Legal Best Practices for CBD & Cannabis Payment Processing

The legalisation of cannabidiol (CBD) and cannabis products across various states in the U.S. has opened the floodgates for a booming industry. However, despite the growth, businesses in the CBD and cannabis sectors continue to face significant hurdles, particularly in payment processing.

Classed as “high-risk” due to regulatory uncertainty and federal restrictions, merchants operating in this space encounter difficulties securing reliable, compliant merchant services. TFM Law, a legal firm specialising in high-risk processing compliance, notes that without proper legal guidance, many businesses risk account shutdowns or regulatory violations.

To operate legally and successfully, CBD and cannabis businesses must understand and implement best practices that ensure regulatory compliance, reduce risk, and maintain uninterrupted financial operations. This article dives into the legal intricacies, challenges, and actionable strategies for navigating CBD and cannabis payment processing.

Understanding the “High-Risk” Label in Payment Processing

Businesses in the CBD and cannabis sectors are typically labelled as high-risk merchants by banks and payment processors. This designation isn’t necessarily about the ethics or quality of the product, but about the perceived legal and financial risks involved in supporting these industries. Factors that contribute to the high-risk label include:

• Ongoing federal prohibition of cannabis (including THC-based products)
  
• Unclear or evolving regulatory frameworks (FDA, DEA, FinCEN)
  
• High chargeback ratios and consumer disputes
  
• Difficulty in verifying age and identity for online sales
  
• Association with other high-risk industries (e.g., supplements, vaping)
  

Because of this categorisation, traditional banks often avoid partnering with CBD and cannabis companies, leading to the need for specialised high-risk payment processors and legal support.

Legal Framework Governing CBD & Cannabis Payments

Even though hemp-derived CBD was legalised through the 2018 Farm Bill, payment processing remains a grey area. While the bill removed hemp (with less than 0.3% THC) from the list of controlled substances, regulatory agencies like the Food and Drug Administration (FDA) and Financial Crimes Enforcement Network (FinCEN) still monitor and enforce compliance.

Key Legal Considerations:

• Controlled Substances Act (CSA): Cannabis remains a Schedule I substance federally, meaning any payment for THC-rich cannabis may still violate federal law.
  
• FDA Regulations: CBD-infused food, beverages, and supplements must not make unapproved health claims and must follow strict labelling standards.
  
• Bank Secrecy Act (BSA) and FinCEN Guidance: Financial institutions must follow “Know Your Customer” (KYC) and Currency Transaction Reporting (CTR) requirements when dealing with cannabis-related transactions.
  
• State Licensing: Each state has its own licensing requirements for selling cannabis or CBD products, making it vital to be compliant at the local level.

Businesses working in this space should engage a high-risk processing attorney to ensure their payment strategies comply with overlapping federal and state regulations. TFM Law, a firm experienced in navigating high-risk payment environments, recommends routine audits of merchant processing agreements and regulatory practices.

Setting Up a CBD or Cannabis Merchant Account: What You Need

To avoid account freezes or shutdowns, CBD and cannabis businesses must establish a merchant account with a provider that supports high-risk industries. The following documentation and steps are typically required:

1. Business Licensing and Registration: Must include a valid state-issued cannabis or CBD license.
   
2. Bank Statements and Financial Records: Transparency in business finances builds trust with payment processors.
   
3. Product Information and Lab Results: Third-party testing and compliance documentation are essential.
   
4. Terms and Conditions / Privacy Policies: Clear policies help prevent chargebacks and demonstrate compliance.
   
5. Shipping and Return Policies: Especially for e-commerce businesses, these protect both customers and merchants.
   
   Many payment processors also require age verification software, secure checkouts, and anti-fraud systems.

Best Practices for Legal Compliance in Payment Processing

1. Work with a Specialised Payment Processor

Not all payment providers are equipped to handle the unique risks of cannabis and CBD sales. Seek processors that:

• Have experience in cannabis compliance
  
• Understand the nuances of CTR reporting and FinCEN guidelines
  
• Offer transparency and reliable dispute resolution

2. Partner with a High Risk Processing Attorney

An experienced attorney ensures that all legal and regulatory boxes are checked. From reviewing merchant agreements to advising on compliance obligations under the FDA, FinCEN, and state law, legal counsel is critical.

3. Avoid Mislabeling and Unsupported Medical Claims

Making health claims without FDA approval can trigger enforcement actions. All marketing, packaging, and website content should avoid language such as “cures,” “treats,” or “prevents” unless backed by clinical research and approved by regulators.

4. Implement Robust KYC and Age Verification

Age-gated access and identification validation are essential, especially for online sellers. This mitigates legal risks related to sales to minors and adds credibility with financial institutions.

5. Monitor Changes in Federal and State Laws

Regulatory frameworks are continuously evolving. Subscribe to industry updates, consult legal counsel regularly, and adapt internal policies to remain compliant.

Managing Risk: From Chargebacks to Audits

High chargeback rates are another reason processors hesitate to support cannabis merchants. These can arise due to customer dissatisfaction, unclear billing descriptors, or product confusion.

Mitigation Strategies Include:

• Clear Communication: Use accurate, transparent product descriptions.
  
• Billing Clarity: Ensure descriptors on credit card statements are easy to recognize.
  
• Dispute Resolution Policies: Offer responsive customer service and a smooth refund process.
  
• Recurring Audits: Regular reviews of your payment system and legal documentation reduce the risk of account termination.
  
  Legal compliance audits conducted with a high-risk processing attorney help ensure your payment system is defensible in the event of a regulatory inquiry.

The Future of Cannabis & CBD Payment Processing

As the cannabis industry continues to expand and legalisation discussions progress on the federal level, we may see changes in how financial institutions interact with these businesses. Bills like the SAFE Banking Act offer a glimpse into a future where cannabis merchants might gain broader access to banking services.

However, until federal alignment occurs, CBD and cannabis businesses must operate carefully. Compliance, transparency, and specialised legal guidance will remain critical for sustainable growth in the high-risk payment environment.

Conclusion

CBD and cannabis payment processing is complex and constantly evolving. By adhering to legal best practices—working with specialised payment processors, engaging a high-risk processing attorney, implementing robust compliance protocols, and staying informed—merchants can reduce risk and build a secure foundation for growth.

Visit us for more information on navigating the legal, financial, and compliance landscape in the high-risk payment sector.

Frequently Asked Questions (FAQs)

1. Why is CBD and cannabis payment processing considered high-risk?

CBD and cannabis are considered high-risk due to regulatory ambiguity, federal restrictions, and the increased likelihood of chargebacks. Banks and payment processors view these industries as carrying higher liability.

2. Can I use PayPal or Stripe for CBD or cannabis products?

Generally, no. Most mainstream processors like PayPal, Stripe, and Square restrict services for CBD or cannabis products due to their internal policies and federal regulations.

3. What legal risks should cannabis merchants be aware of?

Cannabis merchants must be aware of risks under the Controlled Substances Act, FDA violations, state licensing breaches, and FinCEN regulations related to financial transparency and anti-money laundering.

4. How can a high-risk processing attorney help?

An attorney with experience in high-risk payment processing can guide you through merchant agreements, ensure regulatory compliance, assist with audits, and represent your interests during investigations or legal disputes.

5. What documentation is needed to open a cannabis merchant account?

You typically need a state license, business registration documents, financial statements, lab test results, and clear policies on refunds, shipping, and privacy.