Speak with an expert: 801-405-9888

How Can Payment Processing Impact CBD Merchants?


How Can Payment Processing Impact CBD Merchants?

Cannabidiol (CBD) is one of the biggest alternative health trends in recent years. The market for CBD is expected to grow to $19.5 billion by 2025, pending Food and Drug Administration (FDA) approval. So how can payment processing impact CBD merchants?

Despite the fact that CBD doesn’t cause a high and doesn’t seem to have any potential for misuse, payment processors tend to classify CBD businesses as “high-risk” merchants. One reason for the perceived risk of selling CBD is that its regulatory status is still unclear. 

When the Farm Bill made hemp legal in 2018, it also made CBD legal and brought it under the FDA’s regulations and guidance. Payment processors need to be extra cautious about the companies they work with to avoid getting on the wrong side of the FDA and the law. For that reason, some traditional payment processors won’t work with CBD business owners.

If you run a company that sells CBD products or hemp-derived products, it’s crucial to find a payment gateway that’s willing to work with you.

Why Is CBD Considered a High-Risk Industry to Banks?

Banks and payment processors can be reluctant to work with CBD e-commerce companies because of the product’s potential legal and regulatory issues. While CBD is legal, companies that sell it need to follow specific rules. There have been instances of companies trying to skirt those rules, making the situation more challenging for the businesses that want to do everything correctly and by the book.

When a bank or payment processor decides that an industry is high-risk, it usually does so for one of two reasons:

  • The product the company sells is risky: While CBD doesn’t get people high and likely has limited potential for abuse, it can cause side effects, such as gastrointestinal issues or irritability. There are also instances when the origin of the product can be a cause for concern. CBD is legal when it comes from hemp plants, not from cannabis plants. Yet, there are some companies out there that are trying to sell cannabis-derived CBD. Those companies can make it more challenging for the CBD businesses that are following the rules.
  • The company has a risk of financial failure: When a payment processor agrees to work with a merchant, it takes on some level of financial risk. When companies have merchant accounts, the payment processor essentially lends them money, with the understanding that the payments processed will cover the costs. But if a company has a high rate of chargebacks or refund requests, the payment processor can lose a fair amount of money. 

If a payment processor determines that a CBD merchant is high-risk, it might not refuse to work with the company. Instead, it might take steps to protect itself from harm. Some of the actions a payment gateway might take when working with CBD business owners include:

  • Charging higher transaction rates: Whenever a business uses a payment processor during a transaction, the processor charges a fee. The transaction fee varies based on several factors, such as the card accepted and how the payment gets processed. The more risk connected to the payment method, the higher the transaction fee. E-commerce companies often have higher costs than brick-and-mortar stores, as they never actually see the customer’s payment card. Payment processors can also increase transaction fees if they think the company itself is high-risk.
  • Placing holds on funds: After a transaction, the payment goes into a company’s merchant account. A merchant account can act as a sort of line of credit for a business. But if a company is deemed high-risk, the payment processor can reserve the right to put a hold on some percentage of the funds in the account. 
  • Establishing rolling reserves: Similarly, a payment processor might require a high-risk merchant to have some funds in reserve. The funds, usually a small percentage of the company’s gross sales, get deposited in an account and are held there for anywhere from six months to a year and a half. If a customer requests a chargeback or demands a refund, the payment processor can dip into the rolling reserves, covering the expense.

Should You Hide Your Company's Identity?

Given that many payment processors will charge more when they work with CBD businesses or might refuse to work with a company that sells CBD products, you might wonder if it’s a good idea to pretend to be a different industry or line of business. 

Generally speaking, it’s not a good idea to try and mask what your company does. For one thing, there is the risk of getting caught in a lie. If you tell a payment processor you’re in one industry and it later comes out that you sell CBD products, there could be severe ramifications for your business, such as getting let go by the processor and having difficulty finding a new payment gateway. 

Pretending to be in one industry when you’re in another can also make it challenging to grow your business. You might get cut off by your payment processor when you need its services the most.

It’s best to be honest and find a payment processing company specializing in working with high-risk industries.

Why CBD Businesses Need a Specialized CBD Payment Processor

Although it can seem easy to set up an account with a standard payment processor, many of the big names aren’t designed to work with CBD companies or might have policies that forbid the sale of CBD products. Since honesty is the best policy for setting up your company and choosing a payment processor, it’s important to work with a payment gateway specializing in high-risk industries, such as CBD sales.

Some of the benefits of working with a specialized payment processor include:

  • Reduces the risk of having the account shut down: Your company might be able to set up an account with a standard payment processor initially. But there is the risk that certain activities will act as red flags to the processor, requiring it to look more closely. For example, if you have a high volume of sales or a lot of chargebacks, there’s the chance that the processor will shut your account down.
  • Connects you to a network of like-minded financial institutions: Some banks specialize in working with high-risk companies. When you find a specialized payment processor, you can tap into a network of banks and financial institutions that cater specifically to your type of company. You’ll have multiple options and won’t have to choose a company that charges the highest fees.
  • Provides multiple options for payment: Accepting various forms of payment means you can attract a broader base of customers. With a specialized payment processor, you can accept a wide range of credit card brands, as well as debit cards and e-checks.
  • Offers transparent fees and pricing: Payment processing companies that don’t specialize in high-risk industries tend to charge much higher rates when they decide to work with a higher-risk business. Since a high-risk payment processor knows what to expect when it partners with a company in a higher-risk industry, such as CBD, the payment processor can be much more upfront and direct about how much it charges. It might also charge much less for its services than non-specialized processors. 
  • Focuses on security: Your customers want to have peace of mind that their payment information and private details will be kept safe and secure. A specialized payment processer understands the need for data protection and security and will ensure compliance with the Payment Card Industry Data Security Standard (PCI DSS) to keep customer data safe.
  • Helps you grow your business: As CBD gains broader acceptance and more people become curious about it, there’s high growth potential in the industry. Partnering with the right payment processor from the beginning makes it easy to scale and grow your company as demand increases. 

What to Look for in a CBD Payment Processing Gateway

Several companies exist that claim to offer payment processing services to CBD businesses and other high-risk companies. When searching for a payment processor, look for the following features:

1. Experience With High-Risk Industries

Ideally, a payment processor that works with CBD companies will also have extensive experience with other high-risk industries. High-risk industries include:

These industries typically fall under the banner of “high-risk” because they tend to have high-volume or high-value sales or an increased rate of chargebacks. For example, people often submit a complaint to their credit card company about a subscription they no longer want rather than cancel it with the company directly. And high-value transactions are frequent in the travel industry, as people typically pay a lot for airline tickets or hotel rooms.

A company specializing in high-risk industries will already understand the ins and outs of those industries and the common obstacles they face. They’ll be better prepared to offer your CBD business the payment processing services it needs.

2. Flexibility and Ease-of-Use can Impact CBD Merchants

If your business is already up and running, choosing a payment processor that will easily integrate into your existing systems is preferable to partnering with a company that will require you to build everything from scratch all over again. Look for a company that doesn’t require you to give up your current system or limit you to using its own proprietary system. This is a great example of how payment processing impact CBD merchants.

3. Transparent Pricing for CBD Merchants

You can expect to pay fees when you work with a payment processor. How much the company charges can vary, and some processors are much less transparent about their fees than others. When looking for a company to work with, ask about their fees and what you can expect to pay each month. Also, find out the percentage charged per transaction, if there is one. Pricing and fees are one of the main things to know when learning about how payment processing Impacts CBD merchants.

Ideally, the processor should give you an itemized statement that lists every fee associated with your account when you sign up. Some of the fees you can expect to see on the statement include:

  • Statement fee
  • Annual or monthly fee
  • Terminal fee
  • Compliance or non-compliance fee

If you’re not sure what the costs are or why you need to pay them, it’s OK to ask. A high-risk payment processor should be willing and able to answer your questions.

4. Multiple Payment Processing Options

Customers like to have options when it comes time to pay for their purchases. The more payment options you provide, the wider your potential customer base. While many people might prefer to pay with a credit card, there are some who find it easier to use an e-check or debit cards. 

It’s also important that you work with a company that accepts a wide range of credit card issuers. For example, if you can only accept Mastercard or Visa cards, you might have to turn away people who want to pay with American Express or Discover cards.

It’s also important to work with a company that gives you multiple options for inputting payments. Even if your company is primarily online, you might still need to process phone orders from time to time. Alternatively, if you have physical stores and an e-commerce storefront, you’ll need a way to accept payments from both. 

5. Clear Contracts

Before you sign anything with a payment processor or gateway, make sure you understand exactly what the terms of the contract are. Ideally, the contract between your company and the processor will be clear and won’t leave you scratching your head. 

One thing to pay attention to when negotiating with the company is the term of the contract and what the penalties are if you want to exit early. Even though you might want to find a company to partner with long term, it’s also a good idea to have an easy way out if the business relationship doesn’t work. Look out for any early termination clauses and fees and also try to keep the contract short term so you have the option of switching if you want.

6. Available Support can Impact CBD Merchants

You want your payment processor to be there for you when you have a question or if any issues come up. Find out how the company handles chargebacks, for instance. Does it contact your company first, or does it refund the customer first? 

Also, find out when support is available. If you have an issue at midnight on the weekend, will you have to wait until Monday morning to connect with someone? Ideally, the company will have support team members available around the clock, seven days a week.

CBD Merchant Account FAQs

Have a few more questions about getting a merchant account and working with a payment processor? Here are some answers to commonly asked questions about CBD merchant accounts. 

1. What Is a CBD Merchant Account?

If you plan on accepting electronic payments, such as credit and debit card payments, your company needs a merchant account. A merchant account is a type of business bank account that allows a payment processor to issue your company payments for purchases customers make. 

In many ways, a merchant account is similar to a line of credit. There is a chance that a customer might demand their money back after the transaction goes through, in which case, your company would be responsible for reimbursing the payment processor.

CBD companies that plan on operating online need to have a merchant account. If you want to operate a brick-and-mortar store that only accepts cash payments, you don’t need to apply for a merchant account since you’re not accepting electronic payments. But if you’ll accept debit and credit card payments in person, you’ll need a CBD merchant account. 

2. Why Are CBD Merchant Accounts High-Risk?

Although CBD is legal, there are a lot of regulations and restrictions on it, which can make some payment processors nervous. Some common aspects of CBD sales can also raise red flags for payment processors, causing them to label all CBD companies as high-risk. For example, a company that sells CBD products might have a higher rate of chargebacks than other types of business. Customers might complain that the products don’t do what they claim and might turn to their credit card companies to get their money back.

CBD accounts can also be considered high-risk due to the association of CBD with marijuana. While CBD is not illegal, it’s close enough to an illegal product that some payment processors might be unwilling to let a CBD company open a merchant account. This High risk status can be an example of how payment processing can impact a CBD merchant.

3. How Does a CBD Business Owner Get a Merchant Account?

While you might face more challenges or roadblocks when trying to open a merchant account for your CBD company than a non-high-risk business, doing so isn’t impossible. The first thing to do is find a company that works with high-risk industries or that’s willing to partner with CBD companies.

You’ll most likely need to submit an application to open the account. You might need to provide the following with your application:

  • Identification, including business documents and license
  • Your Social Security number or your business’s Employer Identification Number
  • A voided check
  • Several month’s worth of bank statements
  • A link to your website

The payment processor might also request information about the products your company sells, such as the amount of CBD your products contain and any lab tests that verify its quality.

4. What Happens if a CBD Merchant Account Gets Shut Down?

If a CBD company gets a merchant account with a bank or payment processor that doesn’t specialize in high-risk industries, there is a chance that the account can get shut down by the bank. In many cases, a bank or payment processor will close a merchant account if it notices any warning signs, such as a high chargeback ratelarge transaction volume or high-value transactions.

If that happens, your company isn’t out of luck. You just need to find a new bank or payment processor to work with. At this point, it’s in your best interest to look for a company that specializes in payment processing for high-risk industries. You’re more likely to be approved for an account and will have fewer obstacles in your way if you partner with a business that already knows the ropes when it comes to high-risk merchants.

Zen Payments Understands High-Risk Industries

When looking for a payment gateway and merchant account for your CBD company, it pays to work with a payment processor that understands the needs of high-risk industries. Zen Payments has been helping high-risk companies get the merchant accounts they need for more than a decade. We understand the unique challenges and roadblocks a company that sells CBD faces, and we’re here to help you navigate them. Contact us today to learn more and to start your merchant account application.