What Are Credit Cards on File?

Card-on-file (CoF) transactions taking over the payment processing industry. This payment method is slowly becoming a standard among both retail and subscription-based businesses, offering a more seamless and convenient customer experience.

Essentially, COF payments allow merchants to charge their customers’ cards without them having to perform any action. And while they have been used mainly by businesses relying on recurring payments or subscriptions, retail and e-commerce merchants are also starting to see the numerous advantages of this unique banking method.

But what are cards-on-file transactions exactly, and how can they help your business? The following guide has all the answers.

What Is a Card-on-File Meaning?

Card-on-file happens when a business stores, with the cardholder’s permission, its customer’s card and payment details. In other words, a merchant keeps the card information “on file,” using these card details to charge future payments or recurring billing.

Streaming services like Netflix or Spotify typically use this payment model. When registering your account on most subscription-based platforms, you will be asked to provide payment details they can use to automatically charge your card every month instead of you having to perform the payment to prolong your subscription.

The same goes for any other subscription service, gym membership, and other merchants relying on recurring payments. However, card-on-file transactions can also be used for one-time purchases, such as top-ups or service upgrades.

“Buy now, pay later” services, which have been gaining popularity lately, also use CoF payments by storing your card information within the app and giving you the option to have your card charged periodically.

How Do Card on File Transactions Work?

CoF transactions can either be merchant or customer-initiated:

• Consumer-initiated transactions (CIT). Such transactions require a customer to be present when providing their payment details to the merchant – for instance, at a POS terminal in-store or a checkout page. Such a transaction requires proof that the legitimate cardholder was present and involved in authorizing the payment.
• Merchant-initiated transactions (MIT). A merchant can initiate the CoF payment process once the CIT is completed. This gives the merchant authorization to begin the payment without the customer having to authorize it or provide additional credit card details.

In other words, card-on-file transactions work on the agreement between the merchant and the customer. In other words, the customer authorizes the merchant to collect payments, such as subscriptions or automated billing, based on the provided card details.

Types of COF Payments

Type of Transaction	Meaning
Delayed payments	A delayed transaction occurs once the initial transaction has been processed, for example, a fine or service/product upgrade.
Incremental transactions	These occur when an additional product or service is added to the existing agreement, for example, a satellite provider adding new channels to your current plan.
Installments	A large payment can be divided into several fixed transactions called installments. Installment plans are popular when making a higher investment, for instance, buying a car.
Recurring payments	Such payments can be either fixed or flexible, scheduled for an agreed time interval, e.g., 2 weeks, a month, or a year. A typical recurring payment example can be a gym membership, subscription service, meal deliveries, etc.
No-show transactions	Such a transaction process can be triggered if a customer fails to show up for a scheduled service and they didn’t follow the cancellation policy. In such a case, a business can automatically bill a no-show fee using the stored card data.
Reauthorization	Reauthorization can occur when a customer decides to extend the service (e.g., a car rental or hotel stay) or before a partial order is shipped. Instead of doing such transactions manually, a customer is charged based on the stored payment information.
Resubmission	Resubmission happens when the first payment attempt is denied because of the low card balance. A resubmission is then charged to complete the transaction process.

Pros and Cons of Card-on-File (COF) Payments

Although card-on-file transactions are a preferred payment method among numerous businesses, there are several pros and cons one should consider before thinking about implementing them. Let’s take a closer look at some of the most significant upsides and challenges associated with cards on file payments.

CoF Advantages

CoF transactions offer numerous advantages for merchants and customers alike. The most significant upsides are improved cash flow management, time-saving, and streamlined customer payment experience. Let’s discuss them in more detail.

Optimized Cash Flow Management

Card-on-file transactions can be an excellent solution for a business struggling with poor cash flow management. When taking advantage of CoF payments, merchants can use customers’ stored payment information to create an automated billing cycle and ensure a steady cash flow to help manage and plan business-related expenses, improving the company’s cash flow management.

Saved Time

Having an efficient CoF merchant bill payment model in place can significantly boost the business’s efficiency. That’s because CoF transactions are fully automated, meaning there’s no need to chase down customers to make payments. It also saves customers’ time and improves their convenience, as they won’t be required to provide payment information for every transaction they make.

Streamlined Customer Payment Experiences

Speaking of customer convenience, card-on-file transactions provide consumers with a much more streamlined payment experience. First, as mentioned, they don’t need to provide a merchant with payment credentials every time they make a purchase, saving them tons of time on future transactions. Secondly, if they purchase a subscription, they don’t need to remember to make a payment every month. Instead, the service provider will automatically bill them to prolong the subscription or membership.

CoF Disadvantages

If you’re considering adding CoF transactions as one of your available payment methods, you should know that they aren’t perfect. And as great as card on file payments are, they also come with several potential disadvantages and challenges for you to think about.

Greater Risk of Credit Card Fraud

While storing your customers’ credit card information significantly improves overall payment convenience and saves time, it also puts a company and customers at a greater risk of potential card fraud. Scammers can then hack the online merchant, steal the store’s customer data, and use them to make purchases or steal money directly from their accounts. Therefore, it’s so vital for any online merchant to use reliable fraud protection tools.

Potentially Higher Costs

Although that isn’t always the case, card on file transactions can include higher processing costs for businesses. That’s because many credit card networks charge higher fees for such transactions. Because of that, many businesses that operate on recurring payments opt for direct debit processing, which is a more affordable way to collect their payments.

Risk of Faulty Charges

CoF payments are excellent for collecting recurring or future purchases. However, there’s a risk of billing the wrong amount or charging the wrong bank account, which can result in faulty charges. Such situations typically happen when a customer provides the wrong credit card details or changes their payment information without providing an update.

How to Set Up Card-on-File Transactions?

When implementing card on file transactions in your business, you should know that collecting your customers’ payment information is not enough to get started. You will also need to gain their consent for billing associated with the stored credit card credentials.

You can obtain their consent through several methods, such as completing an online form, signing a consent agreement, providing credit card details over the phone, etc. However, before you obtain your customers’ data, you should first ensure you have the proper technology in place to securely store saved data and have an efficient point-of-sale system for smoother and streamlined payment processes.

The best way to ensure this is by working with a reliable third-party payment processor, such as Payment Savvy. We will provide you with everything you need to ensure your card-on-file transactions are as smooth and secure as possible. The best thing is that we will also work with you directly to ensure your payment processes are tailored to your specific business needs.

Contact us today and see how we can help your business thrive.

Card-on-File Transactions – Best Practices

Considering implementing CoF payments into your business operations? In that case, there are a few things you should do beforehand to make sure that you protect yourself:

• Establish a payment policy beforehand. Having a payment policy in place can help you deal with those awkward moments when a customer’s card bounces, sets precedence on how to proceed in these situations and protects both your business and the customer in case one party doesn’t keep their side of the deal.
• Remind your customers about upcoming payments. Refunds can be expensive for a business, and card companies protect their customers from transactions they don’t recognize, even if they gave authorization earlier. That’s why it’s important to remind your card-on-file customers about upcoming charges.
• Choose the right payment processor. We already talked about this, but we just want to remind you – picking the right payment processor to collaborate with can make a world of difference, so make sure it’s a carefully made decision.

The Bottom Line

Card-on-file transactions is one of the most commonly used payment methods among online retailers, streaming services, SaaS businesses, healthcare service providers, and more. Essentially, a card-on-file transaction utilizes a created customer profile, using the payment details provided by the customer for a merchant to bill their accounts automatically.

Such a payment method provides both businesses and consumers with numerous advantages, such as improved flexibility, better checkout experiences, optimized cash flow management, and time-saving. And while it also poses a few risks, mostly relating to payment security, it can become your organization’s significant asset in streamlining payment processes.

If you aren’t sure where to start with CoF payments, Payment Savvy can help. As a reliable payment processor, we’ve helped numerous businesses take advantage of streamlined and secure payment processes.

Learn more about our payment solutions, and contact us to see how we can help your business.