6 Obstacles CBD Merchants Need To Understand AND Why Processors & Acquiring Banks Struggle With CBD
In 2019, many merchant service providers, acquiring banks, and processors entered the booming industry. The majority either failed to deliver, lost their license with a card issuer, or their underwriting caused concern requiring regulators, attorney generals, and card brands to step in.
Here is a quick recap at what the CBD credit card processing world looked like in 2019:
1 — Elavon and US Bank start processing CBD and abruptly stop processing.
2 — Fresno First and Bank of Modesto start processing CBD and abruptly stop when Fresno First cannot keep up with underwriting and Elavon gets shut down.
3 — Greenbox, Pinwheel Gateway (now branded as EMB Gateway) and a South African Bank start processing CBD using blockchain & cryptocurrency. Greenbox underwriting gets overwhelmed with applications, communication fails, the parent company fails to file financial documents, and merchants are missing thousands of dollars.
4 — Base Commerce and Fresno First start processing CBD and get backlogged with quadrupled merchant applications. Hundreds, maybe thousands of merchants are charged a $250 application fee and still are not processing six months later.
5 — Bank of Modesto, Infinity, Greenbox, and many others lose the ability to process with some card brand — requiring new audits and some did return…
6 — Merchant Service Providers say Fifth Third Bank is doing CBD merchant processing, Fifth Third Bank C-Suite says they’re not. MSPs respond saying to “fly under the radar” until the SAFE Bill passes in the senate.
7 — Digipay launches with Shopify and stops taking applications
8 — E-Merchant Broker launches a Shopify solution that requires a $375 WeWork hot-desk in the UK, filing UK business paperwork, an attorney verification and hundreds of merchants still do not have processing.
9 — Square launches a beta program and kicks off merchants who fail to do $10,000-$15,000 a month in processing in 60 days.
And, these are only 9 of the many merchant processing hell stories that have left CBD merchants with anxiety, frustration, anger, disappointment, a loss of power, and resentment.
We know because we hear it from hundreds of CBD merchants looking for a sliver of hope that some new solution has arrived.
(NOTE: Still looking for Credit Card Processing for CBD? Complete our Pre-Application for CBD Merchant Accounts and we’ll let you know within 36 hours if our direct banks can on-board your CBD Account. Shopify, Big Commerce, WooCommerce, etc. Multiple Domestic Banks. Start Application by clicking here!)
There are six major obstacles to CBD Merchant Processing that could be preventing you from accepting credit cards. Anyone of them, if you fail to recognize and correct it, can hold you back.
Here are the six biggest obstacles processors and acquiring banks deal with in regards to CBD…
Obstacle #1: Is the merchant selling a Controlled Substance?
There are two types of CBD available to consumers: hemp-derived CBD and marijuana-derived CBD.
〉Legal at Federal Level 〉Contains less than 0.3% THC 〉Less likely to get you high (some people’s bodies are sensitive to 0.3% THC) 〉Can purchase online or in retail stores 〉Some states disallow you to purchase Hemp-Derived CBD in licensed medicinal or recreational marijuana dispensaries.
〉Illegal at Federal Level (Schedule 1 Substance) 〉Contains more than 0.3% THC 〉Will get you high (some strains can get up to 34% THC) 〉Can purchase in licensed medicinal or recreational marijuana dispensaries
So what does this mean?
At a federal level, Hemp-Derived CBD is not a controlled substance and Hemp-Derived CBD can be transported through any of the 50 states.
However, there are some states whereby either a lack of information, misinformed law enforcement and/or the states do not recognize hemp as independent of marijuana.
Perspective: Risk mitigation is a strategy to prepare for and lessen the effects of threats faced by a processor or acquiring bank. Comparable to risk reduction, risk mitigation takes steps to reduce the negative effects of threats and disasters on business continuity. Marijuana is a schedule one controlled substance and Hemp is not. There have been hundreds, probably thousands of attempts made by merchants claiming to sell hemp-derived CBD, when in fact they are selling marijuana-derived CBD or some other illegal product.
Obstacle #2: Is the CBD business owner complying with government regulations regarding manufacturing and distribution?
2020 starts the season of CBD regulation and compliance.
Processors have to question CBD merchant’s product at both federal and state laws when it comes to compliance.
Common questions a CBD Merchant Processor thinks through when evaluating your application include:
〉Are you compliant with the rules governing foods and other things that consumers use and consume? 〉Are you going to sell your CBD products into all states or only certain states? 〉Are you aware of your complete supply chain? 〉Are your products registered and tested properly? 〉Are you making any claims in your marketing? 〉Are you going to import/export out of the US?
And, the biggest being, “Are you in alignment with the current position of the FDA?”
The Food Drug Administration (FDA) regulates the “Food Drug & Cosmetic Act” (FD&C Act) which governs products that people use from drugs to dietary supplements to foods to cosmetics.
〉Foods, including dietary supplements, bottled water, food additives, other food products. 〉Drugs, including the prescription of drugs (both brand-name and generic and non-prescription (over the counter) drugs. 〉Cosmetics, including color additives found in makeup and other personal care products, skin moisturizers and cleansers, nail polish and perfume. 〉Veterinary products, including veterinary drugs, devices, and food.
As of January 1, 2020, the FDA’s stance is that CBD CANNOT:
〉be used as a food ingredient (human or pet); 〉be marketed as a dietary supplement; 〉be marketed with therapeutic or medical claims (aka health challenges)
Perspective: CBD business owners are selling what a year and two months ago was a schedule one controlled substance. Regulations to protect consumers are still being developed and some rules and laws have already been made. A merchant who does not understand their supply chain is a risk. A merchant who violates the FDA rules and regulations is a risk. Additionally, processors and banks will begin to question the quality of your product because if you are not taking the time to change or update how you are manufacturing and distributing based on new regulations, then there is a high probability that the quality level with how you are manufacturing, package, shipping is even riskier.
Obstacle #3: What products are CBD merchants selling and marketing online?
There are probably three things at the top of your mind right now.
If the FDA says CBD cannot be used as a food ingredient (human or pet), cannot be sold as a dietary supplement, and cannot be marketed with therapeutic or medical claims (aka health challenges), how come industry-leading brands like TheCBDistillery, Charlottes Web, Exinol, KOI and every brand selling gummies, chocolate cookies, brownies, syrups, etc, are doing it with no issues.
While this is true, like all government agencies, the FDA has limited resources, and it APPEARS the FDA has chosen to use its resources to not attempt to remove CBD in food.
Instead, what the FDA has been doing with its resources and very aggressively, is to target companies that are marketing dietary supplements and making therapeutic and medical claims on their websites, social media sites, print, and digital distribution, video channels, testimonials, and even packaging.
A quick search on Google “FDA CBD” and you will find companies that are saying outlandish things like CBD cures cancer, CBD cures Alzheimer’s, CBD cures depression, CBD treats teething and ear pain in infants, CBD treats autism, CBD cures Parkinson’s, CBD cures erectile dysfunction and so on.
And, while many people have personally reported experiencing CBD working for those medical issues, you must remember that those things have not been proven by the FDA (yet).
In late 2019, the FDA identified over 21 brands that have been illegally selling various products containing CBD (cannabidiol).
The FDA is enforcing prohibition for some other health challenge claims that are not so outlandish like pain relief, helps with sleep, reduces anxiety, menstrual cramps, etc. And while some of these claims have been shown in some studies to be true, their truth is irrelevant because the FDA says you can’t make any claims about it. Period.
In addition to FDA violation warnings, multiple class-action lawsuits were filled in 2019 against CBD brands for these types of claims as well, many of them sent FDA Violation Letters.
Here is the current list of class action lawsuits and it is expected to increase given the number of merchants who are making claims and dietary supplements:
Perspective: The bottom line is that if you are not following the regulations and are making claims in your marketing, that all translates to processors and banks that your company is not focused on being compliant.Brands that are about compliance are constantly updating their marketing, manufacutring, and distribution strategies to fit with regulations.And more likely than not, even if a business has a good product, the company that chooses to have claims or break the law are going to cause the processor trouble down the road.
Obstacle #4: Are merchants creating systems to manage products and qualitycontrol?
There are a lot of rules regarding food production and manufacturing.
For example, CBD consumers need to be able to see that the hemp-derived CBD was lawfully acquired and can be traced to a batch.
Why is this important?
Similar to other industries, if there was a recall or something happens, as the case does with consumer products, then that whole lot can be quickly identified, removed, and replaced.
(NOTE: Want to implement a COA Batch Database that provides compliance and transparency? You can do it with our simple Wordpress COA Batch Database Implementation. Get the exact process we designed and implement for our enterprise clients processing over $1M monthly.)
Perspective: Even if a business has a good product, the company that chooses to not provide transparency into their supply chain are going to cause the processor trouble down the road because they don’t focus on compliance.
Obstacle #5: Does the Merchant have Third-Party COAs?
While hemp farmers, extractors, and white labeling distributors have their own produced COAs, CBD merchants must have their third-party lab tests available to customers.
Our Integrity Pay COA Batch Database solution is perfect for CBD Merchants.
Perspective: Merchant processors will validate your CBD COAs and you would be amazed at how many COAs are forged.Out of 1200 applications that one underwriting team reviewed in 2019, 1 in 5 merchants had falsified their COAs by either taking another brands COA, changing the logos using Adobe Photoshop, or creating a fake COA.And again, if you are not doing this, then you’re making every effort to demonstrate that you are not compliant. That you are likely going to go away at some point or cause trouble for the processor or aquiring bank because your product is reflective of how you are not compliant in other areas.
Obstacle #6: Is the merchant following federal and state laws and regulations?
When it comes to hemp-derived CBD, Federal law does override state law, to an extent because states also have the opportunity to regulate industrial hemp production.
For example, some states want to protect their citizens and so they apply additional regulations to things such as business licensing, facility licensing, labeling, how they monitor, quality control; there are many more things that the state will regulate and in some cases municipalities will regulate too.
What does this mean? In most cases “federal law” overrides a conflicting state law, except when it comes to things like the mentioned above.
Domestic processors that are federally regulated must comply with all federal and state laws when it comes to CBD and hemp-derived products. Maintaining the quality of service and abiding by regulations and laws is critical to the integrity of the processing network, card brand reputation, and avoidance of potential fines from a multitude of agencies.
NOTE: The list below may be outdated. We will do our best to come back to Medium and update when new information is provided.
States where CBD is still considered a controlled substance in the state constitution
States where hemp-derived CBD is restricted in someway
〉Kansas: State law says CBD oil is only legal if it has zero THC content. 〉Louisiana: State officials have warned that CBD with even trace amounts of THC is illegal 〉Iowa: State law still says CBD products can only be sold with a dispensary license 〉Mississippi: To date, Mississippi laws and regulations have not been amended to allow the cultivation of hemp within the state.
States where hemp-derived CBD is legal to consume and has specific state regulations
Is Marijuana-Derived CBD Legal?
States where marijuana-derived CBD is Legal for Recreational Use
As of today, there are 11 States where you can purchase marijuana-derived CBD from a licensed business.
States where marijuana-derived CBD is Legal for Medicinal Use
As of today, there are a total of 47 states where marijuana-derived CBD is legal for medicinal usage. And the regulations for use are different from state to state.
States with regulations that permit a broad range of conditions include:
States with regulations that permit under a certain circumstance include:
States where marijuana-derived CBD is illegal
As of today, there are three states where marijuana-derived CBD is strictly prohibited and even hemp-derived CBD would be categorized as “gray”. These three states have taken a strong stance against CBD in the US:
The Importance of CBD Underwriting
With FDA violation warnings being sent in bulk, class-action lawsuits on the rise, and new rules and regulations being implemented in this industry, if you are playing the long-term strategy, compliance needs to be your mindset.
Your processor being in alignment with federal and state rules and regulations will be essential to them staying in operation.
And you being in alignment with your processor will be critical to not losing your merchant processing for breaking the current and future rules and regulations.
Elavon’s troubles started and ended with underwriting. Same with First Fresno, Modesto, Base Commerce, Greenbox…
… and, it wouldn’t surprise most that Square will shut down its CBD program or pay some ridiculous fine for poor underwriting and lack of merchant compliance.
How To Obtain CBD Merchant Processing in 2020
There are only a few solutions available to CBD merchants today.
Square is the predominant player.
On January 1, 2020, a new CBD Beta Program with the backing of two US domestic banks became available to seeking CBD merchants. And, with a history of more than 20 years in the high-risk business, having a team of four ISO agents managing the entire program, a 10+ person underwriting team, this unique solution can pre-vet each merchant in 36 hours — so you know if this solution will work for you.
This solution supports website builders including WooCommerce, Shopify, 3D Cart, OpenCart, PrestaShop, Squarespace, Volusion, Weebly, ZenCart, Big Commerce, osCommerce, PinnacleCart, Typo3, and any platform that can integrate Authroize.net or NMI.
With only four ISO agents, Integrity Pay being one of them, you shouldn’t worry about submitting the same application to multiple ISOs. We are working in blocks of 200 applications at one time to make sure your supporting documents and website meet underwritings' needs or work with us to get them in compliance so you can start taking payments.
Legal Discretion: CBD and Cannabis laws are changing quickly. Everything above is an educational landscape of the industry and is based entirely on independent research. While our team strives to provide the most accurate and current information by carefully reviewing relevant data from actual legislation and other credible resources, we are not lawyers or legal experts and this information should not be interpreted as legal advice. The information on this page was created to entertain and engage our readers and should not be used for any other purpose. For your safety, protection, and well-being, we strongly advise that you do not use this information to make any decision or take any action and strongly encourage you to seek legal counsel before taking any action related to Cannabidiol (CBD).