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Banking vs. Hemp Industry: What Consumers Don’t Know
While hemp has become a popular topic of conversation, there’s one aspect that rarely gets discussed: banking in the hemp industry.
To date, hemp extract companies have a very difficult time securing and maintaining a merchant processor in the U.S. In fact, for some time, hemp extract companies relied on PayPal and Stripe to process payments, but the two companies discontinued their services for every single hemp extract company.
When the merchant processors stopped working in the hemp industry, they cited their three categories of business: Normal businesses, prohibited businesses such as drugs and casinos, and high-risk businesses like hemp extract companies. The third category is a broad one, as it includes two factors that determine whether or not the company is high risk.
The first factor is based on the actual product. For example, high-risk businesses typically offer digital products, software, or some other online deliverable. However, PayPal and Stripe consider these businesses as high-risk because they don’t include tracking numbers for shipping, which makes it difficult for merchant processors to confirm the delivery.
PayPal, for example, needs the confirmation number to prove a product was in fact delivered, which helps with product disputes. Other delivery confirmations such as email links or “software product keys” are far more challenging to track. However, this is not a problem for hemp companies because they have software that provides shipping and tracking confirmation.
It’s the second factor, which relates to the number of chargebacks a business receives, that prevents PayPal and Stripe from working with hemp extract companies. Brands that offer online products typically have a higher rate of refunds. Moreover, considering their business is generally done on a global scale, these companies have a better advantage in scamming their consumers as well as their merchant processor, which leads to financial loss.
For example, if a business is aware of the number of refunds it will receive, the company could take advantage of this insight and withdraw all their money and close their PayPal or Stripe account with no intent to refund their customers. This scam puts merchant processors like Paypal and Stripe next in line to refund these consumers out of their own pockets.
Most merchant processors believe hemp extract companies are likely to incur chargebacks and close their accounts before refunding customers — and this assumption puts hemp extract brands in the high-risk category. Without banking regulations, even U.S. banks don’t feel comfortable financially backing a hemp extract business. But throughout our 4 years of working with credit card processors, we have never experienced any chargebacks. However, this fact has still not convinced banks or merchant processors to work with us long-term.
The trials CBD companies face when seeking a merchant processor
Upon noticing how difficult it was to work with U.S. banks, some hemp extract companies found alternative routes to merchant processing. At Kat Naturals, for example, we implemented several unique strategies to find a merchant processor but each one failed. Our strategies included:
Realizing that U.S. banks were hesitant to work in our industry, we found that QuickBooks actually allowed us to invoice customers since we never had any issues with chargebacks. Unfortunately, QuickBooks dropped us because our business, like other hemp extract companies, are still in their “high risk” category despite the lack of chargebacks.
- Hemp Processing Companies
Hemp processing companies worked in one of two ways: entrepreneurs crowdfunded them or venture capitalists backed them. Regardless of the route, entrepreneurs and venture capitalists poured millions of dollars into a bank account and held a loan open for our credit cards.
As long as we didn’t have a high rate of chargebacks, we were all set. However, these crowdfunded sources eventually became obsolete because there were too many hemp companies trying to use them, and there wasn’t enough capital to back all of them.
- Overseas Hemp Processing Companies
Eventually, we decided to open a business account overseas in the UK. We had to pay 16% in fees, taxes, and all other charges. However, there were two additional drawbacks to this decision.
First, our customer service line had to go through the UK first, and then the U.S. This detail was very confusing for our customers because they didn’t understand how a Tennessee based brand could operate in the UK. Our team continuously had to explain to customers that we didn’t actually work in the UK and it was just semantics.
However, the second drawback was even worse. Over time, we noticed there wasn’t any sophisticated security in place. This issue gave the hemp industry a bad name, and we wanted to do something — but we couldn’t control another’s country processes. After repeated issues overseas, we decided to leave.
Big banks shatter the hemp industry’s glimmer of hope
Once the 2018 Farm Bill Act came out, Elavon and U.S. Bank decided to support hemp extract companies by offering merchant processing services. However, as of March 14, 2019, only 4 months after accepting these brands, Elavon, a payment processing subsidiary of U.S. Bank, suddenly opted out of their decision.
Elavon notified 138 hemp extract companies and told them their accounts would close in 45 days. An email sent to by Elavon stated, “The pace of an evolving Federal and State regulatory framework makes it extremely difficult to validate the qualifications required to operate within this industry.” This processor worked with the largest CBD companies, all of which are left in dismay and desperately in search of an alternative solution.
The lack of support from merchant processors ultimately hurts customers
Sadly, consumers are unaware of the difficulties hemp extract companies face when seeking and acquiring a merchant processor. More often than not, consumers get frustrated by the inconsistency and purchase products from a competing brand. The competitor may not be encountering the same issues because it’s a new company, but eventually, it experiences the same problems, forcing consumers to transition from brand to brand.
It’s a problematic situation because customers are left feeling just as frustrated as business owners. For example, almost every day, one of our wholesalers is asking us if we can use a different credit card processor because the merchant dropped them. While we do the best we can, finding another merchant processor is quite overwhelming.
Third-party merchant processors do a lot of solicitation in the hemp industry, which can help narrow options. However, third-party processors typically partner with the UK or with another merchant service processor that significantly mark up their services to hemp extract companies.
CBD companies in the hemp industry remain in a legal gray area
Hemp is legal to grow, legal to process, and legal to sell; yet, merchant processors make it difficult for hemp extract brands to sell their products. People predict the hemp industry will experience something similar to the vape industry, which also struggled to secure financing. Merchant processors also put vape shop owners in the high-risk category, making it difficult for business owners to rely on a credit card processor until there was regulation in place.
However, as of March 28th, 2019, the HR 1595, the bipartisan Secure and Fair Enforcement (SAFE) Banking Act, was approved by the House Financial Services Committee. This legislation will allow hemp extract companies to access banking and financial services. In fact, the CEO of Adnant Consulting, Sabas Carillo, stated, “Denying access to banking and financial services holds the industry back, and it’s about time we allow it to come into its own and show the greater U.S. that it’s as legitimate as any other mainstream industry.”
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