Payment processing isn’t often top of mind when auto dealership leaders think about profitability — but when left unchecked, the wrong payment systems can quietly chip away at margins.
Rising credit card processing fees, growing fraud risks, and shifting consumer expectations are forcing auto dealers to reevaluate how they manage payments. Protecting margins without compromising customer convenience requires a modern approach to payment processing, including strategies like surcharging that help control costs.
The profit squeeze dealerships can’t ignore
Today’s auto dealers face a perfect storm of rising costs and risks. While consumers rely on credit cards for 63% of retail transactions, accepting card payments comes with a growing cost to dealerships. Processing fees, often ranging from 1.5% to 3.5% per transaction, eat into already tight margins — especially on big-ticket purchases like vehicle down payments and service repairs.
But rising fees aren’t the only threat. As dealerships embrace digital retailing and remote payments, they face a higher risk of fraudulent chargebacks. That’s because card-not-present (CNP) transactions (e.g., online purchases) make it easier for fraudsters to use stolen card information without detection. Even legitimate customers may dispute a charge if they don’t remember authorizing it or don’t recognize it on their credit card bill.
When a dispute results in a chargeback, the dealership must refund the customer and may also incur additional processing fees. Dealers also face time-consuming administrative demands when responding to disputes, including gathering documentation, communicating with providers and managing follow-ups. And if a dealership’s chargeback ratio climbs too high, card networks and payment processors may classify it as high risk, which can result in higher processing fees or penalties.
In 2023, the automotive industry experienced a fraud rate of 0.60% — a seemingly modest figure. Yet in the context of large-ticket sales, even a handful of fraudulent transactions can lead to major financial consequences.
Still, credit cards and digital payments remain the preferred choice for most consumers, which makes offering them non-negotiable. Fortunately, there are proven strategies to help reduce fraud risk and offset processing costs without sacrificing convenience for your customers.
Surcharging: A strategic response to rising costs
Many dealerships are regaining control over rising payment processing costs through surcharging — the practice of adding a small fee to credit card transactions to offset interchange and processing fees.
Surcharging offers a way to align rising processing costs with customer choice without inflating base prices. Customers can avoid surcharging fees by using alternative payment methods like ACH bank payments, debit cards or checks that carry significantly lower processing costs.
But to effectively implement surcharging, you have to prioritize compliance and carefully manage its impact on your Customer Satisfaction Index (CSI) score:
- Compliance: Your surcharging strategy must align with both credit card network rules and your state’s laws. While most states permit surcharging without restriction, a few, like Maine, Massachusetts, Connecticut, and Oklahoma, prohibit surcharging, and some, like Colorado, California, and New York, allow it but impose specific requirements.
Additionally, most card networks cap surcharges at 3% and require merchants to provide clear pricing disclosures and signage before completing a transaction. Payment software that automatically calculates and displays surcharging can simplify compliance, but it’s still important to consult legal counsel to ensure your practices stay consistent with evolving regulations.
- Customer service score: Beyond compliance, careful communication around surcharges is critical in protecting your CSI score — along with the OEM incentives, inventory access and customer loyalty that are tied to it.
Make sure employees are informed so they can explain why surcharges exist and emphasize that customers have the freedom to avoid the surcharge with alternative payment methods. Alongside any required signage, posting skimmable FAQs near checkout and throughout the dealership can help address common questions.
A transparent approach helps minimize friction and confusion during transactions, reinforcing your dealership’s focus on customer satisfaction and protecting your CSI score.
Before introducing surcharging, it’s also worth considering what your competitors are doing and how your own customers prefer to pay. By understanding customer preferences and competitor strategies, you can implement surcharging in a way that balances cost savings and customer trust.
Beyond surcharging: 4 strategies to protect your margins and reduce risk
While surcharging can help offset credit card processing costs, it’s only one part of a broader payment strategy. To protect your margins and mitigate fraud risk, you need to modernize the systems that power every transaction.
- Simplify operations with integrated systems.
If your payment terminals don’t communicate with your dealership management system (DMS), even minor mistakes — like miskeyed totals or missing invoice numbers — can lead to chargebacks and unhappy customers.
Integrated payment solutions eliminate silos by automatically syncing transaction data with your DMS, ensuring transactions are processed accurately the first time. The right solutions also improve reconciliation and reporting, helping your team catch errors early and maintain clear transaction records to support smoother operations and reduce the risk of costly disputes.
- Leverage interchange optimization.
Flexible payment gateways enable you to work with the payment processor of your choice — and not all are created equally, especially when it comes to how they route transactions behind the scenes.
Some processors offer interchange optimization, which means they submit transactions in ways that qualify for the lowest possible interchange rates. These qualifications are typically based on factors like card type, transaction method, and industry classification. Choosing a processor with this capability can help you lower your rates without requiring changes to how your team operates.
- Offer secure remote and mobile payment options.
As more consumers complete transactions outside the showroom, offering secure, digital payments is paramount. Tools like text-to-pay, mobile card readers and emailed payment links allow you to collect payments quickly and conveniently.
It’s also smart to search for providers that support encryption and tokenization across remote payment channels. These security measures protect sensitive card data by scrambling or replacing it with a unique code, so there’s no actual card data exposed during transmission or stored in your systems.
- Implement tools to help manage chargebacks.
While managing chargebacks can be costly and time-consuming, the right tools can help you stop a large share of disputes before they happen — or give you the documentation to respond quickly when they do.
For example, requiring signed payment authorizations for high-dollar charges can deter fraudulent chargebacks by proving the customer approved the transaction. Digital receipts also make it faster and easier for your team to access transaction records, which is critical when documentation is needed to challenge a dispute. Additionally, real-time alerts (e.g., notifications when a chargeback is initiated) give your staff the visibility they need to respond promptly.
Building a profitable future with smarter payments
Dealerships that take a strategic approach to payment processing will be better equipped to protect their margins in today’s cashless, cost-conscious market.
Combining surcharging with modern payment tools can help reduce overhead and limit preventable losses while creating a more seamless and secure experience for customers. And with the right payment partner by your side, you can navigate compliance, control processing costs, and confidently evolve with shifting consumer expectations.
