7 Questions to Ask When Shopping for CBD for Merchant Processing
We often refer to the CBD banking that our company provides as a straight line and the merchant processing component as the roller coaster ride. We are all on this ride together, and these are industry-wide issues. Our one piece of advice to any CBD business owner who is shopping for a merchant processing solution is to not shop for a solution based on rate, but rather ask important questions so that you really understand what you are getting and if it is the right solution for you needs — now and in the future.
What is the Processing Rate?
Although we prefaced this with don’t make your final decision based on rate, it is a good and reasonable first question. You want to know the rate and the per-transaction fee as CBD is categorized as high-risk because, in banking terms, it is a “marijuana-related” business. All of these rates are typically going to be between 3.7% and 6%. If you do see a rate below 3.7%, you will want to confirm if that rate does or does not include “interchange.” Interchange can vary but for evaluating rates, consider it to be around 1.8%. You’ll then need to do the math for the low-rate + 1.8% to get your true processing rate. Now you will start to see that it probably tracks alongside some of the other rates you were quoted as a flat rate that includes interchange.
What is the Per Transaction Fee?
These are typically fixed and can range from $0.20 — $0.50 per transaction. The best way to consider this is based on your average ticket price, the volume per customer check-out, and how many transactions you run in a month. The only time I would spend much time on this figure is if you a high volume of low-priced items to a large number of customers. Otherwise, this fee is just a regular cost of doing business, and other factors should weigh much more heavily on your decision.
What is the Reserve Amount and Length?
The reserve is the amount of money a processor holds back to cover chargebacks. Sometimes a reserve is put in at the beginning of your contract where other times, a processor will add one (as Square has done) if a merchant starts to have a transaction record that bears more risk than the processor is willing to take. The reserve amount for various solutions typically varies between 1% with a three-month rolling reserve (they give you back in month 4, what they took out in month 1 and that keeps rolling forward), all the way to 10% with a six-month rolling reserve. This can be a significant amount of capital that is being held that could be used for operational and other expenses for a growing business. Therefore, the reserve is one of the more important questions — and in some cases, it may be more significant than just looking at the rate or per-transaction fee alone.
What is the Set-Up Fee?
An onboarding fee is pretty standard for all high-risk merchant processing solutions. Onboarding fees can range from $100 — $350, depending on the processor. They are usually in place to pay for the staff involved with managing the application process all the way through a compliance review. As these applications require a significant amount of information and a lot of supporting documentation, there is a fair amount of work to board a customer in a timely manner. Square doesn’t have these fees, which is one of the many reasons customers find it to be an attractive solution, but sometimes there is no timescale for when you will be boarded.
What are the Monthly Fees?
Most of these solutions come with monthly fees. Typically they are a combination of compliance review for website and PCI. These fees can range from $50 — $200 a month, depending on the processor and negotiating with the bank and their compliance partners. Much of this is actually hard costs for the processor to offer and maintain these accounts and meet compliance guidelines. It is still important to ask about these monthly fees so that as a merchant, you can know what to expect.
What are the Additional Fees?
These fees run the gambit and are worth knowing and asking about. For example, some processors ask for a term commitment, and there is a cancellation fee (which typically will be around the same as the set-up fee). There may be penalties if you do not meet certain processing thresholds. These thresholds are often around $5000 — $10000 a month. Some processors want you to commit to using them as your primary processor and will not allow you to use them as a back-up. You should also know the costs of each chargeback. There is a commonly used overseas processor that requires you to have a virtual office and a monthly cost. These are all things to be aware of when you are shopping for a merchant processing solution that often has a bigger impact on your overall costs than rate alone.
What are the Restrictions?
Some also have month volume restrictions, with some processors only boarding clients with >$50,000 of monthly volume. For start-ups, some require either 3 months of merchant processing history of $5000 in the bank. Beyond those requirements, the next question to ask is will the processor allow you to sell what you offer in your eCommerce or brick-and-mortar store. Some processors will not allow for vape or flower, while others have no problem with it.
You want to make sure that they can accept your business because no discount on rate will make up for the fact that they can’t accept you, or will limit what you are aiming to sell to your customers. There are some processors who will only work with topicals, while others are okay with ingestible, but not flower or kratom. There are solutions out there for all combinations of products (including legal THC sales), but you need to be working with the right processor for your line of business.
If you start with these 7 questions, you will have a better picture of your entire merchant processing solution. It is important to remember there are not that many solutions out there. Most of them are packaged and sold by agents who are working with the same 5–7 solutions and have different negotiated rates and terms. Most of us work together, so all of the options are pretty widely available. Make sure your products, monthly volume, processing history, or capitalization will be acceptable before you start an application.
One last consideration is some merchants say, the US only, but many transactions ping overseas or use overseas banks to do what US banks cannot at this time. There is an old-school UK processor that some people love, and others don’t, and often a US-only stance is basically saying they don’t want T1. There are other US/UK/European hybrid solutions which no longer have the downsides to T1, like showing up a foreign transaction on the customer’s statement or having to make a website EU compliant. I encourage you to talk to your representative, empowered with this knowledge, and they can help you to understand all of this and more!
Reach out to us at MRB Compliance Group.
MRB Compliance Group is a financial and marketing compliance company serving cannabis, CBD, and other high-risk industries. We can be reached at services@mrbcompliancegroup.com.
