Risks Banks Face When Working With CBD-Related Businesses

The CBD industry is booming, and its market value is projected to hit over $22 billion by 2030.

With more consumers embracing CBD for its potential health benefits, entrepreneurs are rapidly entering the market. But while the industry shows remarkable growth, it also presents significant challenges for financial institutions tasked with providing CBD merchant services.

Banking CBD-related businesses isn’t straightforward—complex regulations and reputational risks make it a high-stakes endeavor. 

This blog explores the unique risks associated with offering financial services to CBD businesses and provides strategies for banks to safely manage these challenges.

Whether you’re a financial institution or a CBD entrepreneur, this guide will help you build legal, effective partnerships within this dynamic sector. 

Regulating CBD and Banking: A Complex Landscape 

The regulatory framework for CBD is fragmented and often confusing, presenting banks with serious compliance concerns. 

Federal vs. State Regulations 

The 2018 Farm Bill legalized the cultivation and sale of industrial hemp containing less than 0.3% THC at the federal level. 

However, state laws regarding CBD vary widely.

Some states fully align with federal laws, while others impose stricter rules or outright bans.

For financial institutions operating across state lines, navigating these discrepancies can be a daunting task. 

The Role of the FDA 

The FDA oversees CBD products marketed as foods or dietary supplements, adding another layer of scrutiny.

Past enforcement actions show the FDA doesn’t hesitate to target businesses making unverified health claims about CBD. Banks must ensure their CBD clients comply with FDA guidelines to minimize exposure to potential liability. 

The Impact on Payment Processing 

CBD businesses are often classified as "high-risk" by financial institutions due to regulatory uncertainty and reputational concerns.

This classification makes standard payment processing options, such as credit card services, difficult to access. Without reliable payment processor options for CBD businesses, banks face a critical decision about how to provide secure and compliant solutions. 

Legal, Financial, and Reputational Risks 

Serving CBD-related businesses comes with unique risks, many of which pose significant challenges for financial institutions. Here’s a breakdown of the most pressing concerns. 

Legal Risks 

Even with federal legalization, the lack of uniform state laws creates a regulatory minefield. Banks that fail to conduct thorough due diligence on CBD clients risk violating anti-money laundering (AML) and “Know Your Customer” (KYC) requirements.

Furthermore, mishandling funds associated with CBD businesses could lead to penalties, fines, and potential legal battles. 

Financial Risks 

CBD businesses are inherently volatile due to the industry's rapid growth and regulatory challenges. High customer chargeback rates and inconsistent revenue streams make it difficult for banks to assess financial stability.

This risk is compounded by the need for specialized CBD payment processor options to avoid interrupted services. 

Fortunately, working with a reliable CBD merchant account provider like Seamless Chex is an excellent way to mitigate risks without sacrificing merchant account features. 

Reputational Risks 

Partnering with businesses in a federally gray industry like CBD can lead to reputational repercussions. Banks must consider how such partnerships may be perceived by other clients, stakeholders, and regulators. Even legitimate CBD companies operating within legal boundaries might inadvertently attract negative attention to the financial institution. 

Managing Risks in CBD Banking 

Recognizing these risks, many banks adopt strategic measures to mitigate liability while maximizing opportunities in the CBD industry. 

1. Enhanced Due Diligence 

Effective CBD banking begins with rigorous Know Your Customer (KYC) and Customer Due Diligence (CDD) practices. Financial institutions should verify not only the legitimacy of a CBD business but also ensure compliance with FDA, state-level, and federal guidelines. 

2. Establish Specialized Teams 

Creating a dedicated compliance team to handle CBD clients can improve oversight. Such teams can perform ongoing risk assessments, monitor industry changes, and help the institution adapt to evolving guidelines. 

3. Partner with CBD-Friendly Payment Processors 

Working with a reliable CBD payment processor is essential to reducing operational friction. These providers specialize in navigating high-risk industries and help ensure seamless CBD merchant services that meet compliance standards. 

4. Transparent Client Communication 

Banks should maintain open communication with CBD clients to ensure they understand their compliance responsibilities. Clear expectations help build trust and reduce the likelihood of regulatory breaches or reputational damage. 

5. Review Internal Policies Regularly 

The CBD industry evolves rapidly, and so should a bank's internal compliance policies. Regular review and updates allow financial institutions to stay ahead of new regulations and industry practices. 

Seamless Chex is Your Payment Processor for CBD

Whether you're a bank or a CBD entrepreneur, collaboration and the right partnerships are essential to thriving in this complex industry.

At Seamless Chex, we specialize in helping CBD businesses access robust, secure merchant account services designed for high-risk industries.

With our expertise, you can confidently navigate regulatory challenges and ensure smoother, safer payment processing.

Let us be the partner that supports your growth in this rapidly expanding market. Ready to get started?

Contact our team now!

CBD Merchant Services FAQ

Q: Can financial institutions provide banking services to CBD businesses?

A: Yes, financial institutions can provide banking services to CBD businesses, but it requires partnering with institutions experienced in high-risk industries. These specialized CBD merchant services providers understand the unique needs and challenges of the CBD industry and can offer tailored solutions to ensure smoother operations and secure transactions.

Q: What compliance practices should CBD businesses follow when it comes to financial transactions?

A: CBD businesses should adopt rigorous compliance practices to ensure legal and profitable partnerships with financial institutions. This includes maintaining detailed records, implementing robust anti-money laundering (AML) and know your customer (KYC) procedures, and staying updated on changing regulations and industry practices.

Q: How can partnering with CBD-specific service providers benefit financial institutions?

A: Partnering with CBD-specific service providers can benefit financial institutions by providing expertise and specialized solutions for the unique challenges of the CBD industry. These service providers understand the legal and regulatory landscape, allowing banks to navigate the complexities more efficiently and effectively.

Q: What should CBD entrepreneurs consider when choosing a financial partner and payment processor for CBD transactions?

A: CBD entrepreneurs should consider several factors when choosing a financial partner and payment processor for CBD transactions. These include the partner's experience in serving high-risk industries, their ability to handle CBD-specific compliance requirements, the security and reliability of their payment processing systems, and their commitment to providing excellent customer support.

Q: How important is collaboration in the CBD industry?

A: Collaboration is crucial in the CBD industry. CBD businesses need to align their goals with financial institutions that understand their unique needs and are willing to work with them to overcome challenges. Open communication, a shared understanding of regulatory boundaries, and choosing trusted partners can unlock success in this rapidly expanding market.

By addressing these frequently asked questions, we aim to provide informative and reassuring answers for both financial institutions and CBD entrepreneurs looking to navigate the complex landscape of CBD merchant services.