CBD Industry – Why considered High-Risk?
CBD is the acronym for cannabidiol, a natural chemical compound within the cannabis plant. The cannabis plants are primarily of two types- marijuana and hemp. These plants contain two types of chemicals- CBD (cannabidiol) and THC (tetrahydrocannabinol). THC is the psychoactive chemical in these plants that produces an intoxicating ‘high’ when consumed. CBD on the other hand has much milder effects.
CBD has been known to treat pain, anxiety, cancer, PTSD, epilepsy, and other common ailments. Since its medicinal benefits have been discovered by scientists, cultivation and selling of CBD products has been legalised in many countries. It is now available in tinctures, creams, pills, oils, candies, baked goods, and vape juice.
Now that it is gradually becoming a legalised industry, CBD companies and startups are emerging all around the world and gaining traction. This industry is booming and is expected to hit around $22 billion by 2022. However, the legalisation of this industry brings a lot of restrictions because of which they face a lot of challenges that other startups do not have to normally deal with.
Why CBD industry is considered high-risk
All CBD companies are deemed high-risk due to the nature of the business and the severe legal restrictions on hemp and CBD products. Until regulations are amended in favour of CBD sales and use, CBD firms pose a legal danger to lenders, banks, commercial property owners, and others. Let us have a look at the challenges and risks involved in this industry, which are responsible for making this industry a part of the high risk industry.
- Legislation – Despite the fact that laws regarding CBD are becoming more favourable, the issue remains rather controversial. Despite the fact that CBD does not have the same psychoactive impact as marijuana, many people nevertheless connect it with it. Businesses who are lawfully selling CBD projects must bear the stigma of being linked with marijuana due to the widespread misunderstanding about CBD oil.
- Risk of chargebacks – Companies must seek CBD merchant services in order to offer credit card processing to their consumers. Finding a payment processor to work with is difficult for a CBD company since it is still deemed to be high risk. Because the advantages of the cannabis plant and CBD initiatives have not been evaluated by the FDA, they have a greater risk of chargebacks from consumers who are not happy with the product.
- Slow licensing and expensive – For cultivators and distributors, the legalisation of CBD products has brought with it seemingly infinite laws and legal processes. To get a license, they must pay application fees and other relevant expenses, and then wait an undetermined amount of time, which may be months, before receiving a licence.
- Wrong public perception – Another important issue for CBD businesses is public image. Consumers, as well as payment processors and other service providers, have a prevalent misunderstanding that CBD products would give users a high similar to marijuana. Although this is totally incorrect, the myth persists. CBD firms face several challenges as a result of wrong assumptions and the general unfavourable public image. Some customers refrain from testing the goods because they believe the myths.
CBD businesses are classified as high-risk merchants because they operate in a high-risk sector with multiple regulatory bodies such as the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC) enforcing safety and health laws. CBD’s legal status varies from state to state and country to country.
Hemp-derived CBD products that contain less than 0.3 percent THC are deemed federally lawful under the 2018 US Farm Bill. However, certain state laws may make this unlawful. CBD products produced from cannabis, on the other hand, are prohibited under federal law but may be legal under state law.
For all the reasons mentioned above, the CBD industry is considered as high risk by banks and payment service providers. The regulations around CBD may change, and there is a danger of public perception harming a company’s brand in an unjustified way. It’s no exaggeration to say that CBD businesses often struggle to find payment processors and other merchant services. Even when CBD businesses do find merchants that are ready to work with them, the difficulties remain.
They have to cope with tougher chargeback regulations and have a greater percentage of refused payments. For offshore merchant accounts, CBD firms face very stringent criteria and rules. It’s also why major credit card and online payment processors like as MasterCard, Visa, American Express, PayPal, Square, Stripe, and Shopify all refuse to handle credit card or online payments for CBD businesses.
Business owners operating in this industry will probably continue to face such challenges unless banks and other government agencies join in to make it simpler to do business in the market.