Square has started working with a small group of CBD startups to handle customers' credit-card transactions, the company confirmed to Business Insider this week.
The limited trial, which a Square spokesperson said was "an invite-only beta" for certain CBD products, could solve one of the biggest issues plaguing many e-commerce CBD startups: the lack of domestic payment-processing options.
Payment processors, in short, handle credit- and debit-card transactions on behalf of companies that sell their products online. They take a fee for each transaction. A new, booming industry such as CBD products could provide a windfall.
Square is dipping its toes into an industry in which there are not many ways for young companies to safely process payments. Elavon, US Bank's payment-processing subsidiary, recently pulled out of the CBD industry over what the company said was the lack of clarity around CBD's legality in the US, Business Insider previously reported.
CBD's confusing federal status goes back to the Farm Bill, which President Donald Trump signed into law in December.
The bill legalized industrial hemp, a variety of cannabis containing less than 0.3% of THC — the compound in cannabis responsible for the psychoactive "high" — throughout the country. It was assumed, then, that CBD-derived from hemp would be legal as well. After the Farm Bill passed, an analyst from the investment bank Cowen predicted that the CBD industry in the US alone could become a $16 billion industry by 2025, up from about $1 billion today (though the vagaries of the market make these numbers hard to calculate).
But the Federal Drug Administration had other ideas. The FDA first made it clear that CBD shouldn't be considered a dietary supplement, like Omega-3 for instance, and can't be added to foods. That forced many restaurants and coffee shops to pull CBD-infused products off the shelves.
The FDA has since announced it's putting together a working group to iron out federal policy around CBD. But action on that could take years. Perhaps scared off by that prospect, most federally chartered US banks won't service the industry in any capacity. The risk is just too high, and the reward — in an industry dominated in this early stage at low revenue startups — is far too low.
That has forced CBD startups to look overseas to high-risk payment processors, which charge higher fees, hold onto funds, and create extra headaches for lean startups, a number of CBD startup founders told Business Insider.
CBD startups also don't have much leverage to negotiate these rates with the overseas processors. "Because we don't have any domestic options, we have to take the terms we get," Gunhee Park, the founder of the Arizona-based CBD startup Populum, said.
PayPal is an example of a large US-based payment processor that has yet to jump into the murky regulatory waters of CBD. Justin Higgs, the director of corporate affairs at PayPal, said CBD businesses are considered non-permissible under the company's acceptable-use policy.
However, it's not all bad news for CBD companies. Earlier this year PayPal joined several other financial companies in supporting the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The bill would allow banks to work with state-legal marijuana businesses.
PayPal's support of the bill doesn't guarantee the payment processor will soon begin working with cannabis companies, though. Higgs said PayPal's involvement in the cannabis industry isn't contingent only on the passing of the SAFE Banking Act. There are several other things internally that would need to be reviewed, of which Higgs declined to get into.
However, the SAFE Banking Act would offer the industry much-needed clarity, he added.
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