The problem with plastic: Local business owners say ever-growing credit-card fees are draining their lifeblood

A number of Montezuma County merchants and restaurant owners are organizing an effort to address the increasing use of credit cards.

The problem with plastic is the processing fees that business owners pay to support the convenience at the expense of their own profit margins. It represents a huge amount of money taken straight out of the local economy, they say.

“When I began Stonefish in 2010, credit-card use was 40 percent of my business. At that rate it was manageable. But today it’s 94 percent,” said Brandon Shubert, co-owner of Stonefish Sushi & More, in Cortez.

“But it’s escalating as the economy recovers, impacting retailers’ cash flow and how much money stays here to the benefit of our own residents.”

Tazewell Vass, co-owner of the Dolores Food Market, is joining Shubert and other local retailers in an initiative to increase public consciousness about the impact processing fees have on their small businesses and the subsequent loss of money in the local economy.

They are optimistic that the program, Local 2 Local Checks & Cash, will reduce credit-card use and revive the use of local checks and cash.

“If I can bring credit/debit card use back down to around 60 percent it would create a kind of security to business at Stonefish that benefits more than just the restaurant,” Shubert said.

He is aware that consumers like the incentive programs that benefit them every time they use the cards – earning them airline flight miles, discounts on car rentals and hotels, merchandise, and cash back.

“But we are the originateng source of that incentive revenue,” said Vass. “We are fundamentally the ones who pay for those programs. It’s withdrawn from our accounts every month. Real money. Local money. It goes away and never comes back.”

A million cuts

Vass has been talking about this for years, he told the Four Corners Free Press. “Electronic transaction credit-card fees feel like death from a million cuts. It is rich irony that they are named discount or swipe fees, when in fact the money comes straight out of the retailer’s pocket.”

The total amount is staggering.

If a single local retailer pays $50,000 in annual processing fees – which is common here – then how much processing- fee money actually leaves the county? Vass asked. There are more than 300 businesses on that scale or larger, he said.

A rough estimate of the total amount leaving the county in processing fees could be as high as $10 million to $15 million a year.

Although there is no concrete data, Raquel Moss, director of the Cortez Area Chamber of Commerce, agreed that the issue is worth considering. Understanding how hard it is to address spending habits, the program they are working on has a huge educational component, she said.

“Grassroots movements in our community have been pretty successful over a period of time, eventually changing the hearts of consumers. So, because this is in the schematic stage, we are interested in exploring the topic with them and other businesses in the community affected by the processing fees.”

Swiping money

Swiping a card or clicking a “buy” button initiates a series of transactions that shift money from consumer to bank to merchant. Banks, payment networks such as Visa Inc. and Mastercard Inc., and payment processors such as First Data Corp. and Worldpay Inc. fight intensely for a share of that revenue. As the amount of money involved in credit/debit-card transactions grows, startups and other companies seek to siphon a portion of these fees. But retailers are coming up with creative local ways to lower the amount they pay.

Educating the public, as the Local 2 Local Checks & Cash group hopes to do, is one of them. People simply do not know the cost to the retailer, Vass said.

“I am certain not many people think about how these escalating fees affect local small businesses,” said Vass. “For instance, you really have to wonder how many U.S. businesses operate with swipe fees that take three times our 1 percent net profit, as is now the reality for many retail businesses.”

The rates vary by card and by transaction, explained Vass. American Express is the most expensive, but it also represents a higher-transaction consumer with more available expendable income. Reward and gift cards charge the most, he said, “and, if you think about it, the fees we take out of our businesses every month are, in reality, what pays for the incentives offered by the card companies. We pay for those miles.”

Today, in the push by millennials to create a paper-free economy, plastic or digital may be good for keeping records accurate, and consumers’ pockets free of clutter, but, he contends, “retailers are the ones paying for that convenience, not the banks or the consumers.” And the cost is increasing, said Laurie Hall, co-owner of the Farm Bistro in Cortez. “In the 10 years that we’ve had our restaurant, our average credit-card fees have risen from 2 percent to 3.4 percent, and there’s no reason to think that they won’t continue to rise. It’s a system that takes real money out of our local economy, buying nothing but convenience.”

Concern about the processing fees is not limited to Montezuma County. According to the Salt Lake Tribune, a Salt Lake City chain, Smith’s Food & Drug Stores, will no longer be accepting Visa credit cards for payment, beginning April 3.

The stores, owned by the grocer giant Kroeger’s, said in their announcement that the decision was based on the “excessive interchange and network fees that Visa and its issuing banks charge retailers.”

Boom times after 2008

The economy gradually regained stability after the Great Recession of 2008 and a lot of the increasing strength was due to spending habits. “From 2007 through 2011 consumers reduced their debt at a pace not seen over the last 10 years,” according to a Federal Reserve Bank study published in 2013. Consumers paid down more than one-third of the overall reduction in combined credit-card and auto-loan balances, the report said.

Between 2008 and 2013, overall household debt of all types fell $1.3 trillion. Consumers bit the bullet. During a time of deep job cuts, households pulled back sharply on borrowing. Part of the move was voluntary, the report says, not a reaction to higher lending standards.

“When we started our business, customers were cautious about credit-card use,” said Melissa Shubert, co-owner of Stonefish. “It was just a few years after the 2008 recession. I am certain that businesses begun at that time were basing operating budgets on the 40 percent credit-card use we experienced then. People are feeling good about the economy now, and we’re glad.”

But from 2012 to 2015, credit and debit, including prepaid and non-prepaid card transactions, continued to gain ground, accounting for more than two-thirds of all non-cash payments in the United States. According to the Federal Reserve Payments study released in December 2016 the number of domestic non-cash payments totaled $144 billion — up 5.3 percent annually from 2012. The total value of these transactions increased to nearly $178 trillion. The processing fees are a fluctuating percentage of that total.

“The high percentage of card use today is a much bigger risk for retailers, entrepreneurs and small businesses,” Shubert said.

Local money?

A former professor of finance and economics at Grand Canyon University, David Coit, emphasized that it is difficult to define the notion of local money. Where money comes from initially is very hard to identify, said Coit, a business valuator and advisor who recently relocated to Montezuma County from Phoenix,

As an example, he said, consider what percentage of money being spent in the county is generated here. Look at the high government employment in Montezuma County, and the additional money that travels into the county from other states and bordering tribal nations. It is impossible for local economies to hold money still and to pinpoint where it originates.

“Regarding credit-card fees, I agree that alternative payment options could be effective through a strong public awareness campaign,” Coit said. “It can increase an understanding about the costs of doing business today, what the local retailers face as they work to increase their net returns and grow their business, and what options consumers can use to participate in building a stronger local economy.”

Although he advises that business owners can search for providers offering lower processing fees, there are other options, such as enticing customers to use cash or checks rather than credit or debit cards.

Payment options

The Federal Reserve Board and the Federal Reserve Banking Services are entities of the Federal Reserve Banking System responsible for promoting consumer protection, research and analysis of emerging consumer issues and trends. The 12 Federal Reserve Banks and their 24 Branches are the arms of the Federal Reserve System. Each Reserve Bank operates within its own particular geographic area, or district, of the United States gathering statistics and other information about the businesses and the needs of local communities in its region.

Among the myriad U.S. economic activities the groups track national three-year aggregate trends for non-cash payments. Data, from recent publications shows that in 2017 the value of a payment influenced a consumer’s choice to use cash, debit, credit, or other forms of payment. When the transaction was less than $25, cash was used, while credit and debit cards were used more frequently for payments valued between $25 and $100. Checks and electronic payments were used more frequently for transactions valued $100 and over. Since the majority of all consumer payments are for less than $25, cash is overall the most frequently used instrument.

Cash use is lowest among 25-to 44-year-olds. Households with incomes of about $100,000 use credit cards to pay for the largest number of monthly transactions, 33 percent, followed by cash as the secondary payment method.

Coit said check-verifying systems have improved recently. They let businesses know immediately whether the check is good. The practice will help local retailers accept local checks. If the local initiative can encourage use of checks and cash with an organized, accurate, identifiable, and informative campaign then it will have a positive influence on the local economy. The habit of using credit cards is the core issue, said Coit. “It may be hard to influence change.”

Consumers use card payments to track their business expenses, a very real record of accounting. “We certainly don’t want to discourage credit or debitcard use entirely,” said Shubert. “We are just ratcheting up the awareness about the impact on the local economy.” That money could be put to better use in the community buying more local ads, creating jobs, expanding or replacing equipment, or playing more substantial roles in not-for-profit partnerships, he said.

Cash flow can be affected by the many days needed to get the money in the bank account. The card companies get their fee immediately at the time of the transaction, yet it can take up to three days to see the money deposited in local bank accounts.

“A lot of interest is made on the transaction during the interim days before the payment for our services or goods comes back to us,” Shubert said.

Bigger checks

Surveys of the largest U.S. depository and financial institutions conducted from 2012 through 2017 show check payments on a fast decline. However, the monetary value of checks is on the rise, increasing nearly 8 percent in 2017. People write checks less often, but for larger amounts.

ATM withdrawals declined, too, but, as with checks, the amount people withdraw is increasing. “The habit of getting immediate cash from a machine is growing everywhere, but in our local economy, it is now routine commerce,” Shubert observed.

“In Colorado the pot business is all cash, and many dispensaries have an ATM machine on-site. People know they can’t buy at the pot stores without cash.”

The rollout

The emerging group of local retailers is hoping an awareness campaign will reduce the amount of local money leaving the community in processing fees. They are definitely not discouraging all credit-card use, but are hoping local residents will consider how the fees impact retailers. They understand how much everyone relies on cards for convenience. They say big retailers such as Walmart and City Market can absorb the fees more easily than local small businesses, due to the volume of sales they do.

“But the smaller, local businesses carrying a disproportionate share of the burden, are the very fabric of our local economy, our retailers in the hood,” Shubert says. “This is a positive campaign launched by local retailers that can help local clientele support keeping the money home when possible. It will not dissuade the use of credit/debit cards, but just help reduce the use and support the reciprocal community economy, not just our own businesses,” he says. “It’s the right thing to do.”

The Local 2 Local Checks & Cash Initiative group is reaching out to business people interested in this topic. They plan to provide stickers, posters, and support material identifying businesses that encourage use of local checks and cash. For more information contact Shubert at 970-565-9244 or Vass at the Dolores Food Market, 970-882-7353.

From March 2019.