What Is A Card-On-File Transaction?

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Since COVID-19, more businesses are starting to offer contactless payment methods for customers. This includes all types of companies, from gas stations to hair salons. Card-on-file (COF) transactions are a convenient solution that saves time, energy, and money for businesses and customers alike. Additionally, this payment type doesn’t require customers to touch a point-of-sale (POS) device or manually enter their credit or debit card numbers for each repeat purchase, which many will appreciate. Keep reading to learn everything you need to know about card-on-file transactions. 

What Are Card-On-File Transactions? 

Card-on-file transactions are when cardholders authorize merchants to store their payment information securely and bill cardholders’ stored accounts for future purchases. A common example is when a family joins a local gym. When filling out paperwork, they will likely be asked to agree to provide their credit or debit card information for recurring monthly payments. Once authorized, the gym can automatically bill the customers with their stored payment details on file. Indeed, this is more efficient and less time-consuming than manually entering card details or requesting this information for each billing cycle. Of course, card-on-file payments can also be used for other transaction types, such as one-time payments, top-ups, or upgrades in services or products.  

How Do Card-On-File Transactions Work? 

There are two methods to implement card-on-file transactions – through customers or merchants. The billing process used is based on the agreements established between the merchant and customers. Businesses can receive customers’ consent to the COF terms, such as by asking customers to: 

  • Fill out an online form 
  • Provide their card details over the phone or 
  • Enter their card at a POS terminal and sign a receipt 

1. Consumer-Initiated Transactions (CIT) – this occurs when the consumer is present and provides their payment details to the merchant, such as at a POS terminal in-store or on an online checkout page. Indeed, CITs offer proof that the legitimate cardholder was involved in and authorized the transaction (e.g., chip data with cryptograms in-store or card verification values like CVV, CVC, or CVV2 for online purchases). 

2. Merchant-Initiated Transactions (MIT) – this requires a previous consumer-initiated transaction to take place, which authorizes a merchant to initiate a transaction without the cardholder being present nor any additional card validation required. Indeed, this type of transaction relies on a prior agreement between the customer and merchant that their stored payment information will be used for recurring subscriptions, automated billing, or unscheduled transactions.   

The Main Types of COF Transactions 
  • Delayed – a transaction that occurs after an initial transaction has been processed for products or services, such as fines, service upgrades, or vehicle damages.  
  • Incremental – this occurs when additional services or products are added during a contract period, such as adding a new line to an existing phone plan. 
  • Installments – this transaction involves a deferred payment for an individual purchase, in which several fixed transactions are scheduled for a specific period. A typical example would be monthly car payments of $300 for 60 months to pay off a new vehicle. 
  • No-show – this transaction occurs when a customer is a no-show for scheduled services at a business. The customer did not follow the cancellation policies per the agreement and thus, was charged a no-show fee. For example, if a patient fails to give at least 24 hours notice of canceling or rescheduling their dental appointment, the dentist can charge for services per their agreed terms with the patient. 
  • Reauthorization – this typically takes place before a partial order is shipped to a customer, a customer extends a service (e.g., vehicle rental, hotel stay, or paid parking), or a final transaction amount needs to be (the settlement step of the credit card life cycle).  
  • Recurring – a recurring payment can be fixed or flexible and has a specific time interval, every 2 weeks, month, quarter, 6 months, or year. Common examples include gym memberships, weekly healthy meal deliveries, and monthly beauty or snack subscriptions. 
  • Resubmission – when the first payment attempt is denied due to a low balance, a resubmission can be done to complete a purchase. Each card brand has specific rules regarding how this works and how many days from the original transaction attempt this can be done. 
The Benefits of Card-On-File Payments 

Aside from receiving consistent, timely payments from customers, there are other card-on-file benefits for businesses.  

1. Optimize Cash Flow and Business Efficiency 

No matter what type of business you own, it’s critical to generate a steady cash flow from your products or services. The process used to gather these funds directly impacts money coming in and out of your business. By using COF payments, you can use customers’ stored payment credentials on file to set up automatic recurring payments, create flexible payment tiers, update subscriptions, and more. 

As for business efficiency, card-on-file transactions make it easy for businesses to ask for customers’ payment information once, save it, and then use it to maintain a stream of revenue. Indeed, this payment solution makes it easier to see how much you are generating month over month. In turn, this data can help your business make more effective decisions regarding revenue outlooks and staff management and find areas to address and improve based on customer needs.  

2. Save Time 

Managing payments is one of the many tasks required to run a successful business. If you offer a wide range of products or services and have hundreds to thousands of customers, it can quickly become overwhelming to ask for customers’ credit or debit card information before or after receiving a service or product. This is also frustrating for customers, especially when they use the same payment method. To help save businesses time, they can offer card-on-file transactions and thus, avoid chasing down people to collect payments. With extra time saved, companies can focus their time and energy on their goals, such as gaining new customers, developing new products or services, and achieving sustainable growth. 

3. Improve Customer Checkout and Payment Experiences  

Having a consistent, frictionless, and seamless payment process is essential for existing and new customers in today’s digital age. Once a customer’s payment card is on file, businesses can automatically charge their stored card credentials and process a transaction without additional verification steps required. Indeed, this means that customers do not need to be physically present at a store, on the phone, or on the merchant’s online checkout page to make future purchases.  

With COF transactions, companies can send out personalized invoices via email or text so customers can choose their preferred payment method for purchases. After customers’ payment details are automatically saved to their accounts, businesses can easily use this stored information for each customer’s lifecycle. It should also be easy for customers to update their stored payment credentials if they change bank accounts.  

Card-on-file transactions are an effective solution to help improve your overall customer checkout and payment experience. After all, today’s customers want fast, frictionless, and secure checkout experiences that give them peace of mind that your business is trustworthy and reliable. If a checkout page is slow or requires too many complicated steps, this can lead to cart abandonment and lost opportunities to gain or retain customers.  

Maximize Your Business Revenue Opportunities 

In addition to using card-on-file transactions, it’s also crucial to keep your customers’ card details up-to-date. If a customer’s card expires, this can prevent your business from successfully charging a stored card on file and receiving the appropriate funds for the products and services being used. While this may not seem like a big deal, it will quickly become an issue when this happens to hundreds to thousands of customers’ cards throughout your business.  

To address this common issue, consider using an account updater service. An account updater is software that automatically updates credit card information on file within a merchant’s payment vault. Whether the card was lost, stolen, or expired, this software can take care of this tedious task. Specifically, businesses can send a reputable provider a batch file containing the necessary card details and associated tokens. With this information, the provider can work with the appropriate card brands to automatically refresh outdated card details, help prevent payment declines, and promote better checkout processes and customer satisfaction. If you’re interested in learning more about account updater or payment optimization, contact TokenEx, a leading cloud-based tokenization provider based in Oklahoma. 

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