What are card-on-file transactions and what are they used for?
Card-on-file transactions — also known as card-on-file payments — happen when a customer authorises a merchant to store card details for future purchases.
When a customer provides their card details in person, online or over the phone — and then gives a business permission to store them and use them for future payments — it can benefit both parties across several use cases. But card-on-file transactions, as these payments are known, also have pitfalls and drawbacks if implemented poorly. In this guide, we’ll look at how card-on-file transactions work, examples of where they can be used, benefits and drawbacks, as well as alternative payment methods you might want to consider.
What are card-on-file transactions?A card-on-file transaction is any kind of payment where the cardholder has given their card payment details to a merchant so the merchant can store them securely for future payments. This means the cardholder does not need to supply their details for every single transaction with the merchant. In contrast, cardholders do need to provide their details every time with one-off card payments.
How exactly do card-on-file transactions work?To set up a card-on-file transaction, a business needs two things from the cardholder:
- Card payment information: to store ‘on file’ and to used to carry out the transaction(s)
- Authorisation: to make future payments, with the terms agreed upon by the customer
Why do businesses need the card-on-file feature?There are several uses for card-on-file transactions, which can generally be broken down into recurring purchases and one-off transactions.
Recurring paymentsIf a business needs to collect payments on a repeat basis, storing card details on file can make the process much easier. Examples of recurring payments include:
- Subscriptions: subscription services like Netflix and Spotify store details for card-on-file transactions, so they can collect regular payments from customers without interrupting their user experience.
- Memberships: your gym, for example, may use card-on-file to collect your monthly membership payments.
- Instalments: if you’re paying for something in instalments, the business collecting the payments could use card-on-file transactions until the balance is paid off.
- Repeat purchase: card details stored on apps for ride hailing or food delivery allow you to use that service without giving your details every time you make an order.
One-off paymentsCard-on-file isn’t just for recurring purchases. There are also times when it can be used for one-off transactions:
- Fines/no shows: when you book a hotel or restaurant, you might have to pay a fine if you fail to show up for your reservation or cancel too late. Card-on-file can be used to collect the fee if that happens.
- Upsells: a gym, for example, can use your stored card details if you want to buy add-ons like equipment.