After an abrupt announcement in mid-March CBD and hemp retailers are scrambling to find alternative payment processors. Elavon, backed by US Bank, gave their customers only 45 days of notice to find merchant services elsewhere. According to the Elavon announcement, “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.”
It seems as if US Bank jumped the gun with their move into CBD. They were the first non-high-risk merchant services providers to the industry. From the outside, the signs are increasingly bright for the hemp and CBD industry. First the passage of the 2018 Farm Bill. Then, not long afterward, the Food and Drug Administration announced the formation of a high-level federal working group to explore potential pathways for dietary supplements and conventional foods containing CBD. There is more need than ever before for merchant services within the hemp and CBD marketplace. However, with the exit of Elavon, it seems the climate is still too uncertain for national banks to consider.
Where does that leave hemp and CBD retailers? According to Aaron Reichman of TashTech, (a CBD-friendly payment processor), it leaves the industry extremely vulnerable. With only 45 days to move their merchant services elsewhere, former Elavon clients are left helpless. Reichman believes many retailers will fall victim to predatory pricing, from high-risk providers charging rates of up to seven percent.
The High-Rates of Being High Risk
There is no doubt the CBD industry is booming. The market forecasts are expecting $22 billion in the US alone by 2020. The legislation is rapidly opening up to allow for hemp cultivation and sales, and for the everyday consumer, the industry is moving out of the fringe and into the mainstream.
Yet, hemp and CBD products are classified as high-risk when it comes to merchant services. As the industry saw with the sudden exit by US Bank, the sector is deemed too risky to maintain a low-risk classification.
Beyond hemp and CBD products, the high-risk category also contains industries like gambling, horoscope and fortune tellers, tobacco companies, and multi-level marketers. With the loss of Elavon, CBD companies will now be forced to the high-rates and restrictions of the many high-risk service providers out there.
There are many processors eager to gobble up the CBD companies dumped by Elavon – and it isn’t a surprise based on the rates charged by these processors. Reichman, of TashTech, expects many service providers to prey on the now vulnerable hemp-based businesses. The businesses are desperate to find someone to support the backend of their sales, willing to pay predatory rates to stay open.
High-risk accounts can place excessive restrictions on their clients, including rolling reserves and high transaction fees. By some accounts, rolling reserves hold five percent, for up to 26 weeks of sales. These accounts no doubt, prove extremely lucrative for the processor.
Limited Options for CBD, Hemp, and Cannabis Businesses Going Forward
The Elavon news hit the industry like a freight train. It is a serious step backward for hemp, CBD, and cannabis across the country. With an overwhelming majority of states allowing for medicinal cannabis and hemp production – it's easy to argue the industry doesn’t belong in the same category as MLMS, and tobacco.
As of mid-April, the US Senate is currently debating the “Secure And Fair Enforcement (SAFE) Banking Act.” The bill introduced by Jeff Merkley (D-OR) and Cory Gardner (R-CO), and cosponsored by 20 other members is gaining traction. This bill aims to remove the threat of sanctions from banks who provide services to legal (state) businesses. A similar bill (with even greater support) is currently making its way through the House.
In the words of Merkley, “It’s absurd that cannabis business owners in Oregon have to shuttle around gym bags full of cash to take care of their taxes or pay their employees. Operating in cash is an invitation to robbery, money laundering, and organized crime. This is a public safety issue, and I hope that this will be the Congress when we build a bipartisan consensus to put this common-sense fix into law.”
With so much support for low-THC or hemp-based products (at the very least), there is a strong national need to improve access to banking services for these sales. Today, the situation isn't ideal, but the Elavon set back is likely only a minor setback.
There is much momentum behind the bills going through the US federal government, and public support is strong. As Reichman told Cannabis Tech, “[The] CBD game is changing drastically. Every single week another thing happens.” There should soon be protections for national banks to provide services to CBD and hemp companies in legal states, and national banks will presumably be eager to fill the void.
