Dealership Payment Processing Fees, Profits Fall Service Departments Consider Credit Card Fee

Service departments weigh benefits, drawbacks of recouping credit card fees from customers
Amid falling profits, some dealership service departments are starting to recoup credit card processing fees from customers

Automotive News
July 15, 2024 04:15 PM
JACKIE CHARNIGA

As dealer profits fall from pandemic highs, a growing number of retailers are considering a controversial tactic to help offset one of their top monthly costs: surcharges on credit card transactions in the service lane.

Credit card companies charge dealerships thousands of dollars in processing fees per month, making it one of a dealer’s top 10 expenses, retailers said. Recouping those costs by passing them on to the consumer can risk relationships and customer satisfaction index scores.

Though it is becoming more widespread across industries, surcharging is still a contentious topic in the dealership world, with some retailers unwilling to risk adding another fee for customers. Yet rising operational costs and falling profits have dealerships across the country considering whether credit card fees should always be a cost of doing business.

The price is the price

In 2017, the Supreme Court case Expressions Hair Design v. Schneiderman determined businesses may inform customers there can be discounts for paying with cash, bringing more clarity on how dealerships can compliantly pass processing costs on to consumers. But even so, some dealers aren’t willing to implement such programs into their own stores.

Forrest Olson, general manager of Chevrolet of Mandan of Foundation Automotive Group in Bismarck, N.D., won’t even consider adding another line item on invoices from the service drive.

“We’re dangerously close to five fees for one vehicle repair, and cell phone bills’ level lack of transparency,” he said. “We already have shop supplies, tire disposal tax, data safeguard fees, and now you want to add another?”

Ed Roberts, COO at Bozard Ford Lincoln in St. Augustine, Fla., said his customers feel a range in prices for the same service constitutes a bait and switch tactic.

“Is there value in [surcharging credit transactions]? Yes, there’s opportunity there if you explain it well,” he said. “We don’t want to explain it; we want to be transparent. If we give you a price, that is the price — doesn’t matter whether it’s cash or credit.”

Changing tides

Credit card processing fees can cost an average dealership service department anywhere between $5,000 and $15,000 per month, depending on their volume of business, according to Amberly Allen, managing partner of Dealer Merchant Services. Her company, which works with more than 750 dealerships nationwide, allows retailers to compliantly recuperate credit card processing fees. Its average dealership client records $84,000 per year of net profit savings through the company’s program.

What can be charged depends on what card is in a customer’s wallet. Credit card companies can charge more than 400 different interchange rates that fluctuate on a monthly basis. Limits on how much retailers can be charged for processing debit card transactions have been in place since 2010, contained in the Durbin amendment to the Dodd-Frank Act, but apply only to banks with $10 billion or more in assets.

Debit transactions connected to credit unions and smaller banks have no caps, Allen said. Meanwhile, the credit card brands have their own strict requirements, chief among them that businesses cannot profit from surcharging.

One way to avoid accidentally overcharging customers is to offer flat rate pricing regardless of the pricing charged by the card company. A third-party merchant provider could absorb any additional profit to keep dealerships compliant and take a loss if the credit card fee is higher than what they charge customers. Merchant providers with technology to read the difference between a debit run as credit and a credit card transaction can keep dealers safe as well.

This practice is allowed broadly, with Connecticut, Maine, Massachusetts and Oklahoma imposing certain restrictions. California, Colorado, New York and Texas also have evolving limitations.

For many, the pandemic signaled a need to reexamine cost structure. Lee Harkins, CEO of the fixed operations consulting company M5 Management Services, said he’s hearing more and more from dealer clients that they want to establish credit card surcharging programs, starting in 2022.

“When everything normalized, that’s when these surcharges started popping,” Harkins said. “They’re looking for new ways and new opportunities to generate additional profits.”

Harkins said one of his clients, the owner of a small dealership group in the south, commented on the malaise that set in as retailer profits started to cool. On top of that, inflation concerns required many dealerships he works with to increase labor rates to remain competitive.

“Anybody could make money during the pandemic, but afterwards many forgot how to be successful,” he said.

‘No customer pushback’

Tony Lucas, general manager of Casa Autoplex, told Automotive News his dealerships implemented surcharging in the service drive about a year ago. Lucas has managed Casa Ford, Casa Honda, Casa Mazda and Casa Hyundai in Las Cruces, N.M., since October 2023.

The decision was not an easy one, he said, with many managers and the stores’ controller weighing in before finalizing a plan. But once established, he said the program has been seamless.

“We just decided to try to see what it looked like, and we never really had any pushback from customers,” Lucas said. “As long as it’s well communicated to them, they don’t have a problem.”

The landmark settlement agreed to by Visa and Mastercard for U.S. merchants earlier this year for excessive credit card fees also helped change dealers’ minds. One legal and regulatory representative at a statewide automotive association in a state where surcharging is legal said he has fielded more queries from dealers about how to safely implement credit card surcharging in the past few months. His association represents about 1,000 new-vehicle dealers.

While some experts said urban areas may see faster adoption, dealerships of varying size and serving various market types in this representative’s state are seeking compliant ways to recoup those costs. “It’s really a business decision, one made on a case-by-case basis,” he said.

A CFO of a midsize dealership group in Texas — who spoke to Automotive News on the condition of anonymity — said when the company began a surcharge program in July 2020, there was more pushback from employees than customers. So far, he said surcharging has helped recoup about half the expense the service departments across his stores pay to credit card companies since the program’s implementation.

“If it wasn’t so prevalent in so many other areas, it would be a much harder sell,” he said.

Compliant processes

Harkins, who said he has worked with about 10,000 clients between dealership and automaker employees, said an automaker representative told him one of its biggest complaints on the customer satisfaction index is the credit card fee, particularly if it appears in an invoice before a dealership employee explains the pricing structure difference.

Compliant credit card surcharging programs require three main components: visible signage offering discounts for customers who pay in cash and debit, a credit card processor capable of determining credit from debit transactions and a guarantee the dealership cannot profit from surcharging in any way.

“There’s really no right or wrong way,” Harkins said. “You just need to do your research and understand from a customer’s perspective.”

Though he won’t consider it, other dealerships in Olson’s own group have already added surcharging programs to the service department. Though he doesn’t believe his immediate region is ready for the change, he said he understands why his group’s owner would be making the change.

“It’s getting expensive,” he said.