Card-on-file payments explained

The most successful businesses are continuously seeking ways to improve the customer experience, and one of the most effective ways to do so is to ensure a seamless, friction-free checkout. Solutions like card-on-file payments make this more possible.

In this article, we break down what you need to know about this ubiquitous type of transaction, unpacking everything from its use cases, benefits, and drawbacks.

What is a card-on-file transaction?

Card-on-file transactions are payments in which the cardholder's credit or debit card information is stored on file to be used for future purchases. When the cardholder makes a purchase, they simply provide their name and identifying payment information to the merchant, who will then store the sensitive information safely to charge the card when necessary.

Types of card-on-file transactions

There are several types of card-on-file transactions, each serving a unique purpose. These include:

• Recurring payments
• Installments
• Reauthorized payments
• Incremental payments
• Delayed transactions
• Resubmitted payments
• No-show payments

Find out more about how Checkout.com's payment processing solutions can help you optimize your payments strategy.

How are card-on-file transactions initiated?

Card-on-file transactions can be initiated by both merchants and consumers — these are known as Merchant-Initiated Transactions (MIT) and Consumer-Initiated Transactions (CIT).

MITs are transactions that are initiated by the merchant rather than the cardholder. Consumers must have previously initiated a transaction with the merchant and given their consent for future use in order for merchants to initiate this type of transaction. Merchant Initiated Transactions usually are in the form of either one-time or recurring transactions.

MITs can be used for a variety of purposes, such as subscription services, club memberships, or even donations. Sometimes, MITs can also recoup funds that were previously charged back to the merchant. For example, if a customer cancels their subscription but doesn't provide sufficient notice, the merchant may initiate an MIT to recover the remaining balance.

Some examples of situations where an MIT would be appropriate include:

• When you have a subscription-based service
• When you offer membership-based services
• When you need to recoup funds that were previously charged back
• When you want to improve cash flow by having predictable payments coming in

CITs, on the other hand, represent transactions initiated by the consumer. When a customer makes a purchase on a merchant’s website, they enter their credit card information into their payment gateway. The gateway then processes the payment and deposits the funds into the merchant account. The entire process is initiated and completed by the customer — with no action necessary by the merchant.

Advantages of card-on-file transactions

1. Increase sales

Perhaps the most apparent benefit of card-on-file transactions is that they can lead to increased sales. When customers have their card information stored on file, they're more likely to make more purchases and more significant purchase amounts. That's because they don't have to go through the hassle of reentering their credit card information every time they want to buy something, reducing cart abandonment rates drastically. The purchasing process would resemble a one-click checkout, which has proven to be very effective at maximizing conversion rates.

2. Improve cash flow

Card-on-file transactions enable merchants to develop new predictable business models—like subscriptions. They can then better predict their forecasted cash flow and plan accordingly. Recurring payment models like subscriptions and membership fees provide valuable insight to businesses in terms of projected revenues, enabling them to better plan for the future.

Learn more: recurring payments explained

3. Raise customer retention rates

Card-on-file transactions can also lead to improved customer retention rates, as they offer greater convenience. Customers appreciate being able to make quick and easy purchases without having to re-enter their credit card information every time. This convenience ultimately leads to increased customer satisfaction and loyalty. When customers have their card information stored on file, they're more likely to stay loyal to your brand and make repeat purchases.

4. Optimize company operations

For merchants, card-on-file transactions mean less effort required from the various teams in their company’s ecosystem to re-engage existing clients and customers. For example, dedicated marketing teams can instead focus their efforts on expanding existing customer bases and amplifying brand presence to attract even more shoppers.  

Potential drawbacks of card-on-file transactions

1. Ensuring up-to-date payment details

Every credit card comes with an expiration date, limiting the longevity of card-on-file payments. This requires merchants to communicate with their customers periodically to ensure that the payment information stored on file is up-to-date, also adding the risk that customers will opt to forego providing their updated payment information when that time comes. An account updater can be used to prevent this, though.

2. Higher risk of chargebacks

Customers who have had their credit card information compromised or stolen may typically request chargebacks. If a customer disputes a charge, the merchant may be liable for the full amount of the charge, even if the customer has previously authorized recurring payments. Rules around this, however, are changing in 2023 where some network tokenized card-on-file transactions will be able to benefit from liability shift.

3. Increased vulnerability to data hacks

When a merchant stores a consumer's payment information, that information might become a target for hackers. If hackers can get the stored payment information, they can use it to make unauthorized charges. For this reason, it's important for merchants to ensure measures have been taken to protect the stored payment information, such as encrypting it or storing it in a secure database. Using a payment service provider like Checkout.com, however, allows merchants to store and tokenize card details, thus removing this risk.

Does Checkout.com support card-on-file payments?

Yes, Checkout.com enables merchants to adopt card-on-file payments with secure payment technology to minimize potential risks. This enables them to implement an easy, frictionless, and more efficient checkout process without compromising security.

Discover how to implement card-on-file transactions with Checkout.com by reviewing our documentation.