Everything You Need to Know about Card on File Transactions

Many businesses offer card on file transactions. These can add convenience for you and your customers, as well as encourage repeat transactions. Before starting to use card on file payments, there are a few important things you should know about.

What Is a Card on File Transaction?

Also called CoF transactions, card on file transactions are becoming increasingly common with businesses these days. This is a transaction where the customer previously gave their payment details to the merchant. The merchant stores the payment securely for future transactions.

During a card on file transaction, the customer doesn’t have to resupply their payment details. In the case of online transactions, they don’t have to reenter their card number and CVV. In the case of in-person transactions, they don’t have to swipe or insert the card.

CoF Transactions are Merchant-Initiated

Card on file transactions are a type of merchant-initiated transaction. For reference, a merchant-initiated transaction is when the merchant starts the transaction. They have the ability to do so because the customer previously provided authorization and payment details.

By contrast, customer-initiated transactions occur when the customer enters their payment information at a POS system or online. This is when you would have to enter your PIN or CVV.

How Do Card on File Transactions Work?

When setting up card on file transactions, businesses will need to gather the card payment information and get authorization.

The business needs explicit permission to store the card information on file and to use it to make future payments. When the customer authorizes the card on file, the merchant will outline specific terms that they must agree to. This will include the amount and number of future payments, the timing of payments, and likely services or products rendered in exchange for payment.

You can collect this payment information for a card on file in nearly any way. It can be done online, at the point-of-sale system, or over the phone.

To initially store the card on file, the business will typically have to do one of a few things. The customer may need to make a purchase and agree to store the card information for future transactions (either online or in-person). The merchant can also run a zero-amount transaction to confirm that the card works.

4 Benefits of Card on File Transactions

As mentioned, card on file transactions are incredibly convenient for both businesses and customers. The following are just some of the benefits of these transactions.

1. Reduced Admin Work

A major business benefit of having a card on file is the reduced need for administrative tasks. Your team doesn’t have to waste time and energy collecting the card details for every single transaction.

2. Get Paid on Time

With credit card on file transactions, customers authorize future payments. This reduces the risk of overdue payments, as you can process them automatically. It also saves your administrative team from having to chase down overdue payments or send reminders.

3. Improve Cash Flow

Getting paid on time improves your cash flow. That helps ensure that your business always has the funds it needs. This is especially important for small businesses.

4. Increase Customer Retention

Using a card on file can also help with customer retention when it comes to subscriptions or other recurring payments. After all, there is an extra step that customers would have to take to cancel.

Reduced Risk of Input Errors

If customers are swiping or inserting their cards, then there is no risk of input errors. But online shopping or using a POS system that requires manually entering card numbers does come with the potential for human error. Having a card on file reduces this risk.

Improved Customer Experience

From the customer’s perspective, the fact that they don’t have to reenter their card details or swipe their card with every transaction is convenient. It prevents the need to remember to pay for subscription services and just saves time.

Potential Disadvantages

While card on file transactions are overall beneficial, you should be aware of a few potential issues with them.

To start, there is still a risk of a stolen or expired card. Or a payment may fail for another reason. Minimize this risk by regularly updating the card details you have on file. Most importantly, track expiration dates so you know when the card has to be updated.

Another potential issue is that customers may disagree with the charges, especially if they have forgotten about them. This also increases the risk of chargebacks. You can overcome this with proper communication, such as text or email reminders about upcoming payments.

You also have to be mindful of data security anytime that you store card information. Minimize this risk by using a secure system that relies on encryption.

Common Card on File Use Cases

Card on file transactions are especially common for various recurring payments, from subscriptions to memberships. Streaming subscriptions and gym memberships are very common examples.

Storing a credit card on file is also common for food delivery apps and rideshare apps. In this case, customers can enter their card information once and easily make future transactions on the app without having to reenter the information. A growing example of this is autonomous stores that use AI to track purchases and payments.

This can also extend to other situations. For example, if your gym already has your card information for your membership, they may let you buy equipment or a personal training session without requiring that you reenter your card information.

Yet another common use is ‘buy now, pay later’ situations or payment installments. This makes it easier for the business to collect the payments and prevents the customer from forgetting to make the payment or provide their details.

There are also some one-off use cases for having a card on file. The most common of these is hotel reservations and other travel or hospitality purchases. Having the card on file lets the hotel (or other company) charge fines or no-show fees as necessary.

If you prefer, you can divide the use cases for COFs into the following:

• Delayed – When a transaction takes place after the initial one.
• Incremental – When more services or products are added to the initial contract.
• Installments – When part of the payment is deferred and paid over time.
• No-Show – When the customer doesn’t show up for services and is charged a cancellation fee.
• Reauthorization – When a final transaction amount needs to be added, such as for extending a service.
• Recurring – When you have repeat payments at set intervals.
• Resubmission – When the original payment is denied and it is reattempted.

Do Customers Need to Opt-In?

Yes, customers must opt into card on file transactions. Remember that you need to get authorization from customers in addition to the card details. This authorization serves as an opt-in.

Get Started with Card on File Transactions

Starting to use card on file payments is a breeze with the right system. Podium lets you accept a variety of payment types, including those with a card on file. We also offer a variety of other methods, so your customers can use their preferred payment method, from credit cards to text-to-pay. Our system makes it easy to collect payments, whether for online purchases or in-store transactions.

Ready to modernize your payment processes? Check out our guide and we’ll teach you everything you need to know.