Demystifying Payment Processing Fees in the Auto Retail Industry: What Dealerships Need to Know

Payment processing fees can feel like a mystery to many dealerships. Every time a customer swipes, taps, or dips their card, you’re charged a fee—but what exactly makes up that fee? In this post, I’ll break down the key components of payment processing fees and help you better analyze what you’re being charged. We’ll dive into interchange fees, the concept of interchange plus, and the benefits of a flat fee structure. Let’s start with the basics.

What Exactly Are Payment Processing Fees?

When your dealership processes a credit or debit card transaction, a payment processing fee is charged. This fee is inevitable, but understanding how it’s structured can help you manage costs more effectively. The biggest piece of this fee is called the interchange fee—a term you may have heard, but let’s define exactly what it means.

The Breakdown of Interchange Fees

Interchange fees are determined by the card networks, such as Visa, Mastercard, American Express, and Discover. These fees are charged to the banks that issue credit or debit cards and then passed along to merchants like you. Interchange fees typically consist of a percentage of the transaction amount plus a fixed cost.

What does an interchange fee actually do? it’s made up of a few key components:

• Risk Management: The card networks assume some level of risk in every transaction, like the risk of fraud. Although, as merchants, we all know this doesn’t always work out in our favor.
• Rewards Programs: Interchange fees help fund rewards programs—like the points customers earn on their travel or cashback cards. In other words, part of the fee you’re paying goes toward making sure those programs can continue.
• Network Maintenance: These fees also help cover the costs of maintaining the infrastructure of the card networks, ensuring that the payment systems run smoothly.

Now, one thing to remember is that interchange fees are consistent for every merchant, whether you’re running a small donut shop or a large dealership like Mercedes-Benz of New York. Everyone pays the same interchange rates.

Understanding “Interchange Plus”—More Than Just Interchange

Interchange fees aren’t the only thing you’re paying. Most dealerships are also on an interchange plus pricing model. This means you’re charged interchange fees plus additional fees that go to the payment processor. This "plus" can vary from one processor to another.

Now, here’s where things get tricky. Not all payment processors are transparent about what they charge. Many dealerships I’ve worked with have told me, “I only pay 3 cents per transaction.” My first question is always, “Do you add a surcharge?” If the answer is no, I point out that they’re paying interchange plus. Even if it seems small, that extra "plus" fee can add up fast.

One of my favorite (and I say that sarcastically) tactics used by payment processors is hiding extra fees by calling them “discount fees.” What’s being discounted? Nothing. You’re actually paying an extra fee. It’s easy for these charges to get lost in the mix, which is why it’s so important to know exactly where your money is going.

The Benefits of a Flat Fee Structure

Now, let’s talk about the alternative to interchange plus: a flat fee structure. With a flat fee structure, you’re charged a consistent percentage for every transaction, no matter what. Let’s say, for example, you’re being charged 2.85% per transaction. This fee covers everything—interchange fees, processor fees, and network maintenance fees. You’ll never pay more than 2.85%, and for debit cards, it could be as low as 1%.

There are several benefits to a flat fee structure:

• Predictability: You know exactly how much you’ll pay for every transaction, every time. There’s no guessing where an extra 0.5% went, and it’s easier to reconcile your transactions.
• Cost Control: If you’re running a high-volume dealership, costs can sometimes creep up with interchange plus. With a flat fee structure, you have clear and consistent pricing, so you can better manage your expenses.
• Simplicity: With a flat fee structure, anyone looking at your reports can see exactly how much you’re paying. You don’t need to be a payments expert to understand your transaction costs.

Why Predictability Matters for Dealerships

At the end of the day, the best pricing structure is the one that provides transparency and predictability. Dealerships, especially those dealing with high volumes of transactions, need to be able to understand and manage their payment processing costs. A flat fee structure provides that clarity. You know exactly what you’re paying, and you can build it into your pricing models.

At myKaarma, we understand how crucial it is for dealerships to have clarity and control over their payment processing fees. That’s why our payment solution is designed with transparency and simplicity in mind, offering predictable and competitive pricing models that fit your business needs. As you process credit or debit card transactions, myKaarma ensures you always know exactly what you're paying—without hidden fees or surprises. By integrating seamlessly with your existing systems, we deliver a streamlined, efficient payment experience that allows you to focus on what matters most: exceptional service for your customers. 

I encourage every dealership to take a close look at their payment processing fees. Whether you’re using interchange plus or considering a switch to a flat fee model, understanding these charges will help you protect your margins and plan for the future.

By breaking down your payment processing fees and choosing the right pricing model, you’ll set your dealership up for financial success.