Can Online CBD Merchants Cope Without Card Processing?
Setting up credit card processing accounts for CBD retailers was somewhat difficult from the get-go. But when the 2018 Farm Bill removed industrial hemp and its derivatives from the Controlled Substances List, CBD sellers probably didn’t expect it to resemble a carnival ride.
At nearly four months after the Great Elavon Dump of 2019 and its figurative retailing bloodbath, it’s time to take a look at what really happened and what’s peeking over the horizon now. Were CBD companies all merely innocent victims of a paranoid banking system? In a word, no. Sure, some merchants may have found themselves hopelessly tangled in red tape. But according to Doug Oakland, account executive at Peak Processing Services, others absolutely took advantage.
Some merchants took certain liberties with their new card processing accounts by slipping their marijuana products out the door disguised as hemp CBD. And, of course, purveyors of “dirty oil” – CBD that isn’t what it’s billed to be – helped forge the final nail with which banks boarded up their doors against client fraud and potential federal penalties. For the record, Elavon didn't reply when contacted for comment.
What Makes a Bank Turn Its Back on Money?
Naturally, banks, and credit unions pine for a cut of the billion-dollar CBD action. In fact, speculation suggests that Elavon, a subsidiary of the US Bankcorp behemoth, tried a “land grab” immediately after the passage of the Farm Bill. Once Elavon opened its doors to CBD, a huge number of retailers, delighted that they could finally build out their online shops, clambered aboard.
In order to comply with government regulations, according to Oakland and Michael Dillon of Elemental CBD, marijuana operations wishing to peddle hemp CBD legally must create an entirely separate hemp company. However, too many weed distributors simply created new dba (doing business as) names, then applied and were gathered into the Elavon embrace.
Hasty Onboarding, Sluggish Risk Evaluations
With Elavon boldly going where few merchant service providers had gone before, more card processors lurched into the fray. Merchant services sales teams sallied forth, intent on capturing as much of this lucrative market as they might distract from Elavon. Some even falsified applications for non-qualifying entities outside the knowledge of the business, said Dave Lambert, of FC Financial, LLC.
Then the charge-backs commenced, a splendid method of swirling red capes around the horns of risk management bulls. When customers express deep dissatisfaction with a product (possibly because it’s junk oil) and want a refund, the business suffers a credit card charge-back. If the business refuses a refund, then buyers can ask their credit card company to force one. Any business getting charge-backs, especially from the credit card company itself, will soon find itself under a hot microscope.
Some retailers were caught selling pot products under the pretense of CBD sales, as discovered by card companies’ secret shoppers.
According to Oakland, once risk management departments began to catch up to all the CBD companies so recently acquired, more discrepancies in regulatory compliance came to light, and about 98 percent of CBD companies were dropped. A lot of the disaffected were innocent. However, when it comes to risk aversion, the banks may not distinguish between babies and murky bathwater. After all, they have regulators breathing down their necks and on the look-out for anything that smacks of impropriety in the cannabis space, especially money laundering.
This left CBD sellers scrambling for alternatives. Sean Cope, director of marketing at Daddy Burt Hemp Company, explains that inferior merchant services exist and continue to accept CBD companies. However, retailers find that, like Elavon, they quickly take on CBD clients then ditch them once their risk departments catch up. Cope says many retailers keep several applications going simultaneously as a means to pick up a new card processor the instant they get jettisoned by another.
Off-shore processors, not worried much about US penalties, dangle the carrot of easy acceptance, but require high fees and monthly sales minimums of at least $50,000. Lambert says that some won’t accept a retailer if they can’t pledge sales of $100,000 per month. Cope learned they often charge upwards of three times the rates of domestic services. Plus, these are aggregate accounts, not individual. Merchants complain of poor and spotty service.
Just as there’s more than one way to buck a hemp stalk, so too many unconventional alternatives exist to take customer payments. The problem, though, stems from the fact that buyers possess the big three credit cards and that’s how they want to pay.
Loyalists might agree to download and use some peer-to-peer app specific to their favorite store, but it’s far too soon in the volatile CBD market for much brand fidelity. People are still sampling from a wide and growing field of options, some that work, some that don’t, some clean, some dirty. On the whole, they’re not ready to settle in with one brand or one formula. And they’re certainly not about to download a different payment app for every online store they visit.
Who Stands to Gain?
As the old adage goes, necessity births inventions. Maybe there’s an efficient new way to gather only the honest players into the same carriage and make winners of all. Since the happiness of the consumer comprises the most essential element in the CBD industry, once they win, so does everyone on the supply train. And what consumers want are clean, effective CBD and the ability to pay directly with their ordinary credit cards.
Willing banks are key to merchant services, the intermediary providers that facilitate card processing. New tech hatchlings, Solvent and Hypur, target eager but nervous banks that wish to serve highly regulated industries such as cannabis but blanch at the risk. If banking institutions not already Hypur clients adopt the two technologies, consumers ought to win by default. First, they should find that worthy retailers all accept their credit cards and that individual product transactions depend on genuine product quality.
Hypur, in the regulatory and financial technology business for over five years, automates the compliance rules for banking institutions serving not only cannabis, but other cash-heavy industries like pawn shops and payday loan companies. They work with many institutions that can bank cannabis to scale – which number fewer than 40 at present.
Tyler Beuerlein, executive vice president of Business Development at Hypur, explained that their proprietary software helps banking institutions stay on top of the complex regulatory rules for their account holders. When document filings come due, Hypur will alert the appropriate people, for example. It’s up to the banks to vet their high-risk clientele, but once a CBD company agrees to the rules and gets accepted, they need only remain true to the laws and bank-developed rules. Once banked, ordinary credit card processing can follow naturally. If a business prefers, they can also offer customers Hypur Payments which is somewhat like a peer-to-peer app.
Solvent takes a similar but different tack with their digital technology, according to Brian Meyer, co-founder and VP. Their system envelops both the cannabis business, card processing and the bank in a more linear fashion.
Solvent first arranges to vet cannabis companies, performing the critical risk assessment to prove legal compliance with every pertinent law and banking requirement. But more than legal and financial compliance, Solvent aims to evaporate fraud before it even materializes by mitigating risk even at the real-time transaction level.
As the card processor, Solvent’s system can verify CBD goods at check-out, stopping the sale of any substandard product selling under false pretenses. While this technology, named Ventus, remains proprietary and will involve some work by the retailer, it almost completely re-imagines merchant services for the legal CBD (and soon marijuana) industry. It could easily hold CBD wholesalers and retailers to account for product quality and offer true peace of mind to the banks and credit card companies.
Clean CBD equals happier customers and fewer charge-backs. Product assurance equals a greater likelihood of rock-solid account approval by the banks. Solvent’s Ventus engineering promises a favorable solution for both consumers and banks at rates that won't further squeeze boutique merchants out of the game.
As Meyer says, Solvent’s goal is to “help cannabis companies experience merchant processing treatment that’s as mainstream as any unregulated retail operation."
Who Stands to Lose?
These cyber solutions offer to bypass the current work-arounds such as profit-draining high fees for risk-acceptance, off-shore processing where sales may be blocked as suspicious, hordes of peer-to-peer payment apps, crypto, and direct access to customer bank accounts. Rather, Solvent, Hypur, and others like them, could fashion a new retailing paradigm that eventually sweeps away the present mess and delivers extra value to the doorstep of CBD customers.
Only consumers and honest CBD/marijuana companies that play by the rules, such as they are and become, will gain from the present bedlam if banks and merchant service providers begin to insist on integrated compliance technology.
On the other hand, those entities that market dirty oil and hide behind multiple business personalities will find themselves pushed into the cold. If educated consumers avoid stores not displaying evidence of a protective link to these types of systems, eventually “dark CBD” will exist only in the twilight fringes of the market. It may well behoove merchants to trumpet their compliant banking systems to help evict such competitors.
When banks can feel secure about their accounts and customers assured of product quality, trustworthy merchants will prosper with substantially fewer competitors. Everybody who deserves to will win.