One silver lining to the turmoil of 2020 was the global move to eCommerce, which allowed many businesses to remain successful despite the economic downturn. In many ways, e-commerce was the ark saving businesses from the flood. But many cannabis and CBD merchants were left behind with only life vests, thanks to current regulatory hurdles that may cripple their growth long-term.
How can the payments industry support merchants facing such stormy waters and thorny requirements?
November’s election was a big win for marijuana, which voters legalized (to varying extents) in Arizona, Mississippi, Montana, New Jersey, and South Dakota. Some estimate this may add $9 billion to an already-lucrative industry, likely to pass $15B in revenue and grow to more than $73B by 2027. As a result, many cannabis merchants, investors, and entrepreneurs are seeing promising growth opportunities. The biggest roadblock to “seeing green,” however, is the federal criminalization of marijuana as a Schedule I drug.
As a result, cannabis merchants cannot participate in FDIC-insured programs, including most household names in banking and loans. Additionally, marijuana businesses are barred from conducting trade between states, even if both have legalized recreational marijuana. This leaves cannabis merchants struggling to find trustworthy payments and banking partners to grow their business while remaining compliant.
From a payments perspective, marijuana businesses have only a handful of options to process transactions. The most popular is a direct debit or “cashless ATM” transaction, which allows a direct sale from the customer’s debit card to the merchant account, as would happen with an ATM cash withdrawal. This option can feel legitimate to customers, who perceive the transaction no differently than a traditional debit card payment despite the differences on the backend.
Another common option is plain ole cash, the pitfalls being security concerns, and additional costs to secure vaults, transport cash, and painstakingly ensure accurate bookkeeping (more highly prone to human error). Other, rarer options include cryptocurrencies, which are unstable and can be difficult for customers to obtain, and Automated Clearing House (ACH), which relies on a third-party app that the customer must download.
A critical missing element here is credit card transactions: 76 percent of consumers have a credit card, and it has become the default mode of spending for a large swath of the population. Many consumers expect to pay with a credit card when entering a dispensary and may be dismayed when they can only use cash or debit, so this can be alienating. This, however, can only change with federal legalization of marijuana.
In 2020, we saw the downfall of brick-and-mortar stores, and most businesses adapted by moving to e-commerce platforms. Experts expect the move to online shopping to last far beyond the pandemic, as consumers have appreciated the convenience and safety of at-home delivery, and businesses have abandoned many of their profit-leaking stores.
Left in the dust are dispensaries, which cannot conduct traditional e-commerce, as shipping marijuana qualifies as federal drug trafficking. Until that changes from a legislative perspective, marijuana merchants are facing a long-term handicap, pretty much forcing them into a brick-and-mortar-only model (barring expensive solutions like payment via a closed-loop mobile payment app followed by hand-delivery by courier).
There is one branch of the cannabis industry that can be processed online: CBD. Since the 2018 Farm Bill separated hemp from marijuana, CBD is no longer regulated under the Controlled Substances Act (CSA) and can be legally processed online. In fact, the CBD market may reach more than $20B by 2024.
But CBD is not as easy to sell as a traditional retail good, as the industry is classified as “high risk.” Like in the legal marijuana business, the biggest payment players are barred from working with these merchants. Additionally, CBD merchants need to jump through hoop after hoop to ensure total compliance on a federal and state level – which can also seem like a moving target. The environment is highly volatile, and uncertainty around regulations and difficulty with ensuring compliance has in many cases led to payment processors or sales platforms changing their policy around allowing CBD sales at the drop of a hat.
In terms of compliance, the greatest difficulty (and most rampant violation) we’ve seen is CBD merchants not understanding website compliance, especially when it comes to false or unproven medical claims. The Federal Trade Commission (FTC) has started to crack down harder on these violations, recently imposing $30k in fines to six CBD merchants for making unproven claims on their websites. It can be tempting for CBD merchants, who believe wholeheartedly in the product and its benefits, to make assurances about the medicinal benefits of the product. Still, this practice is illegal and will result in fines that can shatter a young CBD business.
To ensure safety, compliance, and long-term success, CBD businesses need to work with a payment processor that they trust and build a partnership. A payment processing company specializing in the high-risk space can better understand the business’s challenges and deeper needs and guide the merchant out of harm’s (and illegality’s) way. Even the most seasoned connoisseur of CBD products should find a trustworthy high-risk processor to lean on, as it will know the ins and outs of the payments landscape.
Violations of the FTC’s rules around website compliance will cause many payment processors to reject merchant applications outright, not wanting to work with businesses making facetious statements. To ensure compliance, a reliable high-risk payment processor will go the extra mile at the start of the relationship to manually check every page of the merchant’s site to identify and flag legal discrepancies, such as unproven medical claims and deceptive marketing. The partner can continually monitor for these discrepancies in case they appear on the website. One lapse in judgment or a hyperbolic statement can lead to enormous fines and a lack of consumer trust. The best payment processor will go beyond customer transaction management to also guide the merchant with website compliance, give counsel on fraud prevention, and ensure the website is up-to-date and running smoothly on the backend.
Both marijuana and CBD merchants face an uncertain road ahead, as public and private policy around the industries can dramatically shift at the drop of a hat. By vetting and locking in a stable, user-friendly payment process and selecting trustworthy partners, cannabis business leaders will have one less thing to worry about and can chart a course toward calmer waters.