What is a Merchant Initiated Transaction?

Merchant Initiated Transaction is the technical industry term for a subscription or automatic recurring payment. MITs enable merchants to charge customers without their active involvement at the time of payment. This article will discuss what an MIT is, how it works, and how it benefits businesses in managing recurring payments, subscriptions, and automated billing.

Understanding Merchant Initiated Transactions

A Merchant Initiated Transaction is a subtype of Card on File payments where the payment is initiated by the merchant without direct input from the customer at the time of the transaction. Unlike Customer Initiated Transactions, where the customer initiates the payment—such as in an online purchase—an MIT allows merchants to transact autonomously. This distinction is particularly useful in recurring billing environments, such as monthly subscriptions.

MITs are also vital for some automated processes, such as retrying a transaction in the case of a soft decline or managing installment payments. By enabling seamless, uninterrupted billing, MITs allow businesses to provide customers with a more flexible, customer-friendly experience.

How Merchant Initiated Transactions Work

MITs work by combining secure data handling, tokenization, and automation to securely store sensitive customer data for scheduled or automated payments. Here’s how the process unfolds:

1. Customer Consent and Initial Authorization

For a merchant to initiate an MIT, the customer must first provide consent and authorization for the merchant to keep the card on file. This is often established during the first transaction when the customer actively provides payment information for future charges. For instance, a customer subscribing to a service might agree to recurring monthly billing. This initial consent serves as the basis for all subsequent MITs.

2. Tokenization of Payment Information

After the initial authorization, the customer’s payment information is tokenized—a process where sensitive details, such as credit card numbers, are replaced with secure tokens. These tokens are stored in the vault of a payment provider and used to authorize future transactions without handling sensitive data directly. Tokenization reduces security risks and ensures compliance with regulatory standards, including PCI-DSS.

3. Merchant-Initiated Payment Requests

With consent and tokenization in place, the merchant can initiate subsequent payments on demand or on a set schedule. These are transmitted directly to the payment processor, which uses the stored token to request the payment without requiring real-time customer interaction. MITs are particularly effective for automated payments, such as renewing a monthly subscription or managing installment payments.

4. Manage Recurring Billing and Declines

MITs provide flexibility for managing recurring billing and resolving failed payment attempts. For example, when a transaction fails due to a temporary issue (a soft decline), the payment orchestration layer can automatically retry the transaction. Strategic routing and multi-PSP retry capabilities enable businesses to maximize authorization rates while delivering a frictionless experience for customers.

Examples of Common MITs

MITs are widely used across industries to simplify operations and improve customer experiences. Here are a few common examples:

• Subscription Renewals: Monthly or annual renewals for services like streaming platforms, software licenses, and memberships.
• Installment Payments: Payments divided into installments for larger purchases, such as electronics financing or travel programs.
• Automated Retry Payments: Retry attempts on declined transactions through a different processor or card network, without customer involvement.
• Usage-Based Billing: Billing services based on customer usage, such as utilities or cloud storage.

Key Differences Between Merchant-Initiated and Customer-Initiated Transactions

Understanding the differences between MITs and CITs helps businesses manage both effectively:

• Customer Involvement: In CITs, the customer actively initiates the payment, often by inputting their payment details. MITs, on the other hand, are initiated by the merchant based on prior consent from the customer.
• Authentication Requirements: Regulations like PSD2 in Europe require Strong Customer Authentication (SCA) for CITs, whereas MITs are typically exempt once initial consent is obtained. This simplifies subsequent billing processes, particularly in subscription-based models.
• Risk Management: MITs leverage enhanced tokenization and vaulting to ensure the security and compliance of customer data. Additionally, transaction flags and indicators used in MITs signal the transaction type to issuers, boosting authorization rates by establishing trust.

Benefits of Merchant Initiated Transactions for Businesses

MITs offer significant benefits for businesses, particularly in industries reliant on recurring billing or automated payments. These include:

Improved Customer Experience

MITs remove friction from the payment process, enabling businesses to handle recurring charges seamlessly. Customers in subscription services, for example, expect uninterrupted service without needing to authorize every payment.

Reduced Transaction Declines

By using MITs with intelligent routing and automated retries, merchants can recover revenue otherwise lost due to payment declines. A recent Spreedly study found that retrying failed transactions through MITs and multiple gateways can help businesses recover up to 7.9% of failed transactions.

Improved Operational Efficiency

MITs reduce customer involvement in routine transactions, enhancing operational efficiency. They also minimize administrative burdens for finance teams, allowing them to focus on other critical tasks.

MITs with Spreedly's Advanced Vault and Network Tokenization

Spreedly’s Advanced Vault and network tokenization enhance the value of MITs by providing a secure, compliant foundation for managing stored payment data. The Advanced Vault helps merchants keep payment credentials up-to-date through tools like network tokenization and account updater services. Network tokenization replaces sensitive card data with network-issued tokens, which remain valid longer and are less prone to declines, improving authorization rates.

Pairing MITs with Spreedly’s Advanced Vault not only ensures smoother recurring payments but also prevents service disruptions caused by outdated or invalid cards. By storing both traditional and network tokens, Spreedly allows merchants to dynamically choose the best payment method for each transaction, reducing false declines and boosting transaction success.

Merchant Initiated Transactions Matter

Merchant-initiated transactions form the backbone of any business seeking to automate recurring billing and maximize revenue. MITs enable companies to manage payments independently and create frictionless customer experiences. 

Spreedly supports Merchant Initiated Transactions (MITs) as part of its comprehensive Stored Credential Framework. This framework is designed to securely store customer payment credentials and manage them according to industry standards, optimizing transaction processing for subscription-based payments.

As e-commerce continues to expand, taking advantage of MITs within an open platform offers businesses the agility, security, and efficiency needed to thrive.

Book a demo to see how a Spreedly’s open payments platform can support your business today.

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