If you have been working with payment service providers for some time, you must be familiar with the high-risk businesses that face difficulty setting up their merchant accounts. Those dealing in CBD products, such as CBD oil, edibles, medicines, and creams, need to research different payment processors to create their merchant accounts.
A merchant account is mandatory for those accepting credit/debit card payments. But how do you find a processor who’s willing to work with a CBD company? Why exactly is this industry considered high-risk, and what can you do to get your merchant account for a CBD business? Keep reading to learn is CBD a high-risk business and how you can get a merchant account. Also, read the common problems in the CBD business in this post.
Is CBD a High-risk Business?
Recreational marijuana is legalized in 23 states in the US. Despite its growing popularity, those offering cannabis—whether for medicinal use or recreational purposes—are considered high-risk businesses. That’s what slows down the growth of the CBD business across the world, as businesses experience difficulty getting a merchant account, which in turn, makes it harder for them to operate their businesses online.
Financial companies do not want to work with high-risk businesses because of the risk involved. But does that mean there’s no way your business can get a payment processor? Well, certainly not! Below we’ve explained some factors that make CBD a high-risk industry and which financial institutions are willing to work with these businesses.
Common Problems that CBD Businesses Experience
Getting into the world of the CBD market is not an easy decision for an aspiring business owner. Even though the recreational use of marijuana is now legal in most states, it faces many challenges that impact your success odds in this industry. Knowing these challenges will help you better prepare for them. In addition, if your business addresses these issues, there’s a good chance you might find a suitable payment processor that can set up your merchant account. Let’s explore the challenges first.
Just because it’s legalized doesn’t mean it has no restrictions. Even in places where recreational marijuana is allowed, there are certain legal regulations that every citizen must be aware of before buying or growing weed.
This includes age limits and other restrictions that create confusion for merchants that want to start a CBD business. The government keeps passing new laws regarding the consumption of recreational marijuana, making it difficult for retailers to keep up-to-date with these regulations. Compliance is mandatory, as a business can shut down if it fails to meet regulatory compliance.
CBD products claim to offer a host of physical and mental health benefits, which seem promising. That’s why it’s used for medicinal purposes. But, the benefits of CBD might vary. There’s a chance the edibles or other hemp-based products do not work. A customer will issue a chargeback if the product doesn’t deliver the results that the business claimed.
Another challenge that a CBD-based business is likely to face is reputational damage. Since there’s a social stigma surrounding the use of CBD for recreational purposes, the financial company might not want to put its reputation on the line by working with a high-risk company.
Each state has varying regulations regarding CBD use. While all 23 states may allow the recreational use of marijuana, the age limit and other restrictions vary significantly. These location-based regulations and the uncertainty of the laws in different states make CBD businesses high-risk. It increases the likelihood of the CBD processor being found violating a legal regulation when manufacturing, distributing, and working with hemp-based products.
If we see it from the payment processor’s perspective, they carry significant risk for each merchant account they host. A payment processor wants to ensure that your business doesn’t break any regulations concerning marijuana use or harm anyone (whether intentionally or unintentionally).
It’s because of these reasons that financial companies avoid working with CBD merchants. They don’t open their merchant accounts and nor do they provide any banking services to CBD operators. That’s why getting payment processing is often a challenge for those in the cannabidiol industry.
Can a High-risk Business Get a Merchant Account?
Not only CBD but many businesses that sell products associated with social stigma or legal issues are considered high-risk. So, does the label “high-risk” affect your chances of securing a merchant account? Well, yes.
As mentioned previously, businesses that fall into the high-risk category often face difficulty securing a merchant account, as payment processors do not accept their applications easily. As a result, they have fewer options. You should look for a payment processor that does not only set up your merchant account, but does it at a reasonable processing fee, and offers customized support.
Now, some of you might wonder what if we sell our products under different business categories? Know that it is a fraud. Not disclosing accurate information about the goods and services sold, or operating your business by a different name are considered legal violations. You might end up with hefty fines and penalties imposed by credit card processors, card networks, and your banks. If you are found to conduct fraud, your merchant account will be terminated and your business might be listed on the MATCH list, which includes all the high-risk businesses. If that happens, you won’t be able to get any payment processors for businesses you might operate in the future.
Hiding critical business information just to get payment processing is a bad idea. Besides, what’s the need for that when there are payment processors offering banking services to high-risk businesses? You might just have to pay a little higher processing fees than other businesses, but it’s much better than those hefty penalties.
High-Risk Merchant Account for Your CBD Business: Here’s Why You Need It?
Despite the difficulty to find a CBD merchant account service provider, having this account is a necessity for those operating in the Cannabidiol industry. It offers protection against chargebacks and fraudulent activities. Working with a merchant account provider means a lower risk of compliance issues, as these account providers keep up-to-date with the latest regulatory requirements and allow a secure channel to process card payments. They also provide you with the technology to identify fraudulent transactions and decline them.
In addition to these, there are certain benefits of opening a high-risk merchant account that we’ve explored below.
- Reduced Risk of Chargeback and Fraud: With a merchant account, you get fraud detection and prevention tools that can reduce the risk of friendly fraud. These tools check the cardholder’s identity and verify their address and other personal details before accepting their transaction. This prevents the customer from issuing chargeback due to the misused credit cards.
- Identify Sales Trends: You can track the sales activity for your business from the payment portal provided by your payment processor. This helps you identify your customers’ buying behavior.
- Professional Support Team: The payment service provider offers a dedicated support team for assistance. Should you experience any technical issues or payment-related concerns, you can reach out to them for help.
Paying Extra for a CBD Merchant Account
There’s no doubt a CBD merchant pays a ridiculously high processing fee. In addition to that, they might be subject to early termination fees and upfront reserve withholdings. Every payment processor keeps a portion of the merchant’s monthly income in the reserve account to reduce their financial liability.
That’s done to ensure that in case the merchant gets too many chargebacks and they close their business, the payment processor will be liable to refund all the customers that have issued the chargeback. So, they keep a reserve for such situations. Unfortunately, since CBD merchants are at high risk of fraud and chargebacks, the payment processors ask for an upfront reserve.
What to Look for in Payment Processors?
Finding a payment processor that accepts high-risk merchant account opening applications is a challenge in itself. But don’t settle for less. Here are some factors to consider when choosing a payment processor.
- Industry Specialization: Some payment processors offer payment services to businesses operating in the CBD industry specifically. As such, they have extensive knowledge about how they should operate, what steps can help prevent fraud, and the latest trends in the market.
- Customer Reviews: Check what their previous customers have to say about them before hiring. Positive customer reviews indicate that the company prioritizes its clients’ needs. This also means they will be available for your assistance as and when required.
- Fraud Prevention: The right payment processor equips you with the best fraud detection tools, which identify fraudulent activities and decline suspected transactions.
Most payment processors have implemented strict regulations for high-risk businesses applying for a merchant account. Even if they accept your application, they will most likely charge an exorbitant fee for offering banking services. But you can find a payment processor that charges a minimal fee and offers a host of fraud detection tools with advanced payment technology. Some research will go a long way in helping you find a trusted partner.