Merchant-Initiated Transactions: What MIT Means and When Merchants Use It

When someone swipes their card, an entire web of activity starts to occur behind the scenes. Payment gateways, issuers, and acquirers work together to authenticate and approve the transaction so that it can be processed. While many transactions begin when a customer swipes a card or pushes a button, this isn’t true in every case.

A merchant-initiated transaction (MIT) is a transaction that is initiated by the merchant and not the customer. MITs are often used with subscription-style payments because they allow the merchant to charge the customer for agreed-upon products and services. 

While MITs offer an added level of flexibility and convenience, they also face increased scrutiny. To learn more about MITs and how to successfully process them at your business, read on.

TL;DR

• Merchant-initiated transactions are initiated by the merchant with the customer’s consent. 
• Once the customer approves the initial transaction, future MITs are linked to this prior authorization to show the customer’s consent.
• If the transaction is improperly linked, it can result in a declined transaction. Similarly, poor flagging or incorrectly labeling the payment as a card-not-present transaction can result in a declined payment.
• A customer-initiated transaction (CIT) is different because it is always initiated by the customer.
• While the party that initiates the transaction is different, CITs and MITs are both considered pull transactions. This means the merchant is “pulling” funds from the customer’s account following the customer’s authorization.
• Unlike CITs, MITs do not generally require real-time authentication to be processed. However, merchants need to document and store the customer’s prior authentication in order to avoid declined transactions in the future.
• If MITs are handled poorly, it can result in lost revenue, declined transactions, and lower approval rates.
• To avoid these issues, it is essential to correctly configure payment gateways and stored credential flows.
• Ongoing monitoring of decline reason codes, decline rates, and other issues helps you spot problems before they worsen.
• With the help of PayCompass, companies can configure their payment gateways and optimize their MIT flows.

What Are Merchant-Initiated Transactions? 

Merchant-initiated transactions are payments that trigger without the customer’s active involvement. This is the major difference between MITs and customer-initiated transactions, which are started by the customer.

Often, MITs are used for recurring payment processing. Once the initial transaction is authorized by the customer and the authorization is securely stored, the merchant can use that authorization to process recurring payments.

MITs are effective for installment payments, no-show fees, cancellation fees, post-rideshare tip charges, and any kind of delayed charge. They can also occur with authorized top-up payments, such as when customers request an automatic top-up if their prepaid cell phone is low on data.

MIT vs. CIT Comparison: Key Differences and Similarities

While MITs and CITs are both considered pull payments because the payment is pulled from the account by the merchant, there are key differences between these two transaction types. Because of the differences between customer-initiated and merchant-initiated transactions, there are special approaches and tools required during and after the initial transaction. To learn more about what to expect from MITs and CITs, check out the main aspects of each payment type below.

	MIT	CIT
Who Is Responsible for Initiating the Transaction?	The merchant is responsible.	The customer is responsible.
Customer Involvement During the Charging Process	The customer doesn’t play an active role when they are charged.	Whether the customer is at a checkout counter or clicking “pay” online, they are actively taking part in being charged.
Is Customer Authentication Required?	The same level of authentication is generally not required. Instead, the transaction relies on prior authentication.	Customer authentication is required.
What Type of Payment Is Involved?	Often, this is used for no-show and cancellation fees. MIT works for subscription payments, delayed charges, and installment payments.	One-time purchases or first-time subscription payments are initiated by the customer.
Risk Level	These transactions are higher risk, especially if the customer has been poorly informed about when the payment will occur.	Because the customer initiates the transaction, CIT is typically considered lower risk.
Cardholder Consent	Consent is given in advance. For example, the customer may provide consent for future subscription payments.	With CIT, consent is provided at the time of the transaction.
Common Reasons for Declined Transactions	If these transactions are declined, it is often due to a missing mandate, no cardholder present, or incorrect MIT flag.	These transactions are more likely to be declined for insufficient funds or failing authentication measures.

When Are Merchant-Initiated Transactions Used? 

An MIT is necessary in cases where the merchant must charge the customer, but the customer isn’t directly involved. These types of payments rely on prior consent in order to capture the customer’s payment authorization for future transactions. In general, MITs are most effective for the following transaction types.

• Subscriptions: Streaming services, subscription boxes, monthly SaaS billing, and other subscriptions store the customer’s payment authorization so that future payments can be processed without the customer’s involvement.
• Usage-Based or Unscheduled Top-ups: This transaction type is common for rideshare companies, prepaid phones, and other pay-as-you-go programs. MITs allow merchants to top up the customer’s account as needed.
• No-Show or Cancellation Fees: MITs are commonly used for salon appointments, hotel reservations, healthcare appointments, and other bookings where the customer must be charged for canceling or not showing up to their appointment time.
• Delayed Charges: When someone charges an electric vehicle, books a hotel stay, or rents a car, the total balance isn’t always known when they swipe their card. Because of this, merchant-initiated transactions are needed to process the correct total at the end of the entire transaction process.
• Retries Following a Failed Payment: If a subscription or top-up payment fails, the merchant can use an MIT to retry the payment. However, this retry must still be in compliance with the original authorization rules.

Why Merchant-Initiated Transactions Must Be Handled With Care

MITs are essential for providing payment flexibility for merchants, especially in industries that rely on subscriptions and delayed payments. However, this added flexibility comes at a cost. Because they rely on prior authorization, MITs are more prone to customer disputes and declined transactions. 

As a result, card networks and issuers have strict rules about how MITs must be classified. These transactions rely on trust instead of real-time authorization, so issuers depend on key transaction signals. Reference IDs, MIT indicators, and transaction history are used by issuers to determine if the transaction is valid.

If the classification, flagging, or linking is incorrect in any way, the transaction can be declined. For example, some merchants accidentally send an MIT as a standard card-not-present transaction. Because the issuer expects non-existent customer authentication, the end result is a declined transaction. At the very least, the issuer may flag the transaction as having a higher risk level.

For merchants, approval rates and dispute outcomes are closely tied to your flagging and linking. MITs are generally exempt from many authentication measures, which can boost their approval rates. However, this is only true if they have been properly linked to a valid CIT at the beginning of the transaction chain. 

Similarly, poor referencing or improper linking can have a negative impact on your dispute outcomes. If a customer disputes a transaction, poor classification can result in losing your case. Instead, merchants must properly classify the transaction as MIT, stick to the agreed-upon billing terms, and link the current transaction to a prior transaction that was authorized by the customer.

How Merchants Can Avoid Processing Issues and Declined Transactions With MITs

Merchant-initiated transactions are an effective tool for businesses, but they require the right payment processing approach. Missing consent, improper authentication, and incorrect flags can lead to declined transactions. With the following steps, you can ensure your MITs are processed correctly.

Capture Consent

The first step is to capture consent properly. In order to process an MIT, there must be a prior CIT that it is linked to. To demonstrate consent, clearly explain the type of future charge to the customer. For example, note if it will be recurring or variable. Never use vague language because this can confuse the customer and muddy your proof of consent. 

Finally, store the timestamp and consent acceptance securely. Through documented consent, you can prove to issuers that the transaction was valid and avoid transaction disputes.

Ensure Proper Authentication Upfront

Your first transaction with the customer is the most important one in the entire chain. Issuers expect this transaction to include customer authentication. The right authentication establishes trust for future MITs and helps you avoid potential sources of friction.

Store Credentials Properly

All card credentials and tokens must be stored in accordance with Payment Card Industry Data Security Standard (PCI DSS) requirements. Tokenization and vault-based storage are effective tools for protecting important data and making sure it is available for future transactions. Plus, these storage techniques make it easy to update expired cards or reissued cards, so your company can experience fewer declined transactions.

Use the Right Transaction Indicators and Reference Data

MITs must be flagged correctly at the network and issuer level. For instance, they might be labeled as recurring transactions, delayed charges, or installment payments. If you make the mistake of mislabeling them as a card-not-present transaction, it can result in an issuer decline. 

Monitor Decline Codes

As a merchant, it’s important to monitor your decline codes. By doing so, you can identify issues in real time and resolve them before they lead to multiple failed transactions. Often, missing authorization, authentication issues, and invalid transaction types are due to configuration and compliance-related causes. Once the underlying issue is fixed, you can prevent declined transactions.

Be Transparent With Customers

One of the most important things you can do to avoid MIT issues is to communicate with your customers. Be clear about when payments will be pulled and how much the customer will be charged. 

Ideally, you should send out reminder emails or texts before the payment date so that the customer has a chance to update their payment type or cancel the transaction. You should also give customers easy access to receipts and your refund policy, so they don’t feel like chargebacks and disputed transactions are the only option available.

How PayCompass Can Support Your MITs

MITs aren’t simply about storing a payment card. They require accurate payment configuration, correct stored-credential flows, and ongoing monitoring. With PayCompass, you can optimize your payment systems throughout the payment lifecycle. 

Through our team, you can process MITs at scale. We start by ensuring that your payment gateways and processors are correctly configured. This includes updating your reference handling and transaction flagging so that you experience higher approval rates and fewer declined transactions.

Our enhanced stored-credential flows allow you to capture and document consent. Once this is done, you can process future MITs without an issue.

At PayCompass, our work doesn’t stop just because we’ve finished setting up your payment gateway and stored-credential flows. We continuously monitor decline reason codes and dispute trends, so we can spot minor issues before they escalate. Through this technical expertise and attention to detail, our team helps merchants complete their billing processes and bring in revenue with as little friction as possible.

Final Thoughts

Merchant-initiated transactions play an essential role in modern commerce. Many industries rely on processing payments when customers aren’t present. Through MITs, subscriptions, top-up payments, and no-show fees can be processed through the customer’s account.

Because these payments occur through a customer’s prior authorization, there are stricter rules in place about consent documentation, flagging, and classification. If any of these factors are missing or slightly off, it can result in a declined transaction. 

As a merchant, it’s important to be proactive in setting up your gateway configuration and stored credentials. Through the right payment provider, you can get help optimizing and monitoring these systems.

To learn more about payment processing and MITs, reach out to the payment experts at PayCompass today.