Thanks to legislation like the 2018 Farm Bill, finding quality CBD products is easier than ever before. The same can be said for finding a CBD payment processor. In the past, it was difficult, if not impossible, to buy CBD online, let alone start a business selling it. Thankfully, regulation has evolved over time to allow many entrepreneurs to take part in this booming industry.
While you have a number of options available when it comes to choosing a payment processor, it's important to find the right CBD payment processor. Your business will rely on them greatly as you grow, so partnering with the right company can mean life or death for your CBD dropshipping business. Use this guide to aid your efforts in identifying the right CBD payment processing gateway for your online store.
- What is CBD?
- Is CBD Legal?
- High-risk processors required
- Why CBD is high-risk
- What a great CBD payment processor looks like
- Final note
What is CBD?
First discovered in 1940 by scientists from the University of Illinois, it’s hard to believe that CBD has been around for over 80 years. Though CBD has existed for quite some time, studies involving the non-psychoactive cannabinoid are fairly new. Despite this, CBD has quickly become the most popular cannabinoid among researchers, even surpassing THC.
CBD is found in marijuana and hemp plants, but most of the CBD products available today are made from industrial hemp plants. Today’s advanced technology has allowed scientists to study the cannabinoid closer than ever before, discovering new uses and benefits almost daily.
Although many consumers swear by the benefits of CBD, the Food and Drug Administration (FDA) forbids anyone selling CBD from making unproven health claims about it. Until more research is done to prove the benefits of CBD, the FDA wants to prevent merchants from making misleading claims about their CBD products. False claims about CBD can lead to consumers mistaking it as an alternative for professional medical care. This has led to all CBD merchants requiring a high-risk CBD payment processor to process orders.
Is CBD Legal?
The high-risk associated with CBD, coupled with marijuana still being labeled as a Schedule I drug at the federal level, makes it fairly difficult for merchants to accept payment online.
Because marijuana is not legal at the federal level, CBD derived from marijuana is not legal at the federal level. While marijuana is from the same cannabis family as hemp, it contains more than 0.3% THC; the psychoactive cannabinoid found in cannabis.
“Marijuana-derived” CBD is not legal at the governmental level. "Marijuana" or "cannabis" is a member of the cannabis family, much like hemp, as it is more widely known. The variation comes from cannabis that grows with more than 0.3% THC-- known as the plant's psychoactive ingredient.
The confusion between hemp and marijuana plants has caused trouble for hemp business owners who are looking for merchant partners who will accept online payments for CBD products.
CBD laws are still evolving and changing to this day, so it’s in your best interest to stay up-to-date on the latest developments at the state and federal level. Luckily, there are plenty of resources available online that keep record of current law. One example is ProCon.org.
High-risk processors required
CBD merchant accounts are considered high-risk, despite being legal in many different forms through the U.S. Since the FDA has yet to implement regulations for the industry, there’s no real regulatory process for all CBD merchants to abide by.
Don’t let this damper your view on selling CBD though, because you can find success selling CBD online/offline as long as you stay prepared and informed.
At the same time, the current regulations around CBD cannot be ignored. This means all products containing CBD are considered high-risk and many payment processors will shy away from, if not outright avoid, any partnerships with CBD companies.
Because of the lack of regulations, there are dubious manufacturers who give CBD merchants a bad name and cause payment processors to fear delving into this high-risk category.
So, what’s the solution? Find a merchant partner that offers payment processing for CBD with the same support and functionality that any low-risk business would enjoy.
Why CBD is high-risk
We’ve briefly touched on the reasoning behind CBD being labeled as a high-risk industry, but there’s more to the story than just lack of regulation. Besides the legal nature of CBD, payment processors also avoid the industry due to its high rate of chargebacks and unproven health claims regarding the cannabinoid.
Although the FDA does not allow merchants to claim medical benefits for CBD products, many still proceed with making claims that CBD is a cure or treatment for a variety of illnesses and conditions such as depression, anxiety, and even autism. Without little to no peer-reviewed evidence to support these claims, many payment processors will want to avoid the industry and its legal implications altogether.
Chargebacks are a danger to just about every business that accepts credit card payments. Any industry can be affected by chargebacks, but CBD merchants are especially vulnerable due to the unverifiable medical claims mentioned. If a customer comes to the conclusion that their purchase did not heal or treat their condition and files a chargeback, there’s a chance of the dispute ending in their favor.
Again, while this information may sound defeating, there are still a plethora of reliable merchant partners prepared to offer payment processing services for CBD businesses. Understanding why some payment processors avoid the industry will lend to identifying the right partner for your business.
What a great CBD payment processor looks like
According to Brightfield Group, global CBD sales are expected to reach $22 billion by 2022. Naturally, a flood of online retails are looking to take part in this growing industry by finding a CBD payment processor to work with.
Here are some features and characteristics to look for before opening a CBD merchant account:
The CBD payment processor you select must be able to process high-risk transactions for CBD products.
As mentioned above, the lack of regulation and oversight makes the CBD industry susceptible to fraud and chargebacks. Not all payment processors are willing to take the risk associated with CBD transactions, so look for companies who have a lengthy history of experience in a high-risk industry.
Integrating a new CBD payment processor shouldn’t mean moving to a new ecommerce platform. If you’ve spent a lot of time and energy building your current site, you know moving to a new platform would be devastating.
Avoid payment processors who require you to integrate to their existing systems, and instead look for payment processors whose system can be integrated with your existing ecommerce platform.
You want to work with companies that are agile from an integration perspective because they are more likely to scale with your business as you grow.
Most CBD payment processors offer an API integration, which is the ideal solution because it allows you to monitor transactions while gaining valuable analytical insights as well.
Point-of-sale (POS) capabilities
If you plan to sell both online and offline, look for a CBD payment processor that offers POS functionality.
A POS system lets you manage transactions whether online or offline. As an added bonus, most POS systems include inventory management, business analytics, and other services to help increase sales and customer satisfaction.
You have options when it comes to payment processors and the fees associated with them. Seasoned processors may charge a sizable application fee upfront, but there are processors who offer little-to-no fees for their services.
Determine if the transaction rate offered by the processor is one that you can afford. If your profit margins don’t allow for transaction fees at the specific rate set by the processor, you’ll need to start looking elsewhere.
It’s important to note that credit card fees are often higher than fees associated with debit card transactions.
Additional fees to consider are:
- Monthly/annual fees
- Statement fees
- Non-compliance fees
- Compliance fees
- Terminal fees
Chargebacks may come with a fee as well, so be sure you fully understand the fee structure before partnering with a payment processor.
Every company is different when it comes to business contracts for CBD payment processing. Some may require a long-term commitment, while others will offer short-term contracts.
It’s generally best to avoid any companies that only offer long-term agreements, unless they have the experience and customer success stories to back them up.
Be prepared to negotiate. Some companies with require you agree to pay an early termination fee if you choose to switch payment processors down the road.
No matter how secure and safe you feel your CBD business or site is, you have to be prepared for the worst case scenario.
Let’s say a customer wants to file a chargeback on an order placed recently. As the merchant, you need a clear understanding of how your payment processor handles these disputes. At the end of the day, the result of the dispute can greatly affect you and your business.
Ask prospective payment processors how they handle chargeback disputes. You should also inquire about their fraud prevention efforts, so you can mitigate disputes before they occur.
The best payment processors will offer personalized support with a dedicated agent, but at a minimum you should look for partners with 24/7 email and phone support.
Use the information from this guide to thoroughly investigate potential payment processors for your CBD business. Ask about specialized services or benefits they can provide you. Every processor is different, and it’s of the utmost importance that you find a payment processor your CBD business can rely on.
Selecting a CBD payment processor is no easy task, nor should it be taken lightly. Knowledge of regulatory changes, fraud prevention, and chargeback management are just a few key services you should look for in a payment processor.
This material does not constitute legal, professional or financial advice. For specific legal, professional, or financial inquiries, contact your attorney.