By Brett Husak
National Bank Services
Let's face it: if you haven't heard the recent news about the e-cigarette "vape" industry, you're in for a surprise, and it's not the type of surprise you receive on your birthday; it's more of the type you receive from the IRS when there's a capital gains error on your tax return.
The vaping industry, which brings in millions of dollars of revenue for ISOs, is facing the tip of the Federal Drug Administration's sword. Even though the industry is still in its infancy, the newly proposed regulations being set forth by the FDA could bring about its early demise.
How will this affect the market and how will it affect thousands of merchants whose businesses will be forcibly closed if these regulations are adopted? This article aims to explore the who, the what and the why of this situation to bring some clarity to what is at stake.
Although we all may have heard of vape and recognize vaping's growing popularity, many of us still may be in the dark when it comes to understanding exactly what it is. So first, a bit of background to this story is needed.
Vaping can most basically be defined as the act of inhaling water vapor through a battery powered vaporizer. The electronic cigarette (e-cigarette or e-cig) is a type of vaping device that was developed as an electronic nicotine delivery system (ENDS) that has gained substantial appeal among those trying to quit smoking traditional cigarettes. In fact, over the past decade, vaping has evolved into a multibillion-dollar business with products being used by millions of Americans.
When they first came out in 2004, e-cigarettes were made exclusively by a few manufacturers, available only in tobacco flavor, and for sale in a small number of retail locations. Today, as the industry has evolved, the product has as well, with a variety of different device styles and an extensive menu of e-liquid flavors being offered. It is also being sold in more places than ever before, including malls and online. Additionally, there is a specialized niche, which represents about one-third of the industry, of around 3,500 vape shops and lounges that have popped up all across the country.
The e-cigarette was introduced to the market as a means to deliver nicotine to smokers without the destructive tar and cancer causing chemicals. Unlike traditional cigarettes, they do not contain tobacco or carcinogens such as arsenic and vinyl chloride, and they do not generate secondhand smoke. Cigarette smoking is responsible for over 400,000 deaths in our country each year and remains the leading cause of preventable illness and death. The worst side effects of smoking are cancer and heart disease, which are attributed to inhaling tar and chemicals produced by burning tobacco.
There are currently an estimated 45 million smokers in the United States. Of particular interest to the vaping industry is that 29 percent of people who tried e-cigarettes were able to quit smoking within six months.
Although medical experts can agree that e-cigarettes are less harmful than traditional cigarettes, the long-term health effects of e-cigarettes remain unknown. In addition, many officials are concerned that these devices will indoctrinate a new generation of smokers.
With e-cigarettes being the most commonly used "smoking" product among youth for the past two years, these fears may not be unfounded. The CDC released a 2015 study that showed there are more than 3 million middle and high school students who are current users of e-cigarettes. This is an increase from the estimated 2.5 million such users in 2014.
An overwhelming majority of young people using e-cigarettes cite the appealing flavors – that include gummy bear and Skittles ‒ as the primary reasons for use. On the other hand, there are those who feel the devices are the most effective way to deter minors from ever trying traditional cigarettes. In fact, the rate of youth smoking has declined since e-cigarettes have been available.
So, what is changing that could cripple our merchants? On May 5, 2016, the FDA proposed rules and restrictions for the e-cigarette and vape industry. It comes as no surprise to anyone that the FDA was putting something together. In fact, this has been anticipated for quite some time.
Allow me to familiarize you with the Family Smoking Prevention and Tobacco Control Act (FSPTCA). It was rolled out in 2009, not to be the eventual downfall of the vape industry, but more so to act as a filter to protect the population. At its core, the FSPTCA does the following:
In sum, this act gives the FDA the power to regulate the manufacturing, distribution and marketing of tobacco products. This has become the entry point for the FDA to police the vape community.
If you ask any vape business owner whether there should be guidelines, they would almost all agree that there should be. No responsible business owners want children getting hooked on nicotine, nor do they want to sell products whose ingredients are unknown to their customers. In fact, a large portion of the vape industry welcomes protocols with open arms, but they do not embrace sweeping restrictions that would essentially shut down their businesses.
In the nearly 500 pages of regulations the FDA has issued, tobacco products have now been redefined to include e-cigarettes, hookahs, pipe tobacco and cigars. The new rules are set to take effect within 90 days and will have extensive implications for public health and the tobacco industry.
The regulations the FDA hopes to impose would effectively treat e-cigarettes as if they were actual tobacco cigarettes. The new rules would basically make it almost impossible to sell or make any new vape products. Even worse, in order to continue selling existing products, businesses would need to get FDA authorization first - which means they would need to pay.
Virtually every e-cigarette currently on the market, as well as every flavor and nicotine level, would require separate applications for federal approval. Each of these applications would cost thousands of man hours and approximately $1 million dollars. It would put an estimated 16,000 shops out of business across the country. The only ones left standing would likely be the tobacco giants who can afford these payouts and are now big players in the e-cigarette game.
Fortunately, implementation will take time, and manufacturers are being allowed to sell for the next few years while applications are submitted and reviewed. In the meantime, the FDA Deeming Authority Clarification Act of 2015, H.R. 2058, introduced in the House by Rep. Tom Cole, R-Okla., is a bill that could basically save the vapor industry. It would change the grandfathered date for "deemed tobacco products" to allow for vapor products currently being sold to remain available without being subjected to the expensive FDA approval process.
Could the FDA's actions mean the end of ENDS? Let's hope not because we all stand to potentially lose millions in revenue from these proposed regulations. Whether their transactions are card-present or card-not-present, if you have boarded merchants with the merchant identification numbers affected by the FDA's new rules and restrictions, you stand to lose those merchants quickly.
These next few months will be critical for the industry. Keeping your ear to the street and staying abreast of the issues at hand will definitely play in your favor.
To learn more about the issues discussed in this article, see the following resources:
Brett Husak is Director of High Risk Merchant Services at National Bank Services. He can be reached at email@example.com.
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