The Ultimate Guide to High-Risk Payment Processing for Smoke Shops

GUIDE

The Ultimate Guide to High-Risk Payment Processing for Smoke Shops

Do you carry CBD, delta-8, or kratom?

If you’re a smoke shop or vape shop owner, that’s probably one of the number one questions your customers have asked you recently.

Products like these have exploded in popularity — and they present an excellent opportunity to attract new customers to your small business and boost your sales.

The catch? Many standard payment processing providers will label you as a high-risk merchant for carrying these product lines, meaning that you’ll need a specialty solution.

In this guide, we’ll share everything you need to know about high-risk payment processing to help you make the most informed decision for your small business. Here’s a peek at what we’ll cover in this comprehensive resource:

What high-risk payment processing is, and why many smoke and vape shops are considered high-risk
How high-risk and standard payment processing are different
The benefits of high-risk payment processing for your smoke or vape shop
How to find a high-risk payment processing provider
How to future-proof your small business’ payment processing

Chapter 1

What Is High-Risk Payment Processing?

Before we dive straight into high-risk payment processing, let’s take a few steps back and discuss payment processing in general.

Payment Processing Basics

In today’s retail industry, most customers opt to pay using a debit card, credit card, or contactless payment method rather than purchasing their items with cash.

Payment processing is how you accept these card payments. Put simply, this foundational step in the checkout process is how funds are transferred from the customer’s account to your business’ account.

When a customer swipes or taps their card or mobile device to pay, your payment processing service receives the transaction information and validates it with their bank to ensure that the funds are available. After validation, your customers’ bank will approve or deny the transaction during a process called authorization. If everything goes right, the money from the sale will be transferred to your business’ account.

Why Do Some Businesses Need High-Risk Payment Processing?

High-risk processing is a specialty service offered by some payment processing providers to businesses that are considered to be more at risk of chargebacks, fraud, or other financial complications.

There’s a wide range of reasons that a business might be labeled high-risk by payment processors, including:

Industry: Payment processors consider some retail industries to have higher rates of chargebacks and fraud than others. Examples include diet and weight loss products, subscription services, and online betting.

Poor Credit History: Businesses with records of financial instability and unpaid debts may struggle to secure a standard payment processing account.

Controversial Product Lines: Businesses specializing in products that exist in a legal grey area or are subject to changing regulations may require high-risk payment processing. This is the category in which your smoke shop or vape shop likely falls if you carry products like CBD, delta-8, or kratom.

How Is High-Risk Payment Processing Different?

Along with the types of businesses they serve, there are some key differences between high-risk and standard payment processing. Let’s walk through what you need to know about high-risk payment processing:

High Risk Payment Processing Involves

Application Process: One of the first differences you’ll notice between high-risk and standard payment processing is the more in-depth application process. Your payment processor will take a more thorough look at your business and might require additional documentation before accepting your smoke or vape shop as a merchant.

Higher Payment Processing Fees: This is one of the most important distinctions to be aware of. To offset the risk of fraud and chargebacks, your payment processor will likely charge a higher fee per transaction.

Cash Reserve Requirements: Due to the financial risk of processing your payments, your processing provider might require a cash reserve to cover potential chargebacks.

Volume Caps: Many high-risk accounts have a limit on the number or monetary value of transactions, or that they’re able to process within a certain period. Understanding this restriction is critical because it can affect your business’ ability to scale.

Higher Chargeback Fees: In addition to higher processing fees and cash reserve requirements, high-risk payment processors protect themselves from losses by charging high-risk merchants higher fees when a customer requests a chargeback.

Each high-risk payment processor will have different requirements, so make sure to thoroughly research the specific terms of each provider when you’re evaluating your options.

Chapter 2

Why Are Smoke Shops Considered High-Risk?

Now that we’ve covered the fundamentals of high-risk payment processing, let’s talk about why it matters for your small business.

The most common reason for a business to be considered high-risk is that the processor is wary of excessive chargebacks and fraud, but there are a few specific reasons that smoke, vape, and cigar shops often fall into the high-risk category.

First, the tobacco industry is tightly regulated, with restrictions on the age of your customers, the types of products you’re allowed to stock, and even the marketing strategies you can use.

In addition to the legal complexities of selling tobacco and vape products, there’s reputational risk involved for the payment processor. The tobacco industry has faced public scrutiny for its health impacts, making it a riskier space to enter as a service provider.

The arrival of new products onto the tobacco and vape scene has also increased the need for high-risk payment processing. Cannabis-related products like cannabidiol (CBD), delta-8, as well as the herbal substance kratom, have exploded onto the market — bringing higher profits and higher risks to smoke and vape shops.

These products are relatively new to smoke shops and vape shops, are governed by complex regulations, and are still being investigated for their health effects — meaning that payment processors consider them high-risk.

Smoke and vape shops that offer CBD, delta-8, and kratom are more likely to be labeled high-risk than retailers focusing on more traditional tobacco products like cigarettes and cigars, so if you’re looking to sell these products, it’s crucial to understand high-risk payment processing.

Chapter 3

The Profit-Boosting Benefits of High-Risk Payment Processing

At this point, you may think of high-risk payment processing as a necessary evil for businesses that fall into certain categories, but in reality, it’s a great opportunity for your business.

Cigars POS Pull Quote Design

In this chapter, we’ll explore four reasons why your smoke or vape shop will benefit from high-risk processing.

Expansion of Product Offerings: By securing high-risk payment processing, you’re opening new doors for your smoke shop. You can sell emerging products like CBD, delta-8, and kratom, unhindered by processing limitations. Expanding your product offerings will boost your sales and help you attract new customers to your business.
Advanced Security and Fraud Protection: High-risk payment processors specialize in security — which gives you confidence in how your store’s transactions are handled. These providers often use enhanced encryption and real-time monitoring tools to protect your sensitive financial information.
Expertise in Risk Mitigation: Processors specializing in high-risk accounts are an invaluable source of experience and knowledge when navigating the complexities of running a high-risk business.
Recurring Payment Support: Choosing a high-risk payment processor gives you new opportunities to start a subscription-based business. For example, if you want to create a special membership for your smoke shop or open a cigar lounge, you can rely on your high-risk processor to securely handle recurring billing.

High-risk processing isn’t just a costly must-have for your smoke shop; it’s a way to process payments more securely, take profitable financial risks, and be the first among your competitors to offer new and exciting products.

Chapter 4

How To Choose the Right High-Risk Payment Processor

Selecting a payment processor for your smoke shop is a pivotal decision. This provider will be responsible for the security of every transaction that takes place in your store, so it’s critical to choose one that you can trust.

Your best bet will be to choose a payment processing provider that specializes in high-risk transactions in the tobacco and vape industry. These processors will understand your needs and goals, be familiar with the regulations and complexities of tobacco and vape sales, and be able to provide expert advice and support during your small business journey.

Research High-Risk Payment Processing Providers

Before submitting any merchant applications to payment processing providers, you’ll want to thoroughly evaluate each option and determine if their offerings fit your smoke shop’s needs.

Make sure to investigate how much experience each payment processing provider has in your smoke shop’s specialty. When talking with sales representatives, ask how many of their merchants are in the tobacco and vape space, whether these merchants offer products like CBD and kratom, and what specialty support they offer. Choosing a payment processor with experience in your niche will ensure that they’re knowledgeable about and compliant with all applicable laws and regulations.

Along with ensuring that each provider has the right expertise, you’ll want to make sure that their payment processing is the right financial fit for your smoke shop. Carefully evaluate their fee structures to ensure that you’re aware of all costs associated with their services. Make sure you understand their processing fees, chargeback fees, cash reserve requirements, and volume caps.

Look closely at their contract terms, too. Consider the length of the contract and whether you’re sure about sticking with a provider for that long, and ask about early termination fees so that you’re aware of the consequences of ending your contract early.

Search for reviews of each processor to learn whether other small business owners are happy with their service. One key thing to look for when browsing reviews is the quality of customer service and technical support. If your payment processing goes offline or if you encounter issues, their customer and technical support team should be easily reachable to help you get back to making sales.

Before you apply for a high-risk merchant account, be sure to contact multiple vendors to obtain pricing quotes and ensure you’re getting the best possible terms for your payment processing. Keep in mind that approval odds will also vary depending on industry, location, and credit history.

Pro tip: An excellent way to speed up the search process and find a trusted high-risk payment processor is through your point of sale (POS) provider. Many POS providers either offer integrated payment processing or will have expert recommendations to help you find a payment processing solution that meets your business’ needs, so make sure to check with them as you look for a provider.

How Do I Apply for a High-Risk Merchant Account?

The application process for high-risk payment processing can be extensive, so it’s helpful to be prepared.

First, you’ll want to gather your business’ documentation to ensure that you’re able to produce it upon request. Commonly-required documents include:

Banking information to identify where funds from processed transactions should be deposited
Employer identification number (EIN) for tax purposes and to verify your business
Government licenses like a tobacco retail license to prove that your smoke shop is compliant with all laws and regulations
Proof of Payment Card Industry (PCI) compliance to show that your business complies with all applicable regulations and best practices for handling customers’ financial information
Financial statements including profit and loss statements, balance sheets, and cash flow analyses to show the financial health of your business

Each processing provider might have different application requirements, so be ready to produce all of the documents on this list, along with others like records of your past processing history, business plan, or a personal guarantee.

After you’ve gathered all the necessary documentation, you can start filling out an online application for a high-risk merchant account. To prevent any delays in the approval process, ensure that all of the information you provide is complete and accurate.

How Much Does a High-Risk Merchant Account Cost?

The most accurate answer to this question is that it depends on your smoke shop’s niche, location, and financial history, but let’s talk about the most common costs associated with high-risk payment processing.

The most important thing to know is that high-risk merchant accounts will have higher per-transaction fees than standard merchant accounts. That means that for every transaction in your smoke shop, your processor will take a percentage of the purchase value in exchange for processing the sale.

Along with per-transaction fees, here are some other costs associated with high-risk merchant accounts. These will vary from provider to provider, so make sure to ask about fees during your research process:

Setup Fees: Your provider might charge an initial fee to set up your high-risk merchant account.
Monthly or Annual Fees: On top of your per-transaction processing fees, some providers charge a monthly or annual fee for account maintenance.
Termination Fees: If you decide to cancel your contract before the end of the term, you might be subject to a hefty early termination fee.
Terminal Fees: If you need a credit card terminal to accept payments in your smoke shop, your payment processor might charge you a fee for its use.
Chargeback Fees: These fees apply when a customer issues a chargeback with their bank. Your processor will charge you a fee when this occurs.

Chapter 5

Boost Efficiency With Integrated Payment Processing

If you’re looking to speed up your search for the right payment processor and get the most favorable terms, then your best option is to process payments through your point of sale system.

Smoke Shop Must-Have POS Features Many POS providers offer in-house payment processing, which ensures that your POS system and payment processor work together seamlessly. As a bonus, bundling these two services together often saves you money on processing fees.

Here are a few essential features to look for when shopping for an integrated POS system:

Robust inventory management features like carton-pack inventory tracking
Detailed sales reporting and analytics to show your sales history, bestselling products, and customers’ shopping habits
Customer relationship management (CRM) tools and a customer loyalty program to boost satisfaction and expand your reach
Built-in age verification to speed up the checkout process and ensure your smoke shop’s compliance with the law

If you’re looking for a combined POS and payment processing solution, Cigars POS is a powerful all-in-one POS system that caters specifically to smoke, vape, and cigar shops and offers integrated payment processing for standard and high-risk merchants.

Chapter 6

Dealing With Chargebacks and Fraud

Chargebacks and fraud are major concerns for any retailer — but they can be especially costly if you’re a high-risk merchant.

The good news is that there are effective strategies you can implement to minimize chargebacks. Utilizing tools for fraud detection, and understanding best practices for dispute resolution, can help safeguard your business' reputation and financial stability.

Here are some tips for reducing chargebacks, preventing fraud, and resolving disputes:

Ensure that your smoke shop’s billing descriptors are clear and recognizable to customers on their banking records to reduce confusion and prevent chargebacks.
Make sure that your refund and return policies are clearly communicated to customers when they make a purchase.
Provide prompt customer service when an issue is brought to your attention to prevent it from escalating to a chargeback.
Use your smoke shop’s POS system to keep accessible, detailed records of your sales to use as evidence in the event of a dispute.
Ensure that you’re using all of your smoke shop POS system’s security features, like loss prevention and employee permissions.
Familiarize yourself with your payment processor's protocols for handling disputes, so you can respond quickly and appropriately.
Regularly review chargeback instances to identify any patterns or common issues that you can address.
Train your team on handling transactions securely, along with your smoke shop’s policies for handling fraudulent transactions.

Chapter 7

Staying Compliant and Navigating Legal Considerations

After you’ve chosen a high-risk payment processing provider, applied to be a high-risk merchant, and implemented your strategies for chargeback and fraud prevention, your journey isn’t quite over.

Staying up to date with industry regulations and best practices is an ongoing process, and in the smoke and vape industry where laws are constantly changing, it’s essential to regularly ensure that your business is in compliance.

The most important laws and regulations to watch for are the ones applying specifically to the tobacco industry. Keep an eye on the federal, state, and local laws regarding the legal smoking age and specific product regulations — particularly those affecting high-risk products like CBD and delta-8.

To protect your business from the hefty fines and penalties that come with violating laws and regulations, make sure that these steps are part of your smoke shop’s best practices:

Conduct regular training for new and veteran employees of your smoke shop on compliance matters, including the legal smoking age and secure payments.
Stay informed about tobacco regulations by regularly checking state and federal resources and subscribing to industry newsletters.
Keep meticulous records of your sales. This data can be used to prove payment security compliance, and many states also require you to keep these records on file for maintaining your tobacco retail license.
Choose a POS system that includes all the tools you need to stay compliant. These features might include age verification with an integrated scanner, detailed sales reports, and security permissions.
Keep in touch with your payment processor. Your provider is a great source of information and advice to help your business stay compliant.

Chapter 8

Future-Proof Your Payment Processing

While our goal in this guide has been to give you a solid overview of what it means to be a high-risk merchant as a smoke shop owner, the reality is that the landscape of payment processing is always changing.

As innovations emerge onto the scene and new regulations shape payment processing best practices, it’s critical to stay informed, adaptable, and flexible. To help you understand what’s ahead, check out these three trends on the horizon:

Higher Demand for Alternative Payment Methods: Rather than fishing through their wallets to find cash or the right card, many customers now prefer to use contactless and mobile payment options for a speedier, more convenient checkout experience. To hop onto this trend, make sure your POS system and payment processor accept contactless and mobile payment options.
Evolving Security Technologies: Payment processing and POS providers are constantly developing new tools to keep your business safe and secure. To take advantage of this rapidly developing technology, choose a POS system and payment processor that understand the importance of security.
Omnichannel Retail: Allowing your customers to browse your smoke shop from the comfort of their homes can boost your sales, but to take advantage of e-commerce, you need a POS system and payment processing solution that makes it easy to set up your online store and accept payments.

By staying up to date with changing regulations, trends, and technologies — and staying flexible — you’re opening your smoke shop to new opportunities.

Chapter 9

Open New Doors for Your Smoke Shop With Cigars POS’ High-Risk Payment Processing

Find out how much your dream POS system will cost you - you might be surprised.

Now that we’ve covered what high-risk payment processing is, how it can benefit your business, and the practical steps you can take to become a high-risk merchant, you’re ready to seize a golden opportunity to take your smoke or vape shop to the next level.

High-risk payment processing empowers you to jump on the latest industry trends and stand out as the premier smoke shop in your neighborhood, where your customers can purchase products that they can’t find anywhere else.

If you’re ready to boost your business with high-risk payment processing, the clearest path forward is to use Cigars POS. Cigars POS is a powerful point of sale system designed specifically for smoke, vape, and cigar shops just like yours. Our system has all the tools you need to manage inventory effectively, build your loyal customer base, and grow your business.

Plus, you can streamline the process of becoming a high-risk merchant through our integrated payment processing. Your POS system and payment processing will work together seamlessly, and our team will always be available to provide the best support whenever you need it.

Want to see Cigars POS in action? Schedule a personalized demo with one of our industry experts today.