Member Blog: Payment Processing in the Cannabis Space – Part 3
by Todd Glider, MobiusPay, Inc
This is Part III in a series of blog posts entitled Payment Processing in the Cannabis Space. Click here for Part I, and here, for Part II.
It would be naive to suggest that the cannabis retailer isn’t also facing headwinds resulting, simply, from a century of bad press. Putting the questions of federal vs state legality aside, it’s important to note that payments and banking issues are not unique to the plant-touchers, or Cannabis-Related Business Tier I, or CRB Tier I. CRB Tier II, the ancillary, or cannabis-adjacent businesses, have challenges of their own.
On any given day, there are a galaxy of companies, consultancies, medical practices, and professional organizations expanding their reach into our growth industry. And why not? The legalization of cannabis is a bona fide 100-year event, and intrepid business owners of all shapes and sizes sense opportunity, a new market for their wares and expertise.
And while they may be welcomed with open arms by their new colleagues and contemporaries in the cannabis community, they often find their banking relationships suddenly souring.
A message from their payment processor arrives.
It says, “Sorry, Gayle Force Grow Lights. Your processing has been suspended.”
A message from their bank hits the Inbox.
It says, “Sorry, Gayle Force Grow Lights. Your account is being shutdown down.”
These are chilling, but easily explainable events. And while it may be tempting to tuck them neatly into a dystopian ‘Big Brother is Watching You’ framework, what’s happening here is more Kafkaesque bureaucracy than Orwellian totalitarianism.
So what happened? Gayle Force Grow Lights has been marketing its grow lights to the people of Maine for 25 years. Gayle, the owner, saw cannabis legalization sweeping the nation, and thought, “Here is a new market for my grow lights.”
She updates her digital storefront accordingly, which is to say, she added a new marketing bullet: Ideal for cannabis cultivators.
To us, the word ‘cannabis,’ is an industry term. In Gayle Force Grow Lights’ case, it is marketing jargon. However, to the processors and banks employing dummy algorithms to crawl their clients’ sites, that word is a red flag. When that red flag is tripped, Gayle’s processing is suspended. When that red flag is tripped, Gayle’s business bank account is shut down.
Gayle Force Grow Lights, in the eyes of the PSP it’s been using to accept credit cards, and in the eyes of the financial institution it’s been using to bank, has, suddenly, transitioned from a reliably safe client to a potentially risky client.
Risky clients need to be watched more closely. Risky clients require more due diligence and KYC measures. And since it is not cost-effective for a PSP with 24 million accounts — or a bank with 70 million clients — to police Gayle Force Grow Lights, which processes $100,000 in transactions per-month, and has an average cash balance of $2 million, they show Gayle, and her small business, the door.
The good news? Gayle Force Grow Lights is fictitious. I made it up.
The bad news? Gayle Force Grow Lights is a composite. This is happening to businesses in the cannabis space every day.
What Does the Future Hold?
Right now, merchant accounts are only an option for sellers of hemp and hemp derivatives. But the day will come, with national legalization, when every cannabis-related retailer will have the legal option of accepting credit cards.
As with CBD, it is inevitable that there will be numerous challenges to merchants when this occurs. It is inevitable that cannabis sales will be deemed ‘high risk’ by the card associations. It is inevitable, also, that only a handful of Acquiring Banks will elect to throw their hats into the ring.
The good news is that it is just as inevitable that the companies providing merchant accounts for CBD businesses today will be the ones providing merchant accounts to businesses selling THC in excess of .3%, tomorrow. As always, the most dependable among them will be those that have direct relationships with the Acquiring Banks. This will ensure that account acquisition and maintenance for all cannabis-related businesses is as smooth and as easy as it can be.
MobiusPay, Inc. is a US-based global financial services organization that is committed to empowering individuals and businesses. For more than a dozen years, MobiusPay has leveraged state-of-the-art secure billing technology, long-standing relationships with financial institutions and award-winning customer support to provide merchant processing and payment solutions to brick-and-mortar and digital businesses around the world.
Todd Glider has been an e-Commerce leader since the start of the Internet age. He has an MFA in Creative Writing from the University of Miami, and has served as CEO for small and medium-sized technology companies in Spain, Austria and the United States. As our Chief Business Development Officer, Todd introduces MobiusPay’s suite of award-winning financial services to new industries, and implements the development strategies and key partnerships needed to bring value to new customers.
Member Blog: Payment Processing in the Cannabis Space – Part 2
by Todd Glider, MobiusPay, Inc
This is Part II in a series of bog posts entitled Payment Processing in the Cannabis Space. Part I can be found by clicking here.
America is a federation. As such, individual states have innumerable sovereign rights that supersede federal law. This may seem obvious, but in most countries, that’s not how it works. Whether they are democracies or not, often all rights emanate from the central government. When the central government says marijuana is illegal in such a place, specific regions or territories aren’t permitted to go their own way.
However, as a federation, the 50 states in the U.S. get to make up their own rules on a lot of material issues.
That’s why cannabis products containing more than .3% THC by volume can be legal in your state, but illegal, federally. And it is also why cannabis products containing .3% THC by volume or less can be legal, federally, but illegal in your state.
All this ambiguity gives the banks and card associations the vapors. And it goes a long way toward explaining why, nearly four years after the landmark Farm Bill, so few banks are willing to provide CBD businesses with merchant accounts.
Parenthetically, it’s also why, if you walk into your local Chase branch to open a simple checking account for your CBD or cannabis business, they will give you a lollipop and show you the door.
A Colorado Resident Walks into a Colorado Dispensary with a Credit Card…
Here’s a fair question: “If cannabis is legal in my state, and I operate a cannabis business in my state, why can’t I accept a credit card from a customer who is not only a resident of my state, but also somebody who got a credit card from a bank in my state?”
On those terms, it defies logic how any intrastate cannabis purchase would be a federal issue. Unfortunately, the movement of money from a Visa or Mastercard, or any U.S. credit card, occurs on a card association’s network, or rail. These rails are nationally interconnected, not siloed to a specific state or territory. So, even if a cannabis consumer lives in the apartment above a dispensary, heading downstairs to make a purchase with a credit card is a national transaction, and not a local one. And on those terms, it violates federal law.
Regional rails do exist outside of the card association networks. They connect banks to one another, and these are the rails that are leveraged for the non-cash transactions taking place at dispensaries around the country. Whether or not these rails are truly siloed, and not part of a national network, is, to say the least, the source of much legal, financial, and philosophical debate.
But Do I Even Need a Merchant Account?
It would be disingenuous to say that you need a merchant account to accept credit card payments. You don’t. There are several FinTech companies out there with names we all know and, generally speaking, trust to process payments on our behalf.
In the payments space, we refer to these third-party organizations as PSPs, or Payment Service Providers, or Payment Aggregators. With a PSP, a commercial enterprise doesn’t need its own merchant account. The PSP is allowing you, and thousands of other merchants, to share in the processing power of its merchant accounts and accept credit card payments on your behalf. In this case, you are what is called a ‘sub-merchant.’
However, the big PSPs, by and large, have been reticent about hopping aboard the CBD express. And there is little surprise there. These FinTech giants we associate with banking are, at their core, just software companies. To offer credit card processing, they need merchant accounts from Acquiring Banks, just like the rest of us. So the dearth of Acquiring Banks willing to work in the cannabis space affects them the same way it affects everyone else.
To date, only Square has thrown its hat in the ring, and an overwhelming number of CBD and hemp retailers have opted to go the Square route. Square is the most popular processing solution for CBD merchants for a couple of reasons. First, it’s easy to find. Searching “How do I begin accepting credit cards CBD” on Google nets mostly ads and review sites, but Square appears prominently. Parenthetically, I just entered that very search term, and Square appeared twice on page one.
Square, we always tell CBD merchants, is low-hanging fruit. Low-hanging fruit, by definition, should always be, and usually is, eaten first.
The near-universal recognition of Square also makes integration easier. The technologists that entrepreneurs hire to code their digital storefronts and websites have plenty of experience integrating the Square plugin for all manner of eCommerce businesses.
However, for the CBD retailer, there are important reasons to approach Square with caution, or, at a minimum, not to use Square without a backup processing option. Backup processing, or redundancy, is a must for everybody in a high-risk business, especially for CBD merchants using Square. It’s a bell we, at MobiusPay, sound often, as Square’s Set It and Forget It value proposition has proven a fiction for numerous CBD retailers.
The horror stories, reductively:
“Square shut me down.”
“Square is holding my money.”
“Square shut me down and is holding my money.”
When Square’s underwriters identify a compliance issue in a CBD retailer’s digital storefront, their processing is halted, and their funds are frozen — sometimes, indefinitely. Most problematic is that, owing to their size and dogged commitment to automation, Square does not excel at communicating with clients — even when it’s of vital importance.
Often, Square doesn’t disclose the cause of the account shutdown. This omission of details turns a precarious situation for the merchant into an existential crisis, and the larger the digital storefront, the bigger the problem it is. This is because, frequently, the compliance issue is a small one, like a broken link or an expired Certificate of Analysis. Depending upon the number of products in your shop, identifying the one problematic COA may be like finding a needle in a haystack. That’s doubly damning. Not only has processing stopped, but work has stopped, too — because now, it’s all-hands-on-deck. Everyone in the office is on a frantic scavenger hunt, trying to track down the one compliance issue (and for all you know, maybe there are two) that has caused all sales to halt.
That doesn’t happen when you have a merchant account.
Even without the threat of a halt in processing, though, merchant accounts will always be the smarter choice for CBD retailers. They simply offer greater flexibility, better rates, more stability, better throughput, and, perhaps most important of all, the marketing and strategy flexibility that a business needs to grow successfully.
This is not an indictment of Square. They deserve points for throwing their hat in the ring. They are good at what they do, and what they do good is provide a turnkey processing solution for low-risk brick & mortar and eCommerce merchants. The pet store, down the street from me, here in Philly, uses Square. When I’m picking up cat litter at the shop, I never think to suggest that she consider a merchant account. She doesn’t need it. Square was made for businesses like hers. It is ideal for low volume businesses operating in a routine business environment.
However, if you’re reading this, your business is facing challenges somewhat different from those faced by the pet store down the street — unless you specialize in CBD for pets, of course.
CBD businesses, as with all individuals and organizations in the cannabis space, stand at the vanguard. They are the tip of the spear in an inevitable plant medicine revolution.
Like square pegs — pun intended — in round holes, they don’t fit easily into Square’s steady-as-she-goes ecosystem.
On the other hand, establishing a merchant account is no picnic. Merchant accounts do not open like elevator doors. At their most reductive, merchant accounts are lines of credit, and lines of credit are established with a paper trail. There is an application to fill out. There are KYC protocols to follow. There are document requests and compliance checks. There is waiting for activation.
However, as someone who has spent many more years acquiring merchant accounts as a high-risk merchant than offering them to high-risk merchants, I can promise you that they are worth the wait and the effort, and that depending upon a PSP like Square for something as important as processing makes growth and success more difficult than it needs to be.
MobiusPay, Inc. is a U.S.-based global financial services organization that is committed to empowering individuals and businesses. For more than a dozen years, MobiusPay has leveraged state-of-the-art secure billing technology, long-standing relationships with financial institutions and award-winning customer support to provide merchant processing and payment solutions to brick and mortar and digital businesses around the world.
Todd Glider has been an e-Commerce leader since the start of the Internet age. He has an MFA in Creative Writing from the University of Miami, and has served as CEO for small and medium-sized technology companies in Spain, Austria and the United States. As our Chief Business Development Officer, Todd introduces MobiusPay’s suite of award-winning financial services to new industries, and implements the development strategies and key partnerships needed to bring value to new customers.
Member Blog: Payment Processing In The Cannabis Space
by Todd Glider, MobiusPay, Inc
There is a lot of confusion about payment processing in the cannabis space because payment processing is somewhat confusing to begin with, and because, in the cannabis space, ambiguity is a way of life.
The title of this very blog post could, realistically, seem misleading to some.
So, to be clear, when I say, “Cannabis Space,” I mean the entire industry — from plant-touchers (CBD included) to the ancillary businesses built up around it.
The passage of the 2018 Farm Bill marked an exciting new chapter for the industry. Suddenly, CBD, or, more specifically, any ingestible cannabis product containing .3% THC or less by volume, was classified as hemp. And since it is marijuana, and not hemp, that is defined as a Schedule I substance under the United States Controlled Substance Act, the Farm Bill, technically, made products like CBD as legal as cow milk — federally, anyway.
The upshot of this new classification is that now, at least some players in the cannabis space can market their products to a national base of consumers and clients, and they can do so by accepting credit cards as payment.
However, the myriad Acquiring Banks across the United States have not exactly jumped for joy at the prospect of providing credit card processing in the form of merchant accounts to CBD retailers. Reticence rules. CBD is considered high risk, and four years on, only a handful of them have thrown their hat in the ring.
Jargon Alert I: Acquiring Banks and Issuing Banks
In merchant processing parlance, banks fall into two categories: Acquiring Banks and Issuing Banks. Acquiring Banks, or, Acquirers, provide merchant processing accounts to businesses wishing to accept credit card transactions. Issuing Banks, short for Card Issuing Banks, are banks that offer branded payment cards directly to consumers. For example, if your bank has ever offered you a Visa card, it is an Issuing Bank (not that it couldn’t also be an Acquiring Bank, too).
Jargon Alert II: CBD is ‘High Risk’
CBD is deemed high risk by the card associations (i.e., Visa, MasterCard, American Express), and when the card associations deem a product or industry high risk, most Acquiring Banks tap out. This is because financial institutions are, by nature, risk averse (subprime mortgage crisis notwithstanding).
So let’s talk for a minute about risk. High risk, that compound term, is a truncation of a longer phrase: ‘Higher risk of fraud or chargebacks.’
Why are CBD products at higher risk of fraud? It’s impossible to say for sure since the Visas and MasterCards of the world are publicly traded companies with their own trade secrets and IP, but there are several characteristics unique to CBD, or any cannabis product now federally legal, that likely figured into that decision.
Those FDA disclaimers that CBD retailers must print or paste on all product packaging and webpages are as good a place as any to start. They are mandatory because none of the benefits assigned to CBD have been clinically proven. There just isn’t enough data or testing at this point, and no big story there. That’s what happens when you demonize a plant for 100 years.
Consequently, from the perspective of the FDA, and the card associations, by extension, consumers are making CBD purchases with baked-in expectations based, exclusively, on word-of-mouth advice and anecdotal data. That’s a recipe for dissatisfied customers. And dissatisfied customers tend to charge back transactions.
The card associations, and the banks who provide merchant accounts, worry incessantly about fraud and chargebacks.
Too Close for Comfort
Dissatisfied customers aside, there are onerous legal nuances that make the prospect of boarding cannabis merchants, even those selling products that are federally legal, daunting for banks.
Selling a product with .31% THC across state lines is felonious. It is a federal offense. Violating a law like that could get a bank’s charter revoked, or, at a minimum, result in massive fines.
On the other hand, selling a product with .30% THC across state lines is 100% federally legal. As stated above, safe as milk, federally.
That is a heck of a distinction. If any product contains more than .3% THC by volume, it is ‘marijuana’ in the eyes of the federal government. From the perspective of the banks, that’s a little close for comfort. Furthermore, banks don’t operate laboratories. They must rely on testing data presented to them in the form of third-party lab reports — Certificates of Analysis or COAs for short — to verify that the products being sold are federally legal.
The last thing an Acquiring Bank wants to do is violate a federal law EVER. It could result in a loss of their charter, lawsuits, and massive fines. And it’s important to keep in mind that the Acquiring Banks out there offering merchant accounts to CBD retailers are not giant, publicly traded institutions like Bank of America or Wells Fargo. They tend to be much smaller, and therefore, have infinitely smaller war chests for court cases.
Still, separating the federally legal Tier I cannabis product from the federally illegal Tier I cannabis product should be pretty cut-and-dry. If the product you’re selling is .3% THC by volume or less, it is exempt from the Controlled Substance Act (CSA). If that threshold is documented in the product’s Certificates of Analysis (COA), you ought to be able to sell it.
Unfortunately, it’s not that simple. When bank underwriters look at percentages of Delta 8, Delta 9, and Delta 10 on the COAs that cross their desks, they’re frequently at sixes and sevens trying to figure the whole thing out.
From the perspective of the 2018 Farm Bill, a cannabis product is hemp if it contains .3% Delta-9 THC or less by volume, but what everybody says is “.3% THC or less by volume.” Consequently, when the compliance officer at the bank is performing her due diligence by inspecting the COAs corresponding to each product, she may encounter a lot of crooked numbers, and she may blanch at the results.
Those results, often, look something like the following:
00.195% D9-THC
52.475% d8-THC.
Federally, the Delta-9 threshold is the only threshold that matters. The 2018 Farm Bill says as much, and the 9th Circuit Court of Appeals in California affirmed it in a ruling this past May. Therefore, in the example above, the Delta-9 threshold has not been crossed. It’s not even close. It is textbook HEMP, even if the Delta-8 threshold is off the charts.
However, if the compliance officer was provided the remit, “.3% or lower,” he’s likely to look at this and say, “Fail,” without realizing that the Delta-8 THC information is irrelevant as far as federal law goes.
Complicating the underwriting further is the fact that there is, to date, no standard template for COA reports. Every lab presents them differently. Bank compliance officers rarely moonlight as scientists. Like most of us, these CBD COAs are probably the first lab reports they’ve looked at since high school chemistry.
Furthermore, the banks can set their own rules. They don’t have to board CBD merchants. Few do, and those few that do have their own standards and practices.
Todd Glider has been an e-Commerce leader since the start of the Internet age. He has an MFA in Creative Writing from the University of Miami, and has served as CEO for small and medium-sized technology companies in Spain, Austria and the United States. As our Chief Business Development Officer, Todd introduces MobiusPay’s suite of award-winning financial services to new industries, and implements the development strategies and key partnerships needed to bring value to new customers.
MobiusPay, Inc. is a U.S.-based global financial services organization that is committed to empowering individuals and businesses. For more than a dozen years, MobiusPay has leveraged state-of-the-art secure billing technology, long-standing relationships with financial institutions and award-winning customer support to provide merchant processing and payment solutions to brick and mortar and digital businesses around the world.
