Credit Card-On-File Transactions: A Complete Guide

What is a Card-On-File Transaction?

The shift to digital interactions has sky-rocketed in recent years, primarily due to consumers’ increasing demand for fast, frictionless experiences. One area that has seen rapid adoption and growth is payments, driven by the rise of Apple Pay, Google Pay, PayPal, and Venmo, the ease with which a person can pay for goods and services. Companies like Uber, Lyft, Grub Hub and Instacart have made it the norm to pay without entering card details for each purchase. This is a practice called Credit Card On File. 

Card-on-file transactions occur when consumers authorize businesses to capture card credentials in person, online or over the phone and securely store them to be used for future purchases. They are especially popular for recurring and subscription payments since information doesn’t need to be requested for each billing cycle.

Card-on-file payments create a seamless customer experience, leading to more sales, improved cash flow, higher retention rates, and improved staff productivity.

What are Some Use Cases for Card-On-File Transactions?

Any business that deals with repeat customers can benefit from securely storing payment details on file. The primary use cases are for recurring payments or one-off payments.

Recurring Payments

Card-on-file transactions make sense for businesses that collect payments on a repeat basis. Examples of recurring payments include:

• Memberships: Gyms, yoga studios, doggie daycare facilities and massage parlors benefit from card-on-file payments by allowing customers to enter, use their services and leave without stopping at a counter to pay before or after a visit. Membership fees are automatically collected each billing period until a customer cancels.
• Repeat Purchase: Lawn care companies, healthcare providers, limo drivers or food delivery services can charge a card on file for subsequent purchases. Card details can be captured in-person, online or in a company’s app and securely stored with customer records.
• Subscriptions: Flower delivery businesses, online game platforms, craft kit companies, and car wash/detail services count on customers enrolling in a “set it and forget it” experience that keeps revenue rolling in. It’s imperative to offer a streamlined experience to avoid an interruption and potentially lose customers.
• Installment Payments: Breaking purchases into multiple transactions helps consumers manage finances and can lead to higher-ticket transactions for businesses.  Orthodontists, med spas, electronics retailers, and home improvement businesses benefit from offering short-term financing that allows customers to make purchases and pay for them over time, usually with no interest.

One-off Payments

In addition to recurring payments, storing a customer’s card on file makes it easy to collect add-on purchases. Examples include

• • Upsells: Businesses such as fitness centers, music studios or outdoor-enthusiast membership clubs might also sell merchandise or food. Card-on-file payments can be used for one-time purchases.
  • No-show fees: Restaurants, inns and entertainment venues that operate with a fixed capacity may implement fines when customers with reservations neglect to cancel within the stated terms. Collecting the card information during the reservation process and storing it on file supports this business model.
• Delayed charges: These may include mini-bar purchases, damage fees, or other charges that occur post-transaction.

How Do Card-On-File Payments Work?

Card-on-file transactions require customer consent. Enrollment can be done in person, over the phone, in an online form or through a merchant’s app. During the enrollment process, the customer enters the credentials for the payment method they wish to use and authorizes the business to make future payments according to the merchant’s terms.

Once a customer has enrolled, the card on file can be used for future purchases through any acceptance method the business supports, and to which the customer has formally agreed. To prevent declines and an interruption in service, businesses should confirm that their payment provider supports automated Account Updater services with the card brands, which helps ensure that account credentials maintained on file are current, especially for expired or re-issued cards.

It’s important for the business to clearly state the terms (including cancellation and refunds), timing and frequency of future payments. Any confusion could lead to customer dissatisfaction, cancellation of services, or even chargebacks. One best practice is clearly outlining policies at the point of sale or on your website using common, easy-to-understand language. Stored card credentials must be removed for customers who cancel the card-on-file agreement.

How are Card-On-File Transactions Initiated?

There are two primary methods for initiating a card-on-file payment, via the customer or the staff

Consumer-initiated Transactions

Customers can enroll their cards into their profile for future purchases. It’s great for one-click purchases made online or in an app. The customer selects the stored card without the need to reenter card details.  To further authenticate the cardholder, the software will prompt for the card’s security code (CVV/CVC) during checkout.

Merchant-initiated Transactions

Businesses can use staff or automated software to initiate card-on-file payments without the cardholder being present. This requires permission from the customer, as outlined in the section above. It’s ideal for repeat purchases, recurring/subscription payments and installments. There is no requirement to collect additional card validation data.

Are Card-On-File Transactions Secure?

Storing sensitive card details requires adherence to PCI Data Security Standards (PCI DSS). Be sure to never store actual card numbers in paper records or system files. Not only does this go against PCI compliance standards, it also increases the risk of a data breach.  

Most reputable card-on-file platforms capture card credentials during enrollment and replace them with a random data sequence of nonsensitive information through a process called tokenization, which maximizes security. Tokenization protects actual card details from getting into the hands of hackers should a data breach occur. Working with a provider such as PayJunction that runs a PCI Level 1 data center and can store the data on your behalf simplifies PCI compliance and extends peace of mind. 

What are the Benefits of Card On File?

Consumers like the speed and convenience of making purchases without providing card details every time. Most businesses like card-on-file payments because removing friction during the purchase process increases customer satisfaction and leads to higher revenue. Payments are made in a consistent and timely manner.  

Here are other valuable benefits businesses realize when implementing Credit Card On File:

• Improve cash flow: Set-it and forget-it payments run on a schedule that guarantees payment will be collected when due. Staff no longer has to chase customers down to collect payment data, often taking days.

• Reduce cart abandonment: Repeat customers don’t have to have their card in hand to make a purchase. This increases conversions—and revenue—by turning more shoppers into buyers.

• Boost productivity: Streamlining acceptance frees staff to focus their time and efforts on important business areas that help grow revenue and deepen customer relationships.
• Increase security: Since card-on-file transactions are tokenized, stolen payment data is useless. Businesses retain revenue, the cost of goods, and their reputation.

Card-On-File Disadvantages

There’s no doubt that the benefits outweigh the challenges of storing cards on file. However, businesses should be prepared for challenges by implementing mitigation strategies and remedial processes. In addition to the security measures regarding PCI and tokenization outlined above, business owners should anticipate these other things that can go wrong:

• • Transactions get declined: Storing credentials on file is no guarantee that a customer isn’t over their credit limit or has insufficient funds to pay for a purchase. Make sure staff has a process in place to identify declines, try and resubmit the payment, or contact the customer for an alternative payment method. 
  • Cards expire or get stolen: When a card is re-issued, the underlying details such as account number, expiration date or security code can change. Transactions will fail, which could result in a customer abandoning a purchase or letting a recurring payment plan lapse, erasing a future revenue stream. Requiring staff to contact customers and obtain new credentials is time-consuming. Account Updater service automatically keeps cards on file current.
  • Unexpected charges can turn away customers: Customers might drop out of a recurring payment service if a card on file is used to make a purchase they don’t recognize. This could also result in an increase in chargebacks. Communication is the key to customer satisfaction. This requires clear disclosures during the enrollment process and notification of changes in terms and conditions

What’s the Difference Between Card On File and Tokenization?

Card On File is a convenient method of capturing credentials to be used for future purchases. Tokenization is the security process most used to store information so that it is rendered useless should it be hacked. When combined, business owners can confidently offer their customers a great way to eliminate friction without the fear of stolen data and the cost of a data breach.

Why do Businesses Need a Card-On-File Feature?

We’ve outlined the specific advantages of card-on-file transactions above. However, there’s a bigger story playing out as consumers continue their adoption of digital experiences. 
Competition is fierce, and businesses must fight daily to build customer loyalty and increase lifetime value. Consumers are consistently attracted to businesses that make it easy to purchase and pay for goods and services. Any business with repeat customers should consider offering card-on-file payments, or risk losing their business to a competitor.

What are Some Alternatives to Card-On-File Transactions?

Storing purchase credentials on file isn’t limited to credit cards. While credit cards offer consumers the benefits of rewards, fraud protection, and short-term financing, alternative payment methods widen the net of potential customers. Consider adding lower-cost direct debit to the mix in two ways:

• Debit cards: Unlike credit cards that feature a line of credit, debit cards are linked to a bank account. Purchases are deducted from available funds. Customers often prefer debit for smaller, repeat purchases, reserving their credit card for bigger-ticket items
• ACH bank transfers: ACH payments replace paper checks with electronic funds transfers that deduct money automatically from the customer’s account, resulting in improved cash flow. Plus, ACH transactions carry significantly lower fees than credit and debit cards.

How to Implement Card-On-File Transactions

Here’s a list of considerations for setting up Card On File at your business:

• Implement processes that make it easy for customers to understand, accept and enroll in your card-on-file programs.
• Let customers select all the ways you can use their card on file.
• Adopt proper practices for securely storing card credentials.
• Make it easy for customers to manage and update their information and preferences
• Implement technology and/or processes to keep card information current.
• Give customers a choice of payment methods, including credit cards, debit cards, and ACH bank transfers.
• Monitor activity to ensure proper use and to catch declined transactions quickly so that you’ll increase the success of resubmissions.
• Clearly communicate any changes to reduce surprises that can result in lost customers.

How PayJunction Can Help

We’ve got the solutions and expertise to help you implement secure contactless and card-on-file credit, debit and ACH transactions accepted any way: in-person, online, over the phone, via digital invoices, and as recurring, subscription or installment payments. 

Ready to simplify taking payments?