US Bank subsidiary Elavon drops CBD clients

Elavon, a payment processor that's a subsidiary of US Bank, courted CBD clients through middlemen and dropped them months later, a number of CBD startup founders told Business Insider.Elavon sent the founders a letter in the mail — a copy of which was obtained by Business Insider —citing federal uncertainty around CBD products.The CBD founders were delighted to be working with a company with a reputation like Elavon's. When Elavon pulled out, it was a huge blow. When Annie Rouse started looking for a payment processor for her hemp-and-CBD business last year, she was quickly thrown into a world of sketchy middlemen, shifting rates, and unclear federal policy.As she admits, her company, the Lexington, Kentucky-based Anavii Market, was ahead of the curve. She and her partner, Jason Amatucci, had long been engaged in advocacy and policy work around hemp. They decided to start their CBD oil company in the fall of 2018, just prior to the passage of Farm Bill, which passed in December and legalized hemp in the US.Rouse said she was inundated throughout the end of last year and early 2019 both over the phone and by email with advertisements from various payment processing platforms that wanted her businesses ahead of the legalization of CBD. Three other CBD startup e-commerce founders Business Insider interviewed for this story said they had a similar experience. 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 like CBD could provide a windfall. Read more: The FDA is putting together a group of experts to figure out how to handle the $1 billion CBD industryMany of these requests came from a company called PaymentCloud, which, as many of the founders later learned, was actually a middleman working on behalf of Elavon, a US Bank subsidiary.Lauren Vriens, the founder of the CBD startup The Boteek, said she was convinced to sign on because of Elavon's position as a subsidiary of US Bank – as well as some dubious interactions with other companies that were courting her business.When she had conversations with some other middlemen, they gave her rates “that were all over the place,” with no set contract length, she said. “Some of them asked if I had celebrity endorsements,” said Vriens. Another one bragged that they had helped a convicted felon get a payment processor.“It was just so sketchy,” said Vriens.Elavon deciding to serve CBD clients was the best news they'd heard, the founders said — until it wasn't.For many founders in the CBD industry, finding something as simple as a payment processor to handle credit card transactions for an ostensibly legal product evolved into a never-ending odyssey. The process hurts small startups and mom-and-pop businesses the most, they said.So Elavon deciding to serve CBD clients was the best news they'd heard, the founders said — until it wasn't. When the CBD founders signed up to work with Elavon, it was the only large US company that would work with the industry. To Rouse of Anavii Market, signing on with Elavon was a no-brainer. It offered much lower rates than the previous payment processor she was using for her company — around 3%, which is much more in line with other, non-hemp or cannabis related e-commerce businesses — rather than the 7-10% Rouse said she was forced to pay for each customer's credit card transaction with her previous, overseas payment processor. Anavii Market officially started working with Elavon in November. “We jumped on board with it,” said Rouse in an interview. “It was a pretty easy onboarding process.” Vriens, from The Boteek, sent Business Insider a form from Elavon titled “Hemp Based CBD Product Disclosure” which had a few questions about what types of hemp products the company sells, and asked the merchant — in this case, Vriens — to sign a form saying her business complies with all local, state, and federal laws governing CBD and hemp. Read more: Wall Street thinks the $1 billion market for CBD could explode to $16 billion by 2025It was perhaps too easy of an onboarding process, as Elavon quickly backtracked. By March, just months after PaymentCloud was aggressively courting their business, Elavon dropped all of its CBD clients with a letter in the mail, a copy of which was obtained by Business Insider. The letter states that as a federally regulated organization, Elavon is “committed to complying” with all federal laws regarding CBD and hemp.“In this evolving marketplace, the challenge for financial institutions is to find the balance between serving our valued customers and maintaining the highest standards of legal and regulatory compliance,” the letter said. For that reason, Elavon said it would no longer offer payment services to businesses designated as hemp and CBD merchants by May 15. All three founders confirmed they received the same message in the mail.“My personal opinion is that this was backward and ironic,” said Gunhee Park, the CEO and founder of the Arizona-based CBD oil startup Populum. “The expectation from the Farm Bill was that banking and payment processing would open up. It's fully heading in the opposite direction.” A spokesperson for Elavon said in an email to Business Insider that the CBD industry “continues to evolve.”“As a financial institution, our challenge is finding the balance between serving customers effectively and maintaining the highest standards of legal and regulatory compliance,” the spokesperson said. “At Elavon, we have an unbending commitment to do the right thing for the long-term benefit of our employees, customers and communities.”That has forced CBD companies to go back to “ground zero,” according to Park, where they use offshore processors that categorize CBD companies as high-risk and charge exorbitant fees.“For a big institution to enter the space, you would think that it would go through the hierarchy to get approval,” said Park. “I thought they'd stick by their decision. They reversed it in months.” Apart from the higher fees, companies that use overseas payment processors are sometimes forced to set up companies abroad, and customers' credit cards often get flagged, adding an additional headache for entrepreneurs.The overseas payment processor Park now works with holds onto up to 5% of Populum's funds for a six month period. For a small startup, that's a big chunk of revenue. Park declined to name the processor due to the company's sensitivity towards working in the CBD industry. They're also often “one or two-man shops” with little oversight from the jurisdictions where they're located, said Park. The websites often show little information about the company, and if you're not referred by someone you trust, said Park, it's difficult to find a quality partner.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,” Park said. CBD's legal, but everything is still a shade of gray CBD's confusing federal status goes back to the Farm Bill, which President Trump signed into law in December of last year. 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 around $1 billion today (though the vagaries of the market make these numbers hard to calculate). A pet project of powerful Kentucky Republican Sen. Mitch McConnell, he touted industrial hemp in a press release as a “bright spot” for Kentucky's entrepreneurs and farmers — people like Annie Rouse.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 of the shelves.The FDA has since announced that 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. Sen. McConnell has floated legislation to rectify these issues. He signed a letter in April addressed to the Federal Deposit Insurance Corporation (FDIC) with Congressmen from both parties that CBD and hemp are legitimate businesses, but it may amount to too little, too late. 'Only the biggest companies can survive this hump'The excitement around this industry was about “creating a new opportunity for America,” said Rouse. “And now we're seeing because of this banking problem, it's creating this chokehold on the small companies and only allowing those massive companies to come in, which totally ruins the integrity of the industry, in my opinion.” Some of the payment processors, Rouse gave PayVision as an example, have said they'll only process their highest-revenue clients. PayVision has a $200,000 a month limit on CBD companies they'll serve, said Rouse, which effectively freezes out startups who aren't handling nearly that amount.The only companies that can match that number — and dedicate resources to find creative ways to get around some of these issues — are ones that are backed by venture capital money, or have gone public on stock exchanges. That, according to the CBD founders, squeezes out smaller startups.“It's kind of creating a monopoly in of itself in that only the biggest companies can survive this hump,” said Rouse.While grateful they were given at least a month to figure out a new plan, the founders felt that Elavon should not have allowed middlemen to court their business in the first place unless they were sure they could serve them, given the rapidly evolving rules around hemp and CBD. Read more: A California company tested 20 popular CBD products and found 'insanely high levels' of dangerous chemicals and misleading labelsFaced with no other options, Rouse, like the other founders, was forced to turn back to her old payment processor, which forced her to lose a higher percentage of each transaction to processing fees — hurting her business as she was trying to get it off the ground. As Elavon pulled back, the CBD founders said middlemen started reaching out immediately. “I was getting over 20 emails a day,” said Vriens. Park, the CEO of Populum, sent Business Insider a number of cold marketing emails from some of these middlemen. One email from a representative of a company called BankCard USA said that he worked with a domestic bank that would continue to take CBD merchants. “However, they only have a limited amount of slots open – as they do not want to make the same mistake as Elavon and open the floodgates to everyone – and once these slots fill they will not take on any additional clients,” the representative said. The other founders confirmed they received the same email. To Rouse, Elavon suddenly pulling out of the CBD industry was “really just the tip of the iceberg” of financial institutions treating them like second-class citizens, despite selling a product in compliance with both state and federal laws. Other founders agreed.“Elavon was going to change everything for our industry,” said Park. “It's very frustrating they made the decision to pull out.”Read more:Top cannabis investors reveal where they're placing bets, but say there's 'pain to come' in the crowded CBD spaceBNY has quietly started working with a marijuana ETF — and it's about to be the first major bank to help the world's largest funds invest in the booming industryTop cannabis CEOs say Canopy Growth's $3.4 billion purchase of pot cultivator Acreage 'shakes the foundation of what has been true' and will spur a cannabis M&A boomUnilever is the latest consumer giant to break into the potentially $16 billion hemp and CBD space with a new line of deodorants