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Will Credit Card Companies Be the Undoing of CBD Product Sales?

Rich Duprey, The Motley Fool

Thrive Market recently stopped selling products with hemp and cannabidiol oil (CBD) because its payment processor demanded it do so. The online natural products marketplace was told to immediately remove the products from its website or it would no longer be able to process credit card payments via the processor, who was not named. Thrive naturally complied, but it should be a major concern for all retailers looking to hop onto the CBD bandwagon. 

Last month, according to CNN Business, Stripe, a third-party payment processor, dropped as a client the nonprofit U.S. Hemp Authority, which has been working to develop a certification program and label for hemp products. Stripe considered the business a liability, according to CNN Business. U.S. Bank's processor, Elavon, began shutting down the accounts of CBD retailers in April. 

MastercardVisa, and American Express all refuse to accept transactions for marijuana dispensaries, even where they are legal, and it may not be long before they also demand businesses stop selling hemp and CBD products for fear of being held liable themselves.

Marijuana leaf next to extract bottles

Image source: Getty Images.

Heavy interest in greening store shelves

Retailers including Urban Outfitters, Designer Brands (formerly DSW), and GNC have all begun selling CBD-based products, as have pharmacy chains CVS Health, Rite-Aid, and Walgreens. Supermarket giant Kroger also just announced it would be adding CBD products to its shelves. Despite their retail heft, these stores would also immediately capitulate if their credit card processor made similar demands.

Banks, credit card companies, and payment processors are declining to do business with marijuana-related businesses and their offshoots because as financial institutions, they're obligated to ensure their clients are complying with the law, and even the hint of impropriety makes it not worth the risk.

And because the rules regarding cannabis vary from the federal to the state level and among states, it creates gray areas that also raise the risk level.

Currently, only Idaho and South Dakota still ban hemp products, though the Food and Drug Administration is against CBD's addition to food, drinks, and dietary supplements and some states are cracking down on edibles. Meanwhile dosages in creams, lotions, and the like -- such as Thrive Market was selling -- are still a subject of conjecture among researchers, and some companies remain leery of jumping into the fray.

The wheels of bureaucracy turn slowly

Despite hemp and hemp-derived cannabidiol being legalized by the 2018 Farm Bill, Congress punted on its responsibility to set the ground rules by deferring instead to the FDA, which now has to decide how it will regulate the products.

That was the purpose of the regulatory agency's public hearing at the end of May that got the process going. But the FDA moves at a glacial pace, and there seem to be divisions within the agency over how best to proceed. Acting FDA commissioner Ned Sharpless said he understands the interest in the issue, but that there are "real risks" with using CBD and "there is still much that we don't know." 

That means it may be a long while before the FDA offers anything concrete, which suggests retailers will be operating in a legal limbo and if their payment processors get nervous, they may be out of luck.

A patchwork of potential

Not all processors balk at letting companies sell CBD. Square, for example, began offering an invitation-only program for CBD businesses, after refusing to support them for years, following passage of the Farm Bill.  And some businesses look to overseas payment processors to handle their transactions, though that could trigger a bank to reject a payment if it looks like a purchase was made overseas.

Thrive Market didn't identify its third-party processor, but CEO Nick Green said in a post on the company's blog that the online marketplace was the first e-commerce retailer to begin selling CBD products 18 months ago and it's working behind the scenes to get the products reinstated. He says Thrive is looking for a new processor to make that happen.

Until the FDA sets some definitive rules for retailers and their banks and payments processors to follow, the industry will be held hostage to the whims of credit card companies, which may decide CBD is much too risky for them to handle. And that could cause the nascent market for these products to crumble.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard, Square, and Visa. The Motley Fool recommends CVS Health and Designer Brands Inc. The Motley Fool has a disclosure policy.