How Does CBD Payment Processing Work? Cannabidiol Banking Challenges and Solutions

Today’s leading CBD brands are struggling to establish good banking relationships. While some CBD companies accept credit and debit card payments, others do not.

We’re explaining some of the challenges facing the CBD industry – including the solutions today’s market leaders are implementing.

Why is It Hard for CBD Companies to Bank?

With most online retailers, the online shopping process is simple: you input your credit card information, and then a package arrives on your doorstep a few days later.

The CBD industry, however, has never been that straightforward. Sometimes, customers will purchase a CBD oil only to have the purchase denied by their bank. The bank might reject a payment because it comes from a shady international payment processor.

Or, several major merchant payment processors have come out and specifically said that they would refuse to process payments for cannabidiol companies.

These issues have led to a confusing web of banking restrictions for CBD companies. So what’s the problem? What’s the solution for CBD consumers and merchants?

Finding Banks is Easy, But Finding Merchant Payment Processors is Hard

First, as pointed out by Sonja Soderlund at CBD Hacker, it’s a giant myth that hemp and cannabis companies are unbanked. There’s a prevailing myth that the industry’s largest companies are just sitting around with enormous piles of cash hidden inside walls or mattresses.

In reality, most hemp and cannabis companies have transparent banking relationships. It’s relatively easy to find a bank willing to manage your money and setup a business account.

However, the hard part is finding a payment processor willing to process merchant payments for hemp, cannabis, and CBD companies.

Specifically, companies struggle to find domestic payment processors, which forces them to rely on costly international payment processors instead.

Without a merchant payment processor, it’s difficult for a CBD business to accept credit or debit cards. Merchant payment processors are the middlemen between a company and its customers’ conventional payment methods.

The merchant payment processor is responsible for accepting the customer’s information, then encrypting and sending that information to the credit card company for authorization. The payment processor then handles the entire payment transaction, deducting a fee, then depositing the customer’s money into the business’s merchant account.

When a CBD company does not have a merchant payment processor, it typically means that customers cannot make debit or credit card purchases using the CBD company’s website. Obviously, that’s a problem.

If CBD is Legal Nationwide, Then Why Is It Hard for CBD Companies to Find a Payment Processor?

CBD is federally legal. The 2018 Farm Bill clarified the legal status of hemp and CBD, theoretically making it easier for CBD companies nationwide to do business.

After the 2018 Farm Bill was passed, it looked like merchant payment processing would be more accessible for the CBD industry than ever before. Elavon, a major domestic merchant processor and US Bank subsidiary, announced it would start providing payment processing services to the CBD industry.

Elavon garnered significant attention across the CBD space. Merchants jumped on board, excited to have found a stable and convenient payment processor.

Then, Elavon bailed: in April, just a few weeks after launching its service, Elavon announced that its CBD clients had 45 days to find alternative payment processors.

Clearly, Elavon encountered a problem that scared it away from the CBD industry. Elavon was dominating the space and making tons of money: they wouldn’t have just abandoned this revenue stream unless they saw something that worried them.

So why are Elavon and other merchant payment processors worried about the CBD space?

CBD is a Legal Industry – But It’s Still a High-Risk Industry

CBD may be federally legal, but it’s also a highly-regulated industry. Like any industry with extensive regulations, there are significant regulatory hurdles and costs facing all participants in the industry.

There are extensive rules governing the production and sale of CBD. There are rules governing how much THC can be found within a strain of hemp before it’s declared cannabis and becomes federally illegal.

CBD producers need to follow all of these rules and regulations. If they don’t, then their product can quickly become federally illegal.

Merchant payment processors need to not only follow these rules as well, but they also need to ensure their clients are following these rules. If a single client in a merchant payment processor’s network violates any of these rules, then the merchant payment processor could face significant liability.

Making things even more complicated is that the regulatory framework around CBD has not even been clarified as of yet. The regulations are changing and unclear. It’s creating a frightening, toxic trap for CBD companies.

Payment Processors Worry About Chargebacks Due to Shady CBD Supplements

There’s another issue scaring merchant payment processors away from the CBD industry. CBD has already become closely intertwined with the world of nutritional supplements.

There are plenty of valid nutritional supplement producers on the market today. There are also shady supplement producers who package their products with low doses of low-quality CBD, automatic auto-ship programs, fake free trials, and other issues.

The supplement industry has long been plagued by chargebacks. A customer might order a free trial of a diet pill from a website. The website requires a credit card to cover the costs of shipping. The customer pays just $4.95 today. Hidden in the terms and conditions, however, are terms that allow the customer’s credit card to be automatically charged $89.95 within 14 days if the ‘free trial’ bottle is not returned. Seeing the charge on his credit card statement, the customer might contact Visa and claim they did not order the product, and that it’s an illegal charge.

Chargebacks like this occur daily in the supplement space. CBD supplements are trendy and have become wrapped up in this space – just like garcinia cambogia supplements and thermogenic diet pills of the past.

Any time a business has a high number of chargebacks, that business will struggle to find a merchant payment processor. Many supplement manufacturers struggle for this reason, and that’s part of the reason why CBD makers are struggling as well.

CBD Companies Rely on Costly International Payment Processors

CBD companies struggle to find domestic merchant payment processors for all of the reasons listed above.

And yet many CBD companies continue to accept credit card and debit card payments. So how are they doing it?

The secret is simple: CBD companies rely on high-priced international payment processors. These payment processors may be less bound by US laws – but they also charge higher fees than a domestic payment processor would.

These higher fees inevitably get passed onto customers. Customers are paying higher prices because domestic merchant payment processors don’t want to touch the industry.

This is also the reason why your CBD oil payment will occasionally get rejected, even when ordering from a reputable US-based provider. The provider is forced to rely on a shady overseas payment processor, and your bank sees this as a suspicious transaction and blocks it.

Final Word: CBD Customers Pay Higher Prices

All of this boils down to one simple conclusion:

CBD is not an illegal industry for payment processors, but it is a high-risk industry.

Merchant payment processors are staying away from CBD due to unclear regulations, the fear of chargebacks, and the difficulty of making sure clients play by the (ever-changing) rules.

Until these issues are resolved, customers will continue to pay the price as CBD companies resort to costly international payment processors.