What does card-on-file mean?

In this post, we’ll delve into card-on-file transactions, what they entail and the advantages and disadvantages they offer.

What is a card-on-file transaction?

Card-on-file (CoF) is the storing of customer card and payment information by a merchant, i.e. keeping card information “on file”.

A card-on-file transaction is therefore a transaction which involves the cardholder authorizing a merchant to store their card information and bill them when appropriate.

Card-on-file transactions are either cardholder-initiated, and involve a cardholder giving a business permission to store their card information for future use, or an agreement between the cardholder that the merchant can initiate payments using stored payment information. With the latter, this is typically used for subscription billing.

Subscription transactions occur on a regular basis, usually at predetermined intervals. An example would be a streaming network that has a customer’s card information file and makes automated monthly payments for the use of the service. Therefore, instead of a customer manually renewing their payment every month, they give permission for the network to store their card information and make the payment when required. This entails that there is no action required on the part of the customer.

How are card-on-file transactions initiated?

There are several ways to initiate CoF transactions as a merchant. The ways you can do so, however, will depend on whether you operate online, in-store or as a subscription service.

As an in-store or online merchant, you can store a customer’s card details by:

• Swiping the card for card-present transactions.

• Filling in customer card information for card-not-present transactions.

• Storing payments details in a customer profile after they have made a transaction and given permission for their information to be kept on file.

If you are a subscription service business, you can initiate card-on-file payments by asking customers to authorize recurring payments.

Card-on-file advantages

Whether you operate exclusively online or have a brick-and-mortar store, the benefits of being able to store customer payment information are numerous, for both the customer and you as a business. Some of these advantages are outlined below:

• Allows your customers to consistently use their preferred payment method. Making the payment process easier for clients will make them much more likely to return.

• Speeds up the transaction process considerably — not least because it doesn’t require the re-entering of payment details each time a transaction is carried out.

• Allows for single-click billing, again making things quicker and easier.

• Is often highly secure, offers encryption and tokenization to prevent fraud.

• Offers a simple means to approach debt repayment, installment plans and recurring billing.

• Customers are easily able to update their card details when required.

Card-on-file disadvantages

While there are far more perks than cons, nonetheless there is the serious concern of security risks with card information storage online. While the majority of online retailers offer secure shopping, there are some sites that have malicious spyware or key-logging software, allowing for credit card information to be copied and stolen. Cautious customers may therefore be put off by the prospect of card-on-file transactions.

Card-on-file transactions may also incur high costs, as the major card networks charge high fees. Businesses are likely to find direct debit a cheaper solution to collect their recurring payments.

Lastly, card-on-file transactions fail when the customer changes their card - either due to its expiration date coming around regularly, losing it, or in case of theft. Using a bank debit solution, like GoCardless, prevents this type of payment failures, as funds can be moved directly from their bank account to yours - so there's never an expiration date on the horizon.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.