When Elavon decided to cut ties with all its CBD merchant accounts, Dee Dee Taylor’s retail store 502 Hemp was left scrambling for alternative solutions. Taylor told WFPL News, “In April, when they (Elavon) sent the news out to everybody that was like ‘Oh my gosh, what am I going to do?’ I felt like I was scrambling because you can’t have a retail store and not have credit card processing. You just can’t.”
In this article, part two of a four-part article series, we’ll explore the current hemp & CBD problem with the financial industry, take an in-depth look into the confusion caused by the passing of the 2018 Farm Bill, and explain how Solvent plans on providing affordable merchant processing for the hemp & CBD industry.
You can read part 1 here.
So, why did Elavon make such a difference?
Imagine a situation where you’re running a business and customers come across your products and love what they see. However, when they attempt to purchase said product, you have to inform them you can’t process credit cards. This situation would obviously make an online store obsolete.
This is also the kind of situation many hemp & CBD merchants found themselves in just before Elavon began to offer merchant services and is why Elavon made such a splash in the industry in the fall of 2018. Onboarding thousands of CBD merchants in a matter of months, their presence breathed hope and life into these deprived businesses.
What went wrong?
In February of 2019, hemp & CBD merchants with Elavon accounts were informed that Elavon would no longer register new accounts. Any being processed in underwriting would be canceled and current customers’ accounts would be officially closed on May 15.
In Elavon’s announcement, they said, “After several months supporting this merchant segment, it has become clear that the evolving pace of the Federal and State regulatory framework makes it extremely difficult to validate the qualifications required to operate within the industry. It is with an abundance of caution that we make this decision.”
When we look at the legal framework within which they were operating, they had a point. As much as hemp is federally legal, many states need to formulate their own policies. The direction each state will take is currently uncertain. The resultant confusion has been discussed in the first part of this series. However, they aren’t the only merchant service company to serve this industry so why did they choose to withdraw completely?
One of the reasons for this withdrawal began before any accounts were accepted. Elavon didn’t update their underwriting or risk management policies to reflect the needs of this high-risk industry. This created a situation where the accounts being setup were “auto-approval” accounts since little oversight was being conducted during the onboarding and underwriting process. In our opinion, they were driven by creating a massive “land grab” and generating revenue over establishing procedures that would properly mitigate risk. Elavon’s outdated risk management policies; however, were not the only cause.
Elavon’s withdrawal was also due to a breach of trust. A key ingredient in every successful business relationship is trust. Unfortunately, not all businesses who set up accounts with Elavon kept that trust. US Bank reported that several CBD businesses hid the fact they weren’t only selling CBD products but were also selling federally illegal THC products. This resulted in excessive chargebacks and fraud. Driven by the fear of lawsuits, Elavon chose to completely withdraw.
Is all hope lost?
No. There’s hope a solution can be found to help carry out better KYC procedures in such a way the risk taken on is reduced significantly, thus providing more incentive for the financial industry to invest in the hemp & CBD industry. Furthermore, earlier this year, the SAFE banking act was reintroduced to the U.S. Senate.
The proposed legislation will protect financial institutions from federal prosecution as they work with cannabis-related businesses operating in compliance with state laws. These ancillary businesses working in the cannabis industry will not be able to be charged with money laundering and other financial crimes. It will also require the Financial Institution Council to develop guidance that will educate financial institutions on how to legally serve the hemp & CBD industry. If this act is signed in, financial institutions will feel secure enough to open up their services.
As much as the SAFE banking act is hoped to bring change, an interesting trend is noticeable in the hemp & CBD industry where corporate companies such as Rite Aid, CVS, and Nordstroms are able to use merchant services to sell CBD products. Small to medium-size businesses who sell the same products are not getting access to these same services. Why is this the case? Why should corporate get access to merchant services while small businesses are being denied the same services?
To be continued in the next article…