Elavon/U.S. Bank informed customers in March that it will stop accepting any new applications for CBD merchant accounts. In its email to customers, it also stated it would cease working with existing CBD businesses within 45 days.
Why Elavon Dropped the Ball | 4 Reasons Why
- Because of the regulatory environment and the uncertainty surrounding it: As a result of the FDA chairman stepping down a couple weeks ago, it created uncertainty as it relates to when the FDA and our Federal government would deschedule CBD which is currently listed as a schedule one drug. Also, it is likely that all of the uncertainty surrounding legalized hemp, which is still in its infancy, was a factor, as well.
- US Bank: Elavon was associated to US Bank and across the country people flooded US Bank branches, wanting to open CBD and Marijuana merchant accounts. This created a big issue for dispensary businesses who said they had CBD products. Many accounts were getting set up without any reviews or approval process.
- Cannabis Merchants: All the people in the Cannabis space, who were trying to use Elavon for their merchant processing for their Cannabis products and that created a huge problem. The US Bank branches were inundated with people, not only wanting merchant processing, but also wanting to open bank accounts – something US Bank could not do. It simply became a huge headache for US Bank branches all across the country. So the people at the top simply said they did not want to deal with this anymore and shut down the program.
- Chargebacks: There are reports that Elavon also made this quick decision due to excessive chargebacks and fraud in the industry. Leaving CBD merchants scrambling to find merchant processing solutions.
Many Glitches Despite Passage of the 2018 Farm Bill
Ever since U.S. Food and Drug Administration (FDA) Director Scott Gottlieb announced his resignation in March, 2019, those in the hemp and CBD industry have been on edge. Gottlieb promised to host a public hearing this month to discuss ways to best regulate the industry. With the loss of Gottlieb, unfortunately, it is unclear whether this hearing will ever come to fruition.
The industry has been mired in controversy despite the passage of the 2018 farm bill, which legalized decriminalized hemp and made it legal to cultivate for certain purposes.
Under the farm law, any part, extract, or derivative of the Cannabis plant that has a THC concentration of not more than 0.3 percent on a dry weight basis is legal. The law in no way legalizes marijuana, which comes from a different plant as hemp.
Though hemp can be used to make clothes, furnishings, and other products, most of it is used for CBD oil. CBD oil, which is derived from the cannabis plant’s secretions and can be found in both hemp and marijuana, is added to foods and drinks and promoted for health and wellness.
The problem with edibles that contain CBD is that they are not legal under the FDA. Under the U.S. Food, Drug, and Cosmetic Act, it is illegal to market or sell food and supplements that contain CBD, even if they are hemp-derived.
The problem is that federal laws prohibit the sale of any food or supplement that contains an ingredient that was investigated in clinical trials or approved as a drug by the FDA. The FDA already has approved anti-epilepsy drug, Epidiolex, which contains CBD. therefore, the sale of any edible infused with CBD is not permitted.
Following the FDA’s statement on the issue, some states have chosen to ban the sale of food, such as gummies and cookies, and drinks that contained it. Overall, this has handicapped the industry.
Sen. McConnell Announces He Will Fix the Problem
Earlier this week, Sen. Mitch McConnell, of Kentucky, who led the push for hemp legalization, vowed to fix glitches related to the industry. For example, one trucker was arrested for legally hauling hemp because it was mistaken for its close cousin, marijuana.
No further information about his plan is available.
Banking Woes in the CBD Sector
Like Elavon, expect other major financial institutions, to back off from the industry until they get clear instruction from regulators. One bright spot would be if the SAFE Banking Act, which would provide certain protections for depository institutions that work with cannabis-related businesses and the CBD businesses, was written into law.
Currently, the House Committee on Financial Services is writing a report on the act and plans to present it to the House of Representatives. It would need to pass the full house before it would get to the Senate for a vote.
Until some of the questions marks in the sector get answered, expect most major banks to abandon the CBD industry. However, alternative lenders are ready to rise to the challenge and demand of CBD merchants.
eMerchantBroker.com (EMB) has a processing solutions that will help keep CBD and hemp merchants afloat during this difficult time. If you need a CBD merchant account, apply online today. Its application process is simple and easy.
Unfortunately, it seems like they brought on entirely too many new businesses at one time without updating their underwriting or risk management policies.
This essentially put CBD merchants on “auto approval.” Which, while it may look like a great selling point for entrepreneurs… it backfired heavily.
The “auto-approved” accounts had hardly any oversight…which allowed for those less than reputable marketers to jump in and start selling using things like free trial offers with overly aggressive continuity.
These few businesses may have been the bad apple that spoiled the bunch as they caused a flood of chargebacks.
This poor risk management is what caused this blanket “solution.”
And unfortunately, legitimate business owners like yourself get caught in the crossfire.
But remember, this is a problem with poor underwriting (which can and will be fixed) and not with the product.
CBD is still in its infancy and sometimes it can feel like the wild west out there…. but remember, we’re here to make things easy for you.
As I said earlier, this is a knee jerk reaction and a small growing pain in an incredibly new industry…
But we also have 3 additional banks in the wings (ones with proper underwriting and risk management).
We’re just waiting for the ink to dry before we roll them out.