When hemp-based products were legalized in 2018, CBD products swamped the market. Payment processors, on the other hand, haven’t been as welcoming to this product — or its merchants. CBD merchants face a tall order finding merchant service account providers willing to work with their industry, which makes it near impossible for these merchants to offer credit and debit card acceptance to their customers.
What is CBD?
CBD is a shortened version of the term cannabidiol. CBD is a phytocannabinoid extracted from plants of the scientific name Cannabis sativa. If you’re a marijuana merchant or connoisseur, this scientific plant name sounds awfully familiar.
Both cannabis and Sativa are terms used to refer to marijuana:
While cannabis can be either marijuana or hemp, Sativa is a term that refers to a specific strain of marijuana.
For instance, cannabis may or may not contain psychoactive properties, whereas marijuana always has some level of tetrahydrocannabinol (THC), the substance that gives users a euphoric high. CBD comes from hemp, which is a type of cannabis, but the extracted cannabidiol has little to no THC content. In other words, those fruity CBD gummies won’t result in any form of couch-lock.
Marijuana has a certain percentage of THC depending on various factors, such as strain, seed health, growth properties, and cultivation methods. An average THC content might be around 15%, while some high-end marijuana strains have tested at 37.5% THC. Strains this high aren’t available everywhere (not to mention that a typical “high” THC content is closer to between 25% and 30%.
While marijuana, cannabis, and CBD have all been legalized in different ways over the past few years, this doesn’t mean that everyone embraces these substances or desires to put their own professional reputation on the line for them. The Farm Act legalized CBD and hemp production and distribution at the federal level, but from state to state, the laws are not as uniform much like with marijuana. Marijuana remains illegal federally, but, as evidenced by the many states creating their own laws allowing for marijuana consumption, its control is largely left up to the states.
Most states engage in at least some form of CBD sales and distribution as long as the THC content remains below 0.3%.
Does legal status make it easier to become a CBD merchant?
Unfortunately, no. Despite these products’ legal stature, many banks, credit unions, and payment processors refuse to work with CBD businesses or offer CBD merchant accounts. Businesses that sell CBD products without updating their product list on file with their merchant account provider can face sudden closure of their merchant account.
If you operate a CBD retail or eCommerce business, Zenti offers high-risk merchant accounts across several industries, including CBD sales.
What’s a merchant account for CBD sales?
CBD merchant accounts allow CBD businesses to sell CBD products as long as the products meet the merchant account provider’s requirements. Some merchant accounts might allow a business to sell any kind of CBD product they choose, while others are more stringent.
Certain businesses and industries, such as eCig stores, are considered high-risk industries for various reasons, such as typical ticket prices, type of clientele, and more. Most merchant account providers consider CBD businesses extremely high-risk, placing them into a category all their own — even some high-risk merchant accounts servicers don’t partner with CBD companies.
Why is CBD high-risk? Do businesses in the CBD industry need high-risk merchant accounts?
Due to less regulation in growing, cultivating, selling, and distributing hemp and CBD products, payment processors consider the products exceedingly high-risk, making it harder for these businesses to obtain merchant accounts. A business could have a stellar credit score — for the business and its owner — but, unfortunately, credit scores aren’t a factor given much weight when determining the fate of a CBD merchant account. It’s all about the product itself. For instance, CBD businesses tend to:
Have labels with unconfirmed or unproven claims regarding product efficacy
The Food and Drug Administration (FDA) receives thousands of products and product applications annually for FDA approval. One of the FDA’s least worrisome categories (least worrisome in the sense that these products aren’t high on the list for approval because they won’t cure a disease) is nutraceuticals. CBD falls under the nutraceuticals umbrella.
Any claims surrounding CBD, its oils, and its positive effects and qualities haven’t been substantiated or approved by the FDA. Plus, without more peer-reviewed studies or journal entries illustrating the perceived and actual benefits of using CBD, businesses can say just about anything they want.
For instance, when CBD was first introduced, people claimed it provided a THC-free way to relax and reduce anxiety. Today’s cultivators, sellers, and distributors consider CBD the Miracle Drug that can heal everything from depression to autism — it’s the new “colloidal silver” of sorts, only you won’t see CBD gummy infomercials!
Have higher than average chargeback ratios (which could very well have to do with bold claims that don’t deliver)
Every business can see the occasional chargeback. There’s really no industry that’s immune from chargebacks. Chargebacks aren’t unheard of in the fuel industry, but gas station owners are better cushioned against potential chargebacks than many other industries. That hold that gets placed on your card when you use it to pay at the pump? That protects the merchant and the credit card company from potential chargebacks.
In the world of CBD, the chances of a chargeback skyrocket.
One of the biggest reasons for chargebacks in the CBD industry? People expect it to live up to its claims. CBD manufacturers tout the product’s health benefits extensively — but when a consumer tries the product, if they don’t feel it lives up to their expectations or didn’t solve any of the problems manufacturers claim it will, they are likely to initiate a chargeback.
Finally, financial institutions responsible for underwriting merchant accounts don’t enjoy covering businesses in legally grey areas. CBD legislation varies widely depending on location, which can create multiple issues for CBD merchants, who may become embroiled in legal problems affecting distribution and sales and ultimately leading to lost revenue.
Ecommerce and CBD Sales
Ecommerce has evolved tremendously over the past decade. Today, anyone with an internet connection and something to sell can begin a home-based business online. According to the 2021 US CBD Consumer Report by The CBD Insider, marijuana dispensaries topped the list of places where respondents buy their CBD products. Online CBD brands were a close second. However, if you include all online sales formats, online CBD sales are the victor: Of all respondents, 49.6% choose to buy CBD online (broken down as 30.5% directly from online CBD brands and 19.1% from online retailers that sell a variety of products). Online CBD sales, it would seem, have a built-in marketplace, with buyers and sellers perfectly matched. But this is a difficult industry for businesses, and there’s often no support for them, whether their operation is in good standing or otherwise. For instance, some payment processors won’t work with CBD retailers.
(Image Credit: The CBD Insider 2021)
Does PayPal allow merchants to accept payments for CBD sales?
PayPal is one of the most popular payment platforms. But does this household name allow CBD payment processing? Unfortunately, PayPal doesn’t participate in facilitating CBD payments. PayPal’s policies clearly state that the platform can’t be used to accept payments for CBD purchases. While this probably has a lot to do with the varying legislation around the nation, there are merchant account providers that will work with CBD merchants, like Zenti.
Starting a business a tough. Starting an online business, while it looks easier than traditional retail, can be just as grueling. But starting a CBD business online is especially challenging. This is why it’s important to know your options and available resources before you set up shop. Nothing is worse than opening your online doors to customers only to have to shut down temporarily — or even for good — if you inadvertently violate CBD legislation by selling to consumers in a state or city where CBD sales aren’t allowed.
That said, though, selling CBD products in an eCommerce store is simple. Imagine stocking up on gummy bears — in some locations, those sell themselves and practically sell out before your next shipment of inventory. But let’s take a look at why you can’t process CBD purchases and associated payments using your PayPal account.
What are PayPal’s policies for CBD sales and payments?
PayPal has a relatively straightforward CBD policy: don’t try to sell it or accept the funds using your PayPal account. You can’t get much more clear-cut than that.
PayPal was one of the first online payment platforms. The payments giant changed the game for eCommerce retailers, offering an easy, user-friendly interface. PayPal’s other services, such as invoicing, make running a business from home easy.
From the very beginning, PayPal chose not to work with businesses selling certain products or in high-risk industries. Low-risk industries usually don’t have high chargeback ratios. As the payment processor, chargebacks affect PayPal. So, PayPal monitors all accounts on its platform for risky behaviors. If your chargeback ratio happens to spike, your merchant account and payment processing ability could get suspended. Your account won’t be reinstated until PayPal’s representatives have completed an internal review. It’s important to note that during this review, PayPal reserves the right to temporarily freeze your account, including access to any funds you may have, until the review is complete.
And you probably guessed it — there are millions of individuals and businesses with PayPal accounts. That’s a lot of accounts that PayPal’s responsible for. Due to the sheer size of this payment platform, a review could take a few weeks, if not months, to finish.
What happens when a merchant violates PayPal’s policies?
It seems like CBD is sold everywhere these days: online and in-store. To someone just starting their own CBD business, this presents a false sense of the product’s overall acceptance. It doesn’t necessarily occur to a new CBD merchant that they may encounter payment processing barriers or that disclosing every product they sell in-store or online is mandatory.
Let’s say a convenience store owner sets up an account with a traditional payment processor. The store owner sells many products, and the tiny stand with CBD gummies on the counter (whether an honest mistake or intentionally withheld) doesn’t make it onto the store’s product list.
This one mistake puts the entire business in jeopardy. The business could lose payment processing capabilities temporarily or indefinitely. And if CBD sales aren’t legal in that city or state, the business owner could face fines or other legal action.
Without a way to accept payments, you’re in a tough spot. Once you’ve set up a merchant account, protect its status by knowing and complying with:
- All state and local rules and regulations
- Your payment processor’s policies
How can you change PayPal’s current policy?
Like many things nowadays, a public sentiment often tends to have a bit of influence over the policies of public and private entities. PayPal welcomes the open discussion of and feedback on the company’s policies. The processor even has a Public Policy page where users can post questions, share their opinions, and learn more about policies and regulations, public and governmental.
Open discussion is always good, but it doesn’t necessarily mean that PayPal will ever adapt its current policies. That remains to be seen. As of now, it’d be rather difficult for the payments giant to reverse course on its high-risk business clause and suddenly start facilitating payments for CBD products.
Open your CBD Merchant Account with Zenti
Any high-risk merchant that chooses a traditional payment processor is bound to hit a snag at some point. Payment processors like PayPal just can’t handle the needs of a high-risk merchant.
Zenti’s high-risk merchant account for CBD sales gets you set up and accepting payments online or in-store fast and easy. Reach out to one of our high-risk payment processing experts today and learn how you can start selling CBD in your store.