some high-risk processors may not offer online services. It may take some weeding through to find the right one for your business.
Are Smoke Shops Profitable?
With all this talk about how a smoke shop is a risky business, you might be wondering if they are worth the risks. Of course, like any business, so much of that comes down to planning and operations—but a smoke shop may offer the potential for a better return than other business models. Smoke shop revenue estimations hover around an average of $300,000 with a 7-20% profit margin.
To sweeten the pot, a brick-and-mortar smoke shop might have an estimated startup cost of around $143,000. Which is much less than opening up a Starbucks (in case you’re wondering, you’ll need to pay a $315,000 licensing fee and show that you have $700,000 of liquidity on hand to do that).
Online smoke shops can cost even less. Perhaps as little as a few thousand dollars. The upshot of these startup costs means that yes, smoke shops are indeed a profitable venture. Like any business, there will be some challenges. In the case of smoke shops, one of those challenges will be processing non-cash payments—but there are solutions to facilitate that, such as finding a good high-risk merchant processor.
To contact sales, click HERE. And to learn more about ECS Smoke Shop Merchant Accounts visit High-Risk.
