The Business Behind Hemp – CBD Merchant Accounts and Banking Regulations

We talked briefly in our Jiu-Jitsu Times article about the challenges operating a CBD business despite it’s full legality. With the pace of change in the space we wanted to dedicate a post to the primary challenges facing all CBD businesses alike.

First stop the 2018 Farm Bill.

Signed on December, 20, 2018 the Farm Bill legalized hemp and hemp-derived products. It also created a new regulatory framework on the sale, manufacture and distribution on hemp-derived products. The broad assumption is the passage of the Farm Bill would dramatically open access to ‘regular way’ banking and payment systems enjoyed by other legal businesses.

As of now, CBD oil companies like us can only do banking and merchant processing through certain banks which allow it. The vast majority, however, do not. They still consider hemp as marijuana and don’t understand the difference between these plants. Let’s get into the issues this causes for business like us.  

Banks and CBD Companies

Our experience with banks and processors has been quite an effort and distraction from our primary business and customers. Initially, we faced challenges securing a bank account with a nationally recognized financial institution. Two primary factors impacted our search for a willing bank.

First, the product…. Banks are risk averse and most are not up to speed on the ever-changing cannabis landscape. It’s not in their best interest to commit time and resources ensuring they are in-compliance. They are wildly profitable working with established industries and therefore, do not need to jump at something new. They don’t have the models built to explain the difference in CBD vs THC products and aren’t willing to build them…again, not worth the risk for them.

Second, the sales channel. Online businesses are typically viewed differently than brick and mortar stores. It seems to be an archaic principle that the banks penalize businesses without a physical footprint. A report of Q4 2018 compared to Q4 2017 shows ecommerce sales up 12% and retail store only up 3% year over year. The general thinking is a physical retail store requires additional capital and commitment from the business owners and can lead to more business for the bank down the road.

We discussed our business and plans with several banks prior to opening an account with a major financial institution. Each discussion was met with skepticism, uncertainty and unfamiliarity from the banks perspective. This is also despite the fact we had everything required to start a bank account, good credit, and all necessary credentials. Several informational discussions later and we were in business! It wasn’t easy though…

CBD Merchant Accounts – Payment Processor

If our search for a supportive banking partner is described as a complex formula, our search for a merchant servicing account (or credit card processor) has been a circular reference! Over the past six months we have engaged six different processors, been on boarded with four and been dropped by 3.

To get on boarded, the processor requires a litany of materials generally including an application, corporate documents, identification, personal guarantees and very punishing business terms. Double digit fees, mandatory reserve accounts and limited customer service are also part of the deal.

The best data point to highlight the present market dynamics are looking into the fees. Most processors are charging between 9-12%, let’s call it 9.75% for illustrative purposes. Square, a major force in the payment processing industry on the other hand charges 2.75%. That is a 7% difference basically equates to a penalty for operating in the CBD oil space, else you would use a cheaper more innovative solution.

One would think that in a free market, other competitors, either new entrants or established entities, would jump into the space. They could do so and provide additional options to CBD businesses and improve terms overall.  

Why hasn’t that occurred despite federal legality?

Let’s explore…

With the recent leadership changes at another helpful government enterprise, the FDA, hinting at additional regulation for CBD oil, the banking sector also seems to be pressing pause as well.  

Several of the primary processors in the space have stopped servicing the industry entirely. Citing chargebacks, regulatory uncertainty and co-mingling of CBD and THC business as justification.

It is our hope more certainty from the FDA will create a fair market for these services in the near future. Too many small businesses are being jeopardized as they cannot find a reliable and affordable processor.

We’ll keep you posted on this ever-changing landscape and look forward to a bit of stability going forward.