The tobacco industry has gone through a tumultuous journey in the eyes of public consumers, the evolution of product varieties, and the ongoing regulation placing tobacco shop owners in need of a high-risk merchant.

The tobacco industry has polarizing views from must-haves, to do not touch. Whether you own a small business that sells tobacco products or a large corporation dominating the tobacco industry, there are insights you may find helpful when it comes to high-risk merchant and payment processing in the tobacco world.

The History of Tobacco and The Industry Regulation

Originally utilized by Native North and South Americans since the first century BC, tobacco use has developed its popularity (and lack thereof) for well over 8,000 years.

The Native American culture idolized tobacco, using the plant for medicinal purposes and religious ceremonies.

When the European colonizers made passage to America, they were gifted tobacco as a token of hospitality from the natives, which eventually made its way back to Europe.

Tobacco’s popularity caught fire and spread to the masses, being promoted for its “powerful healing”.

As the years went on, tobacco research began to shed light on the risk factors and negative impacts of tobacco use.

In the 17th century, scientists discovered the negative consequences and health effects tobacco products cause including addiction and difficulty breathing.

In 1632, Massachusetts passed the first-ever legislation against smoking in public.

The tobacco industry, however, continued to flourish, and in the early 1900s, cigarette production changed the way tobacco was smoked and sold, thus the industry boomed.

However, in the mid-1900s the Surgeon General’s warning on the negative side-effects of smoking opened the eyes of many Americans and led to Federal Government regulation on the distribution and sales of tobacco products.

In the late 1990’s lung cancer quickly became the number one cause of cancerous deaths among women in the United States.

In the early 21st century, cigarettes and tobacco products were losing their popularity with targeted campaigns against tobacco product usage, not to mention the ever-increasing poignant odor the chemically infused cigarettes leave lingering.

However, in the past decade, tobacco industries have developed more intriguing ways to regain their consumers. The industry revamped and created new tobacco products with fun flavors to market to the younger generation.

Smoke Shops: High-Risk Merchants?

The new craze of these new flavorful e-cigarettes and vapes helped the tobacco industry to gain a comeback from its downhill decline in popularity.

With the CDC’s most recent statistics on tobacco use, as of 2018, there are an estimated 34 million adults in the US that are current smokers, out of these 34 million, an estimated 8.1 million use electronic cigarettes or vapes.

In 2022 the tobacco industry is estimated to make $867.6 billion. By 2030, tobacco sales are forecasted to be $1,049.9 billion with a 2.4% growth.

Over the years, tobacco products have changed in many ways. Tobacco-related products can be anything now from cigarettes, cigars, chewing tobacco, electronic cigarettes, loose-leaf for tobacco pipe smoking, shisha for hookah smoking, and many more.

With millions of consumers nationally seeking tobacco products for daily use, being in the tobacco industry as a merchant is no longer slowing down, but rather it’s gaining even more popularity.

To sell tobacco products, a merchant will need to offer more ways to pay, including credit and debit cards. However, a merchant selling tobacco products must be aware, as they may be considered high-risk for credit card processing companies.

What is a High-Risk Merchant?

Each business type is categorized uniquely as high-risk or low-risk by each payment processor and sponsoring bank.

This means that one bank or processor may label a particular type of merchant as risky, while another may not. There are numerous reasons a business may be considered higher risk.

Many details may play a factor in the decision of the risk status by a payment processor.

A high-risk merchant account may be classified as such based on the nature of the business, its industry, government regulations, age restrictions on its products and services, transaction amounts, and the owner’s personal credit score and business history.

However, the ultimate definer for a high-risk merchant is the potential for fraud and chargebacks in large quantities.

If a merchant is on the MATCH list, it will undoubtedly be considered a high-risk merchant. And may even be denied by processors who do accept high-risk merchants.

The MATCH list is a compilation of merchants who have been terminated by their processor or acquiring bank due to an excessive amount of chargebacks. These merchants carry an inadmissible level of risk and will struggle to find a new payment processor.

Needless to say, credit card processing for smoke shops in many cases could be considered high-risk.

What is a High-Risk Merchant Processor?

A high-risk merchant payment processor has relationships with acquiring banks that allow them to offer merchant services to high-risk merchants.

Some processors may even accept some high-risk businesses and not others. It will vary as a case-by-case scenario for some banks and processors.

Certain payment methods may be limited to your payment solutions when being approved as a high-risk merchant. Many banks prohibit card-not-present transactions on high-risk accounts including accounts that sell tobacco products, especially any products that contain nicotine.

Card-not-present transactions refer mostly to online or keyed transactions. Although these card-not-present transactions may be prohibited, the sale of tobacco in a card-present or face-to-face environment is more widely accepted by credit card processors and acquiring banks. And even though these types of product purchases may be accepted by specific banks, the industry is still considered high-risk and comes with highly regulated stipulations.

Merchant services for high-risk industries including tobacco merchant services may, however, come with some stipulations.

When processing credit and debit card transactions under a high-risk label your merchant account may be subject to higher fees, rolling reserves, longer contracts, and pricey early termination fees should you break your contract.

All of these possibilities can be discussed individually with your sales representative for your payment processor. Many can make accommodations for high-risk merchants depending on the situation.

How Can a High-Risk Tobacco Merchant Avoid Credit Card Fraud and Chargebacks?

Although credit card processing for smoke shops can be high-risk, there are certain things that tobacco retailers can do to limit fraud and chargeback ratios. So, what is a good chargeback ratio? An acceptable chargeback ratio for merchants accepting credit cards is below 0.5%. Anything above 1% is automatically a high-risk factor. 

A customer can issue a chargeback on their credit card for a few reasons. Whether it be a truly fraudulent transaction or “friendly” fraud, merchants need to know how best to protect themselves. 

True Fraud Vs. Friendly Fraud

But first, what’s the difference between a truly fraudulent purchase and “friendly” fraud? Because friendly and fraud sure don’t seem like they go together. 

Fraudulent Purchases mean a customer is making an unauthorized purchase at your store or website using a stolen credit card or credit card information. Once the legitimate cardholder realizes their card was used for something they did not purchase, they will (if they are wise) initiate a dispute or chargeback to recover their stolen funds.

Friendly fraud occurs when a legitimate customer who used their card to purchase products then issues a chargeback rather than requesting a refund. They can claim to their bank that the product never arrived, that it was damaged, or arrived not as described. They can even claim that they didn’t authorize the charge or some other reason. All so that they don’t have to pay for it, whether they actually used the product or not.

Why Chargebacks Can Hinder Your Smoke Shop

Left unchecked, chargebacks can destroy a tobacco retailer’s bottom line. It can even make it impossible to find suitable credit card processing for smoke shops. This is because when a business receives a chargeback, not only do they lose out on the cost of the product, their revenue, and any fulfillment costs, but they also must pay chargeback fines to their credit card processor regardless of whether the chargeback is legitimate or not. There are ways to regain the sale price from an illegitimate chargeback claim, and we will get to that later. 

Additionally, if there are enough chargebacks on the merchant account, their credit card processor may terminate the merchant agreement altogether, and the business would not be able to accept credit cards going forward. This result could be detrimental to business.

Steps to Take to Protect Your Tobacco Business

There are a few best practices that smoke shops can take to reduce their exposure to credit card fraud and chargebacks.

Maintain PCI Compliance

First and foremost, any merchant accepting credit card transactions must remain compliant with PCI Data Security Standards. PCI regulations were designed to safeguard cardholder data, but ultimately, remaining compliant with their guidelines safeguards your business.

Enable Fraud Filters in Your Payment Gateway 

To better ensure that customers are the actual owners of a credit card used to make a purchase at your shop, be sure to select certain settings in your payment gateway’s fraud filter for online purchases.

  • Flag purchases that are shipping to countries outside of your geographic target.
  • Flag purchases made with a credit card outside your geographic target.
  • Flag all purchase amounts outside of a normal range to review manually.
  • Require all customers to enter their zip code for (AVS), and  CVV before approving the sale.
  • Restrict customers to 3 attempts when entering credit card data to prevent “guessing” zip codes.

Set Up Chargeback Notifications

To quickly catch chargebacks, set up chargeback notifications. The sooner you are aware of a chargeback, the sooner you can fight it.  

Fight Illegitimate Chargebacks

Next, once you are aware of a chargeback, if you believe the transaction was valid, you can enter into a dispute process with the credit card processor and cardholder’s bank. But be aware, regardless of how well you state your case, customer banks tend to side with the cardholder. Every processor will require different information from you to prove the validity of the purchase. However, generally speaking, you will need to provide any receipts, documentation, identification, and proof of purchase that you can acquire. 

Smoke Shop and Tobacco Products

A cigarette is a small thin cylinder with a combination of finely cut and cured tobacco and additional chemicals, wrapped in paper, typically with a filter on the end.

Card present, face-to-face transactions can occur in tobacco stores otherwise known as smoke shops. Tobacco stores are retail establishments open to the public with an inventory of mostly tobacco goods.

Tobacco goods may be any number of items. Below is a list of common tobacco products sold at a smoke shop. All these tobacco products contain nicotine which can cause addictions and long-term health effects.


Imported from Southeast Asia and India, bidis are small, thin hand-rolled cigarettes containing tobacco wrapped in a temburni or tendu leaf, which are plants native to Asia.
The leaf may then be secured with a colorful string at either or both ends. Bidis may be flavored or unflavored.


A cigarette is a small thin cylinder with a combination of finely cut and cured tobacco and additional chemicals, wrapped in paper, typically with a filter on the end.


Regular Cigars are wider and longer than cigarettes with no filter and contain fermented and aged dried tobacco.

Little cigars which resemble the same shape and size as cigarettes contain a filter, are often flavored and are made up of pipe tobacco.

Cigars of both sizes contain a higher level of nicotine than cigarettes.

Dissolvable Tobacco

A newer tobacco product resembling thin candy, breath strips, or lozenges is finely processed to dissolve on the tongue or in the mouth with saliva.

E-cigarette or Vape

The e-cigarette is a reusable battery-powered device that resembles a pen, cigarette, or even USB and contains a cartridge filled with flavored liquid nicotine and other chemicals. There is actually no tobacco involved however it is still categorized within the tobacco industry. The e-cigarette heats up the liquid or juice and converts it into a vapor to be inhaled. The expulsion produces a heatest mist rather than smoke.


Shisha is a combination of tobacco, molasses sugar, or fruit, and is flavored. It is heated on charcoal coals as the smoke is filtered through water in a bowl at the bottom of a Hookah pipe. The hookah contains a long hose that is used to inhale the heated smoke. Hookah smoking originated in Middle Eastern cultures.

Kreteks Kreteks

Kreteks are imported from Indonesia and contain a mixture of tobacco, cloves, and other added chemicals. They may be referred to as clove cigarettes.

Tobacco Pipes

Tobacco pipes have a small bowl where loose-leaf or “pipe tobacco” is placed. As the tobacco is lit, smoke is inhaled through the long stem and mouthpiece.

Smokeless Tobacco

Chewing tobacco or “dip” comes in the form of loose leaves, plugs, which are layers of tobacco leaf made into a cake and cut into small sections, twist, which is tightly wound tobacco to form a rope, snus, which is tobacco inside a “tea-bag” like a packet, and snuff, which is finely shredded tobacco leaves that can be dry or moist.

Smokeless tobacco is generally placed in the gum line or the cheek. The tobacco is sucked on and the residual juices are spat out.

High-Risk Credit Card Processing for Smoke Shops Wrap-Up

Originating in Native American culture for medicinal and ceremonial purposes, tobacco has transformed into a more hybrid product full of toxins and chemicals and increasingly addictive properties, leading to an influx of cancer and becoming the leading cause of cancerous death in the late 20th century.

After its decline in the early 21st century, from massive health campaigns against tobacco products, the industry is now booming with its targeted marketing to the younger generation with flavorful alternatives with the same addictive qualities.

With such a booming industry, accepting convenient forms of payment without interruption is a must. In high demand, tobacco is a lucrative industry, profiting off its ever-evolving generational pulls and products. 

Finding the best high-risk merchant processor with reliable credit card processing for smoke shops will elevate your business as a competitor with convenience for its consumers.

To contact sales, click HERE. And to learn more about ECS High-Risk Merchant Processing visit High-Risk.

Updated January 2024