How Do Card On File Transactions Work?

In today’s modern world, businesses are constantly looking for ways to improve the customer experience. Streamlining the checkout process is just one example of this—and card-on-file transactions help make this possible. 

The cool part about keeping credit and debits on file is that it benefits consumers and businesses alike. On the one hand, customers like the ease of use and convenience. On the other, merchants appreciate the value and effortless way to process transactions.

While we all likely understand the basic concepts of a card-on-file transaction, few companies actually understand how they work. 

Understanding how card-on-file transactions work is crucial for your operation—as what’s happening behind the scenes can impact your processing rates. As a whole, card-not-present (CNP) transactions are more susceptible to fraud, and on-file transactions fall into this category. So having a firm grasp of how this works can also help you prevent fraud.

This in-depth guide will answer all of these questions and more. So read on to learn everything you need to know about card-on-file transactions. 

What is a Card On-File Transaction?

Card-on-file transactions occur when a cardholder authorizes a business to store payment details securely on file and then bill the stored credentials for future purchases. 

With card-on-file payments, the customer doesn’t have to provide their card or payment information for every subsequent transaction. Once on-file, the merchant has permission to charge the card.

One common example of a card-on-file transaction is a gym membership. New members need to provide a debit or credit card for recurring monthly payments. But they don’t have to continue showing that card every month. 

The card is stored on file and billed every month for the membership dues. 

How Do Card On-File Transactions Work?

For a card-on-file transaction to work, the merchant needs to obtain two things from the cardholder—payment details and authorization. 

The payment details typically include the card number, expiration date, verification code, billing address or zip code, and cardholder’s name. Authorization gives the merchant permission to charge for future payments (with terms that the cardholder has agreed to).

Cardholders can provide their authorization by signing a form or by agreeing to digital terms through a website or app. If card details are collected over the phone, cardholders can verbally provide authorization to the merchant on a recorded line. 

Once the payment details and authorization have been provided, the merchant can securely store the card-on-file—and the card will be charged for things like recurring payments, installments, and one-off payments. 

How to Initiate a Card On-File Transaction

There are two different ways to initiate card-on-file transactions. The transaction can either be initiated by the merchant or by the cardholder. 

Merchant-Initiated Transactions (MIT)

For a merchant-initiated transaction to work, the cardholder must have previously initiated a transaction and authorized the merchant to save their payment details with consent to future purchases. 

Merchant-initiated transactions can be recurring purchases (for things like a subscription) or one-off purchases (for something a service provided).

In some instances, the same card-on-file information can be used for both recurring and one-off transactions. But proper consent must be provided by the merchant when they obtain authorization. 

For example, let’s say a customer has their card on file for a gym membership for recurring monthly charges. That same card could also be used for upsells, like buying a smoothie or using a tanning bed. 

Consumer-Initiated Transactions (CIT)

Consumer-initiated transactions occur only when the cardholder manually authorizes a new purchase.

For example, let’s say a shopper buys something from an ecommerce website. At checkout, they enter their credit card information and save it to their customer profile for future purchases. This is made possible through the seller’s payment gateway. 

When they visit the same website to buy something else, they can pay using their card on file (as opposed to re-entering all of the payment details again). 

Common Use Cases For Card On-File Transactions

There are several different industries and business types that can benefit from using card-on-file payments. We’ll take a closer look at the most common examples of these below.

Subscription Services

Subscriptions are arguably the most prevalent use for card-on-file payments. From streaming services like Netflix and Hulu to meal delivery plans, internet subscriptions, cell phone subscriptions, software subscriptions, and so much more—cardholders are typically billed on a monthly, quarterly, or annual basis. 

Buy Now Pay Later (BNPL)

We’ve been covering BNPL quite a bit in our latest industry news stories. With these services, a single purchase is split up into installments where the card on file gets periodically charged through the BNPL provider. 

Unified Commerce

This is common for retailers selling through multiple channels. For example, let’s say a consumer buys something from an ecommerce website and wants to return it in person at a brick-and-mortar location. The retail operation can refund the card using the on-file information.

Travel and Hospitality

When a hotel room is booked, guests are typically asked to provide payment details to hold the room. But the card doesn’t get charged until the guest arrives or checks out. In some instances, that card is used to collect a deposit. It’s also common for hotels to keep that card on file to cover no-shows, incidentals, damages, or visits to the on-site restaurant. 

Mobile Apps

Lots of different mobile apps store payment details on file to cover future purchases. For example, ridesharing apps like Uber or Lyft keep the cardholder’s information on file so they don’t have to manually enter payment data for each ride. 

Benefits of Card On-File Transactions

There are lots of perks for card-on-file transactions for merchants and cardholders alike. But in my opinion, these are the top three. 

• Simple Administration — It’s so much easier for a business to keep a card on file and charge it with the cardholder’s authorization instead of calling them every month or sending a paper invoice. 
• Fast and Seamless Customer Experience — Consumers can complete a checkout process in a matter of seconds. They can also benefit from ongoing subscription services without having to constantly provide payment details. 
• Cash Flow — Merchants benefit from increased cash flow by charging subscriptions and recurring payments to customers. Even for one-off transactions initiated by the customer, the convenience increases the chances of more frequent purchases. 

Drawbacks of Card On-File Transactions

Card-on-file transactions aren’t always flawless, and there are a few downsides to them.

• Fraud — On-file payments are classified as “card-not-present” transactions and CNP transactions account for 65% of all credit card fraud. 
• Unexpected Charges — Sometimes customers are surprised to see certain transactions on their statements, even if they provided prior authorization. This can lead to higher chargeback rates for merchants. 
• Failed Transactions — Cards can expire or get canceled. When this happens, the transaction will fail on the merchant’s end—sometimes meaning the customer received a service that has yet to be paid for. The merchant will need to contact the customer to provide updated billing details, which isn’t always easy.

Final Thoughts

Card-on-file transactions have become part of our day-to-day lives. 

They can be used for such a wide range of use cases—and merchants and cardholders alike typically share the benefits. 

Just be aware that these won’t always be perfect. They’re more susceptible to fraud and chargebacks, and as a card-not-present payment, on-file payments can cost more than other types of transactions.