What Is Card-on-File and Why Do Businesses Need It?

Merchants nowadays are continuously searching for ways to streamline the payment process to cater to customers who appreciate shopping with speed and convenience. While it can be achieved in multiple ways, card-on-file (CoF) transactions remain one of the most effective tools to optimize checkout and boost sales.

This guide contains all the information you need to know about CoF, including an explanation of how it works and why it can be effective, examples of its use cases, a list of benefits and challenges linked to it, and some practical tips on this solution’s implementation. Read ahead not to miss any of these valuable insights!

What Is Card-on-File and How Does It Function?

Each card-on-file transaction features five essential participants:

• Customer. The individual who uses their card to initiate the transaction and purchases a product or service.
• Business. The establishment or entity receiving the money for products or services.
• Payment processor. The company responsible for facilitating the payments between the customer and the business.
• Card network. The organization issuing the card, such as Visa or Mastercard.
• Bank. The financial institution holding the customer account.

Also, there are two types of card-on-file payments:

• Consumer-Initiated Transactions (CITs). This method is applicable when the customer is physically present when providing their data to the merchant. It usually occurs either at a POS terminal of a brick-and-mortar store or an online website page.
• Merchant-Initiated Transactions (MITs). This approach requires a CIT to take place previously so that the merchant is authorized to initiate a transaction without the cardholder being present and no extra verification required. MITs are typically used when it comes to automated billing and subscriptions.

There are multiple ways in which businesses can receive cardholders’ consent to store payment information, such as by prompting them to:

• Use their debit or credit card at a POS terminal and sign a receipt
• Fill in a form online
• Share their bank card details during a phone call

Aside from being fairly easy to implement, card-on-file transactions have a plethora of other benefits for both business entities and consumers.

Card-on-File Advantages for a Business

While CoF is a simple tool at first glance, implementing it can be extremely effective for business entities. Card-on-file transactions play a critical role in:

• Ensuring a faster checkout experience. Not having to fill in all the payment details can be a relief for consumers, as it makes swift one-click transactions possible.
• Improving the cash flow. An efficient checkout process promotes a more consistent cash flow. In addition, CoF creates an opportunity for merchants to offer subscription plans and ensures the invoices are paid on time.
• Boosting the customer retention rate. A smooth payment experience creates a competitive advantage for businesses and encourages their customers to make repeat purchases.
• Leveraging advanced security and privacy measures. CoF is extremely secure, as it typically uses encryption and tokenization to effectively prevent fraud and privacy breaches when storing sensitive information.
• Reducing the need for staff effort. Due to automated payment collection with CoF, employees do not face the need to remind clients about upcoming payments and manually input their payment data multiple times.

As you can see, the benefits are plenty - but does CoF also have downsides?

Main Card-on-File Challenges

While CoF has significantly more pros than cons, there are a few challenges of which any business needs to be aware:

• Possible customer hesitation. Cautious customers may be hesitant to allow merchants to store their card data due to the risks of encountering dishonest players.
• Regulations compliance. The storage of payment data requires merchants to comply with PCI DSS.
• Manual debit or credit card details updates required. Consumers have to update their payment details if their debit or credit card expires or they lose it.

All in all, based on the overview you’ve just read, the advantages of CoF payments clearly outweigh the downsides both for various customer categories and business entities.

Use Cases of Card-on-File Payments

Given the abundance of CoF’s advantages, it is no surprise that it can be used across a variety of industries and business models. Here are some examples of this solution’s use cases:

• Subscriptions - CoF is extremely convenient for recurring subscription payments, as the cardholder can be billed periodically without any extra confirmation steps.
• Buy Now, Pay Later services - BNPL providers often choose to enhance the customer experience by saving debit or credit card details with the help of CoF.
• Mobility and delivery apps - Applications that provide transportation and delivery services often turn to card-on-file to prevent their customers from re-entering the same information for every ride and order they make.
• Hospitality and travel - Frequent travelers know how tedious it can get to enter the same payment details over and over again. CoF solves this problem and ensures the payment process is simple and smooth.
• Cashierless stores - Autonomous stores use AI-based solutions to detect the consumers’ shopping activity and charge them accordingly as they leave. CoF is typically used to complete the payment during the walk-out stage.
• Unified commerce businesses - Retailers applying the unified commerce model can implement CoF to collect payment data via one platform to simplify the checkout process across all channels they are using.

Those are just some examples of where card-on-file transactions can be implemented. As the popularity of online shopping continues to increase, CoF becomes a standard practice at more and more establishments and gradually transforms into an essential feature of the shopping experience that consumers expect to be offered.

How to Implement Card-on-File Transactions Effectively

Incorporating card-on-file transactions into your business can significantly reduce errors in the online payments flow and enhance customer satisfaction. Keep the following considerations in mind when integrating card-on-file:

Streamline Customer Onboarding

You have to consider simplifying the procedure of onboarding customers by minimizing the steps one needs to go through to add and store cards on file. To achieve it, you may want to publish explicit instructions and set up a user-friendly interface that will seamlessly guide consumers.

You can also incorporate automatic card recognition and validation to reduce friction, ensure the clients are content, and ultimately boost sales on your site.

Get Explicit Consent

Prior to collecting and storing customers' card information, your business needs to receive permission from the clients in the form of a signed agreement. Therefore, you must clearly convey the terms and benefits of card-on-file transactions, along with the pricing policy and measures in place to ensure information protection.

Overall, transparency and confidence are key to getting more and more customers to sign up for recurring payments or simply return to your website for products and services in the future.

Prioritize Security Measures

Ensuring that customer information is secure can be the most crucial step in building trust with your loyal and recurring clients. Thus, you may need to adopt secure encryption protocols and tokenization techniques, evaluate your infrastructure all the time, and stay up-to-date with the newest industry standards.

Give Incentives to Customers

You may want to get more customers to sign up for card-on-file transactions by using such incentives as exclusive discounts or loyalty rewards. Also, remember to emphasize the convenience and time-saving benefits your customers will gain by storing their information for future seamless purchases on your site.

Monitor and Analyze Performance

Regularly monitor and analyze the collected information and key performance metrics linked to card-on-file transactions on your website. These include aspects like conversion rates, average order values, and customer satisfaction levels.

You can then learn from these insights and use them to optimize your strategies, identify areas for enhancement, and continually adjust your approach to card-on-file payments over time.

Is Card-on-File Worth Implementing?

Overall, card-on-file transactions have a wide scale of implementation and a multitude of benefits for businesses and customers alike, which contributes to the growth of their presence. As a result, they are becoming so commonplace at this point that merchants who do not adopt this feature risk being left behind.

Thus, if, after reading the information above, you see an opportunity for your company to leverage the power of card-on-file to improve operations and drive sales up, it is best not to miss out on it.