There is nothing more frustrating for a business owner than losing a customer before the checkout process is completed. This experience is analogous to hooking that beautiful bass and reeling it in – only to have it escape at the last moment. 

Bringing card-on-file transactions into your business model can help you to drastically reduce this annoying and profit-stealing form of cart abandonment. But what exactly are card-on-file transactions, and what purpose does each kind serve?

Card-on-file payments defined

As the name suggests, card-on-file (CoF) transactions are payments in which the customer’s payment details are stored by the merchant for later use. 

During subsequent purchases, the merchant accesses the relevant credit card data to complete the sale – all without any additional time or stress for the customer. 

As straightforward as this sounds, however, it is also important to recognize the various types of CoF payments so that you can determine which is right for your business.

Recurring payments

These days, retailers of all stripes are embracing the subscription model. 

Also known as recurring billing, this configuration involves making an agreement with your customer regarding payments for ongoing services such as membership fees, education, software as a service, landscaping, day care, wine or food clubs, fashion items or whatever merchandise you might be selling.

In this contract, you and your customer determine from which bank or credit card account the funds will be withdrawn and on what date each week or month the withdrawal will occur. 

Additionally, you will specify the amount to be debited (a fixed number or a percentage of the existing balance) as well as the duration of the agreement. All terms and conditions, including your policy on late fees and account closures, should be provided to the customer immediately upon initiating this contract.

When done right, recurring payments give you a way to capitalize on your customer’s stored payment information. You and the buyer experience payment predictability, few to no late payments and an enhanced relationship. 

As a merchant, you also gain the opportunity for expanded communication with the buyer not only about this particular subscription but about other merchandise and services that could further enhance the person’s experience with your brand.

Installments

There are times when a customer might want to distribute the cost of a product across multiple payments. This is particularly helpful if the item being purchased has a high retail price that might make it difficult or impossible to fully pay for all at once.

With most installment payment arrangements, the customer gives a down payment when the purchase is first made and is given immediate possession of the product. 

As the merchant, you specify how much will be billed, any interest that you will be charging as compensation for making this agreement, when payments will be expected and how often. All details should be transparent, clearly presented and provided to the customer right away and in their format of choice, including hard copy or email. 

Be sure to clearly state any additional fees that you may charge for extra processing or late payments.

Reauthorized payments

There are situations when an order or service is not completed within the agreed-upon time limit. At times like this, the merchant can initiate a reauthorized payment using the CoF details that they have stored.

There are two scenarios when reauthorization commonly occurs. You might experience delays in the shipping of your products, or you may need to split the shipments into multiple parts. 

Alternatively, you might be offering commodities such as car rentals, cruise bookings or vacation stays that become extended beyond the original time parameters.

In either case, you can use the payment data on file to continue to recover what you are owed. As a best practice, be sure that the initial agreement specifies that you will take the reauthorization step should the situation warrant. 

This will minimize the chances of a credit card dispute filed by the customer.

Incremental payments

If the original estimated amount that you and your customer agreed upon falls short of your changing costs, incremental payments are a popular solution. Not designed to replace the original agreement, incremental authorizations simply supplement the amount so that it reflects the modified total. This type of CoF payment does not extend the originally agreed-upon time limit.

This arrangement is valuable in a wide variety of industries. Customers can agree to these additional payments if extending a car rental or hotel stay, modifying a pre-order at a grocery store or when augmenting a software as a service (SaaS) or educational payment arrangement.

Delayed payments

Payment details are sometimes kept on file in order to permit authorization for an agreed-upon amount. However, the money is not collected when the details are captured by the merchant. Instead, the process takes place at a later date.

This type of CoF payment configuration is popular with businesses such as hotels, gas stations and contractors. Capturing the details minutes, hours or days in advance gives the merchant time to verify a customer’s credentials or restock inventory before the transaction is completed. 

This helps to combat fraud and increase both efficiency and flexibility for you as a business owner.

Resubmitted payments

Whether you collect payments in-person or with a virtual point of sale system, there are times when they don’t go through as expected. This is also the case with CoFs.

Possible reasons for this situation include insufficient funds, a blocked payment, an expired card, fraudulent activities or incorrect information among others. In all of these cases, your first step should be to use the data you have on file to initiate a resubmission. Should this fail, you will need to contact your customer to resolve the problem.

No-show payments

If you and a customer have come to an agreement about a purchase and the buyer does not live up to the terms, you will need to initiate a no-show payment using your CoF data. This can occur with either domestic or international payments.

Another case when this type of issue occurs happens if you are in the accommodations business. When your customer does not arrive to stay in the room they have rented for a particular night, you can charge them the no-show fee. 

Of course, the fact that they are subject to this charge must be specified when they make the original reservation.

As you can see, card-on-file payments have come to be a valuable tool for service providers and sellers of all types. If you are thinking about integrating them into your operation, carefully consider your needs and those of your customers to arrive at the CoF types that will work best for you. 

Once you do, you will find that your checkout and invoicing processes are smoother and more efficient.