The rapid growth of the CBD industry has created new opportunities for businesses, but it also presents unique challenges. One of the most significant hurdles faced by CBD retailers is payment processing. Due to the complex legal landscape and regulatory scrutiny surrounding cannabidiol (CBD), payment processors are often reluctant to provide services to CBD businesses. This article outlines the key facts about payment processing for CBD products, helping businesses navigate the industry more effectively.
Understanding CBD and Its Legal Status
Before diving into payment processing, it’s essential to understand the legal status of CBD. Cannabidiol, or CBD, is a compound derived from hemp plants, and unlike THC (the psychoactive component in cannabis), it does not cause a high. The 2018 Farm Bill legalized the production of hemp and hemp-derived products, including CBD, as long as they contain less than 0.3% THC.
However, while CBD is legal at the federal level in the U.S., its legality varies from state to state. Some states have strict regulations governing CBD sales, and even federally, the Food and Drug Administration (FDA) has not fully approved CBD for consumption in food or dietary supplements. This fragmented legal environment has made financial institutions cautious about offering services to CBD businesses.
Why Payment Processing is Challenging for CBD Businesses
One of the primary difficulties for CBD businesses is that many traditional payment processors, like Visa and Mastercard, and large financial institutions, shy away from the CBD industry due to its perceived risk. This risk is associated with regulatory uncertainty and potential liabilities if products are found to violate laws regarding THC levels or are marketed in a way that breaches FDA guidelines.
CBD is often classified as a high-risk industry by payment processors, grouping it with industries like online gambling, firearms, and adult entertainment. As a result, securing a reliable payment processing solution for CBD products can be challenging. Businesses selling CBD face higher fees, frequent account shutdowns, and fewer payment options, making the entire process more complex.
Factors to Consider When Choosing a CBD Payment Processor
Despite the challenges, there are payment processors that specialize in high-risk industries, including CBD. However, businesses must carefully vet potential partners to ensure they provide the necessary support and compliance.
Transparency on Fees
CBD businesses often encounter higher processing fees compared to other industries. While these fees are unavoidable in many cases, a reputable payment processor should offer transparency about the costs involved. This includes any setup fees, transaction fees, and monthly service charges. Businesses should be wary of hidden fees or unclear terms that could negatively impact their bottom line.
Legal Compliance
It’s essential to choose a payment processor that understands the legal intricacies of the CBD industry. This includes staying up-to-date on federal regulations as well as state laws. Payment processors should also have experience with FDA regulations and provide guidance to merchants on how to comply with labeling and advertising laws for CBD products.
Support for Multiple Payment Methods
Modern e-commerce thrives on a variety of payment options, and CBD businesses should ensure their payment processor supports a range of methods, including credit and debit cards, e-checks, ACH payments, and mobile payments. Having multiple payment options is key to offering flexibility and convenience to customers.
Reliability and Uptime
Payment processors play a crucial role in the daily operations of CBD businesses, especially those that rely on e-commerce. A processor with a reputation for frequent downtime or account holds can severely disrupt operations. Look for a processor with a reliable history of keeping transactions running smoothly without interruptions.
Chargeback Protection
Chargebacks occur when a customer disputes a transaction, leading to funds being returned to the buyer. For CBD businesses, chargebacks can be frequent due to the nature of the industry, particularly in cases where customers misunderstand the effects or legality of the product. It’s important to work with a processor that offers chargeback protection and helps merchants reduce these occurrences.
High-Risk Merchant Accounts for CBD Businesses
Given that traditional payment processors are often unwilling to work with CBD businesses, many companies turn to high-risk merchant accounts. These accounts are tailored to industries with higher regulatory scrutiny or a higher risk of chargebacks.
A high-risk merchant account allows CBD businesses to process payments but often comes with stricter terms, such as higher transaction fees, rolling reserves (where a portion of each transaction is held back to cover potential chargebacks), and detailed paperwork to ensure compliance with laws.
While more expensive than traditional accounts, high-risk merchant accounts are sometimes the only option for CBD businesses, and they provide a lifeline for companies looking to build a sustainable payment processing solution.
Navigating Bank and Processor Shutoffs
A common problem for CBD businesses is sudden shutoffs from payment processors or banks. These shutoffs can happen without warning, leaving businesses unable to accept payments and, in turn, halting sales.
This often happens when banks or processors reassess their risk tolerance or when the legal environment shifts, prompting financial institutions to pull back from high-risk industries like CBD. To mitigate this risk, many CBD businesses set up multiple payment processors or diversify their payment methods, such as incorporating cryptocurrency payments or ACH transactions alongside credit cards.
International CBD Payment Processing
For CBD companies expanding internationally, the complexity of payment processing increases. Different countries have varying laws regarding CBD, and some prohibit it entirely. Businesses need to ensure they understand the local legal requirements and that their payment processor can support cross-border transactions.
Some international payment processors specialize in high-risk industries and can help businesses navigate the global regulatory landscape. These processors often have partnerships with offshore banks that are more willing to work with CBD companies, offering services that may not be available through U.S. banks.
The Future of CBD Payment Processing
As CBD continues to gain mainstream acceptance and regulatory frameworks become clearer, it’s likely that more financial institutions will enter the market. Currently, the SAFE Banking Act, a proposed U.S. federal law, aims to provide clearer guidance for financial institutions serving cannabis and hemp businesses. If passed, this law could dramatically change the payment processing landscape for CBD businesses by reducing the risk banks face.
Additionally, as CBD businesses and payment processors improve their compliance efforts, we may see more affordable and streamlined payment solutions available in the future.
The CBD industry continues to face challenges with payment processing due to the high-risk nature of the business and the complex legal environment. However, by understanding the risks, choosing the right payment processor, and staying compliant with legal regulations, CBD businesses can successfully navigate the industry. With evolving regulations and potential legislative changes on the horizon, the future of CBD payment processing holds the promise of greater stability and more options for merchants.
