6 Obstacles CBD Merchants Need to Understand And Why Processors Struggle with CBD Accounts

JD
JD
Jan 2 · 14 min read

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.

Hemp-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.

Marijuana-Derived CBD

〉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.



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?”

FDA & CBD

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)

RELATED: Are you in CBD? Bookmark this webpage and check it daily for updates: FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD)

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).

That list includes:

Pink Collections Inc., of Beverly Hills, California
Koi CBD LLC, of Norwalk, California
Noli Oil, of Southlake, Texas
Natural Native LLC, of Norman, Oklahoma
Whole Leaf Organics LLC, of Sherman Oaks, California
Infinite Product Company LLLP, doing business as Infinite CBD, of Lakewood, Colorado
Apex Hemp Oil LLC, of Redmond, Oregon
Bella Rose Labs, of Brooklyn, New York
Sunflora Inc., of Tampa, Florida/Your CBD Store, of Bradenton, Florida
Healthy Hemp Strategies LLC, doing business as Curapure, of Concord, California
Private I Salon LLC, of Charlotte, North Carolina
Organix Industries Inc., doing business as Plant Organix, of San Bernardino, California
Red Pill Medical Inc., of Phoenix, Arizona
Sabai Ventures Ltd., of Los Angeles, California
Daddy Burt LLC, doing business as Daddy Burt Hemp Co., of Lexington, Kentucky
Curaleaf Inc, of Wakefield, Massachusetts
Rooted Apothecary LLC of Naples, Florida
Alternative Laboratories, of Naples Florida
PotNetwork Holdings Inc, of Fort Lauderdale Florida
Nutra Pure LLC, of Vancouver, Washington
Advanced Spine and Pain, LLC (dba Relievus), of Mount Laurel, New Jersey

It is also important to note:

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.

Class Action Lawsuits

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:

Curaleaf Inc., Infinite Products Co LLC, Green Roads of Florida LLC, Charlottes Web Holdings, Inc, and KOI CBD LLC

Obstacle #4: Are merchants creating systems to manage products and quality control?

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.)

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.

Obstacle #6: Is the merchant following federal and state laws and regulations?

In the United States, “Federal Preemption” is the invalidation of a U.S. state law that conflicts with federal law.

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.

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 some way

  • 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

  • Alaska
  • Alabama
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Kentucky
  • Maine
  • Massachusetts
  • Maryland
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • Texas
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

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.

  • Alaska
  • California
  • Colorado
  • Illinois
  • Maine
  • Massachusetts
  • Michigan
  • Nevada
  • Oregon
  • Vermont
  • Washington

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:

  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Montana
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Dakota
  • Ohio, Oregon
  • Pennsylvania
  • Rhode Island
  • Vermont
  • Washington
  • West Virginia

States with regulations that permit under a certain circumstance include:

  • Alabama
  • Georgia
  • Indiana
  • Iowa
  • Kentucky
  • Mississippi
  • Missouri
  • North Carolina
  • Oklahoma
  • South Carolina
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Wisconsin
  • Wyoming.

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:

  • Idaho
  • Nebraska
  • South Dakota

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.

If you need processing and want to learn more, visit our domestic CBD program page.

This article was originally published on our blog.

IntegrityPay

Global provider of electronic transaction processing services that operate with integrity.

JD

Written by

JD

We move money electronically. We started Integrity Pay in 2018 because we were concerned about the lack of integrity within the merchant services industry.

IntegrityPay

Global provider of electronic transaction processing services that operate with integrity.

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