The Merchant Services Repercussions of the FDA E-Cigarette Flavor Ban

The Merchant Services Repercussions of the FDA E-Cigarette Flavor Ban

Online merchant services for e-cigarettes could possibly get a big boost if the US Food and Drug Administration gets its way (and it usually does).

In an effort to halt vaping prevalent among minors, the FDA is gearing to ban sales of most flavored e-cigarettes in convenience stores and fueling stations in the US. The one caveat of the FDA’s plan, from what we’ve read, is to permit the flavors of mint and menthol so as not to steer e-cigarette users toward traditional menthol tobacco (however, we recently read about the FDA possibly banning or limiting the sale of traditional menthol cigarettes).

It is the latest move by the FDA, which in mid-September, contacted four of the largest domestic e-cigarette manufacturers and tasked them with providing a detailed plan of how they intend to prevent their products getting to minors (their plans are due to the FDA this week). Additionally, the FDA sent letters to more than 1,100 vaping retailers warning of stiff fines and penalties as a result of sales to minors.

We understand fully the FDA’s goal is to keep e-cigarettes out of the hands of minors. Merchants simply need to make every conceivable effort to ascertain the identities of their customers.

Having provided e-cigarette merchant services solutions for the last 10 years, however, the FDA’s plan will not be without repercussions.

More online sales, but stiffer underwriting

While the FDA’s ban is said to significantly impact the retail side of e-cigarette sales, it could shift the sale of e-cigarette liquids online, creating opportunities for e-commerce e-cig merchants. When the feds are involved, however, acquiring banks tend to go into safety mode. As a result, we envision a few changes in merchant services for online e-cigarette merchants.

  • Rolling reserves: Some acquirers impose rolling reserves on high risk businesses, into which a merchant pays into for six months, then begins to recoup the funds incrementally as s/he establishes a good relationship and credit with the acquirer. We could see rolling reserves imposed on merchants who might not have required them prior. Or, we could see reserves exceeding the most common window of six months.
  • Pristine processing history, KYC: We envision the merchant services onboarding process becoming even more stringent, where merchants who met the approval criteria in 2018 may not make the cut in 2019. This particularly affects startups and those merchants who may lack sufficient payment processing history.

The results: Black market? Transaction laundering?

Conversely, should the FDA impose such a ban, it will likely result in black market sales of e-cigarettes and e-liquids – rogue ‘merchants’ skirting federal regulations. Too often, we come across high risk merchants in need of merchant services – mainly online pharmaceuticals and nutraceuticals – who have been previously shut down because they were selling unapproved or illegal products, not found or even hidden on their website. With an FDA ban, our underwriters expect to see more of these dubious practices called transaction laundering.

Merchant services for e-cigarettes: What we suggest

One of the niche industries for which we offer merchant services is online wine delivery. We won’t skirt the truth – it is a difficult merchant account to get done, what with differing state laws regarding shipping (quantities differ from state to state), handling and receipt (the risk of underage persons receiving alcohol). Hence, there are a plethora of hurdles and regulations to navigate.

Should the FDA’s ban ignite online merchant services for e-cigarette flavors, the sale of such should be handled similarly to that of online wine delivery:

  • No post office box deliveries.
  • Website must include an age verification portal prior to customers entering the website.
  • Checkout page must include a check box indicator buyers are at least 21 years old.
  • Mandatory signature upon receipt by an adult 21 or over.
  • Use of a reputable shipping company/deliver capable of ascertaining the recipient’s age and requiring valid identification upon receipt of product.

An additional solution is to offer the option to ship products to the nearest (trusted) vaping merchant to be retrieved by the customer, who can only do so with valid identification.

E-cigarette merchant services with Instabill

Instabill has domestic and offshore banking partners in place that provide merchant services to high risk merchants, including e-cigarette businesses. With a 10 minute telephone conversation, our merchant account managers identify your needs and match your business with the best acquiring banking solutions we know of for e-cig merchants.

We’re available Monday through Friday, 8 a.m. until 6 p.m., US eastern time at 1-800-530-2444.

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