How To Avoid 8 Costly Mistakes When Choosing a Merchant Processor
Banking & Merchant Processing in the Hemp Industry
Since hemp was declared a legal crop thanks to the 2018 Farm Bill, banking has been still a huge stumbling block and has been somewhat of a moving target. It’s been tough to keep up with the changes and find reliable merchant processing. The end of 2019 – December, specifically – brought a sigh of relief for anyone doing business in the hemp and CBD marketplace. Previously, anyone in the industry was forced to find creative solutions for banking. Banks were shying away from doing business with hemp or CBD businesses because the risk factor was too high, in their perception. Hemp customers were targeted as being suspicious, leading to loads of paperwork to prove money laundering was not involved. But all that changed in December of 2019 when the Federal Reserve, Federal Deposit Insurance Agency, and other state and federal regulators declared that banks could treat hemp and CBD customers just like any other customer, as long as they were legit – meaning, all licensing and legal requirements are being met. When choosing a merchant processor, there are eight costly mistakes to avoid, so your profits don’t go up in smoke.
Hemp Is Not the Same as Marijuana
Keep in mind, in this article we’re talking about the hemp and CBD industry, not the legal marijuana industry. The two are very different, particularly when it comes to banking and merchant processing. We’re just focusing on hemp, hemp crops and hemp-derived products like CBD. The legal marijuana industry is still fighting their own banking battle, even to get basics like checking accounts and credit card processing.
When the Farm Bill passed in 2018 making hemp a legal crop, it was difficult to find banks or merchant processors who would service the hemp industry. In many ways – looking at you, banking – this industry was lumped together with marijuana. It took a lot of pressure from those inside the hemp industry to help get a change enacted. And just within the last few months (December 2019), banking and merchant processing rules and regulations have changed. Those involved in the hemp business are finally being treated differently than the legal marijuana industry, which is a big benefit when it comes to banking.
Merchant Processing Baby Steps
When the Farm Bill passed, there was mainly one merchant processor that hemp and CBD professionals could rely on, and that was Elavon Inc, the largest CBD payment processor in the US. In fact, at their height, they had captured 90% of the payment processing in the CBD industry, according to Forbes. But the rug was soon pulled out from under those businesses. In March 2019, Elavon abruptly announced they would no longer service the hemp/CBD industry, leaving businesses in the lurch with just 45 days to find a new solution (they ultimately extended that to 60 days). This decision was sparked when one of their merchants was found to have products with THC levels over the magic number of 0.3%, rendering it illegal. In other words, they got spooked and shut down operations. All accounts were shut down by mid-May. That left one processor at the time, with a lot of brokers. In the confusion, that left a lot of businesses unknowingly submitting multiple applications to the same processor. CBD businesses were left with few options, but they required a lot of digging and long application processes to find them.
In the spring of 2019, Square launched a pilot program that allowed hemp businesses to process payments using their system. It was a quiet step forward, one that was not widely announced, but gave the budding industry one more option, one more step towards normal business transactions.
Historically, credit unions are a popular banking resource for farmers, but as farmers started to want to transition their crops to hemp, credit unions weren’t necessarily on board, similar to traditional banks. Thankfully as of August of last year, credit unions announced that across the board, they would do business with the hemp sector.
All this headway is beneficial to the industry because it help with increased transparency and financial security, allowing the professionals to focus on what they do best, putting the worries of managing their financials under control. And it avoids the nightmare that the marijuana business deals with – a risky all cash situation. It paves the way to access the full range of banking products, like checking accounts, loans, favorable interest rates, investment funds and payment solutions.
Banks and credit unions still have to know and understand the legalities, regulations and procedures, reporting (state and federal) of the hemp industry, which might make some hesitant. So even though a lot of the roadblocks have been removed, it can still include things like:
- Customer identification
- Risk-based customer due diligence
- Suspicious activity reporting (SAR)
- Currency transaction reporting
- Collecting beneficial ownership information for legal entity customers
While we’re very unlikely to see another Elavon situation, banks may still decide to change their minds about doing business with hemp and CBD companies, putting them back to the starting line. Heightened risk and regulations may make banks continue to shy away. But at least if that were to happen now, there are other options available.
So when you are ready to choose a merchant processor for your hemp or CBD business, there are some things you need to look out for because if overlooked or ignored, they can cost your business thousands of dollars or more, a risk that no business should be willing to take.
8 Mistakes To Avoid When Choosing a Merchant Processor for your Hemp Business
- Not Doing Your Research – This is probably the number one way to avoid costly mistakes with anything, and it’s especially true with merchant processors. Thanks to the new declarations, there are choices for those in the hemp and CBD industry, but you have to know which is the right fit for your business. We cannot emphasize this enough, take the time to research different processors online, read the customer reviews, reach out and ask questions. Learn about fees, reporting, and some of the other things that we’ll talk about in this list.
- Multiple Payment Methods – You want to find a processor that will manage multiple types of payments, including credit cards, debit cards and ACH payments. This will allow you to offer the most options to your customers without having to find a work-around or look for multiple processors. Find the one that can handle all types of payments.
- Manage Transactions Considered High Risk – Identify a merchant processor who will manage high-risk transactions. Hemp/CBD is not the only industry where this is an issue, so it’s not unheard of for a processor to deal in these types of transactions.
- Integration – With your current ecommerce site. The worst thing you can do is build your online retail store and not be able to seamlessly integrate payments or have to switch to using a different platform after already investing in one. Make sure the merchant processor integrates with your existing platform. The change can bring an additional cost that is easily avoided.
- Offer a POS System – Look for a merchant processor who can offer a Point of Sale (POS) system. Having a reliable POS system will help your business in many ways, putting information right at your fingertips. Things like accurate, timely reporting, managing any customer payments (both online and in store), and even helping with inventory. Having this information based on the performance of your store will be invaluable in helping you make decisions about products, ordering, accounting and more.
- Fees – This one’s a no brainer. Of course you want to choose a processor with the lowest fees. But, you have to examine and understand all potential fees that you may be hit with and when – a transaction percentage, annual or monthly fee, a statement fee, compliance fee, terminal fee, and chargebacks. Make sure the merchant processor you choose is reputable and not just looking to take advantage of you, knowing the history of challenges that comes with the hemp industry. Don’t get hit with hundreds or thousands of dollars in monthly or annual fees because you didn’t take the time to do some investigating.
- Read the Fine Print – Before settling into a contract with any merchant processor, be sure to read and understand all the fine print. This will tell you any terms, commitment, fees and penalties, along with any other important factors you need to know about. This will let you go into the arrangement with your eyes wide open, avoiding any surprises that may arise. Be wary of long-term contracts that lock you in (and if you do engage in a long-term one, be sure you know the early cancellation penalty).
- Customer Service And Protection – One last thing to examine about a potential merchant processor is their customer service. What’s it like? How do they handle things like chargebacks, fraud or potential customer disputes? A merchant processor might have great options and reasonable fees but lousy customer service, and that’s something you’d need to factor in to your final decision.
We covered a lot of information in this article, and it can be overwhelming to know where to start to find the best solution for your business. That’s where we come in. WhereZhemp.com, in conjunction with CBD Wholesale Networks, is the premiere resource for everything related to your hemp and CBD business. We have a nationwide directory that we can tap to help your business, and we want you to be a part of that network.
Let our team help. To join our directory, visit www.wherezhemp.com or call 1-800-242-5917 to speak with one of our consultants. They are ready to address any business needs you have – merchant processing or otherwise. We’ll connect you with the resource that is right for your business so you can focus on building your profits.
Call or join today, you can’t afford not to.