U.S. Bank Subsidiary Pulls Out of CBD Industry
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U.S. Bank Subsidiary Pulls Out of CBD Industry

With Evalon closing its CBD merchant accounts, what’s next for the uncertain business climate?

March 22, 2019

Brian Baum was pulling up to the Dallas-Fort Worth International Airport on March 19 when he got an email alert: His merchant services account had been terminated. The CEO of hemp-derived CBD product manufacturer Cannovia tells Cannabis Business Times that Evalon’s abrupt message forced him and his team into damage-control mode. They weren’t alone. 

“Fortunately, the industry itself—CBD and the cannabis industry—is a pretty tight community,” Baum says. “We, of course, very quickly started looking into: What are the alternatives? How do we move forward?”

The Cannovia team connected with FINCANN, the “cannabis banking financial network” run by CEO Nathaniel Gurien. The company acts as a broker, in a way, connecting businesses with banking and other financial partners. It’s not a simple task—even for the nascent U.S. hemp industry. “It’s interesting,” Gurien says. “There’s an expectation that the moment a sector of our industry becomes legal, so to speak, that banking and other types of services that are virtually unattainable will suddenly open up. But I don’t think we’re going to see it suddenly.”  

Evalon, a subsidiary of U.S. Bank, quietly began offering merchant services to hemp-derived CBD businesses last fall. (“Merchant services” refers to a banking relationship that allows a business to accept secure credit card or debit card transactions.) This week, the institution pulled out of all CBD business accounts. Of course, much has happened between last fall and the present: Congress passed the 2018 Farm Bill, and the outgoing FDA commissioner has publicly wobbled on how hemp-derived CBD products will (or won’t) be regulated. Uncertainty abounds in this industry, and financial channels are caught in the middle.

The merchant services provider has given client companies a 45-day grace period to continue doing business and to find a new financial alternative. All applications still in the underwriting process have reportedly been canceled.

“I wouldn’t be surprised if a number of [banks] have noticed—or will notice—that Evalon got into it and exited,” Gurien says. “I think that will not have an encouraging effect on banks providing basic services to the CBD hemp industry. But we’re all figuring that, gee, after prohibition, why, the whole banking problem should be resolved! And the interesting thing is: Maybe not. We still may have to fight and wait for things to come around.”

The 45-day window, Gurien says, indicates that Evalon isn’t fleeing the industry for overt regulatory or legal reasons. And Evalon wasn’t entirely alone in its CBD merchant services work; Gurien says he’s aware of another acquiring bank rolling out a limited pilot program for CBD merchant services (for businesses doing at least $1 million in business each year). What happens next, more broadly speaking, is less clear.

FINCANN is working with companies like Cannovia to find suitable avenues forward, so that in 45 days those businesses may still be able to pursue secure credit card and debit card transactions. (Another company, the Maine-based Organic Payment Gateways, is broadcasting its “CBD Shutdowns: What to Do Next” “support program” for businesses set adrift by the news.) 

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But it’s the long game that much of the cannabis industry is playing right now. Baum points to the SAFE Banking Act, which boasts 138 co-sponsors in the U.S. House.

The bill, which would protect financial institutions that are working with cannabis business clients, is set for a markup in the House Financial Services Committee next week.

“That’s encouraging news,” he says. “That comes back to the diversity of what’s going on [in the industry]. You have a lot of agriculturally-oriented states, where this is very important for [lawmakers’] constituents from a farming point of view. So, they’re pushing it. And then [there are] the states where citizens are interested in CBD products. … I think it will bring Congress together and move things along—hopefully at an accelerated pace.”

The SAFE Banking Act, indeed, would go well beyond the merchant services provided briefly by the Evalons of the world. The legislation would open up the playing field for financial institutions interested in working with cannabis clients that are obeying state law, as well as with ancillary businesses that are otherwise vulnerable to money-laundering prosecution and other financial crimes. Already, it’s gotten more traction that nearly any other cannabis reform bill ever introduced in Washington.

“The fact that the SAFE Banking Act, which has unprecedented support in the House, is getting the serious consideration of a markup is a huge step in the right direction for the safety and transparency of the legal cannabis industry,” Aaron Smith, executive director of the National Cannabis Industry Association, said in a public statement this week. “We urge every member of Congress to support this legislation and help ease the unfair burdens facing cannabis businesses, their employees, regulators, and law enforcement due to current federal banking restrictions.”