An overview of pre-authorized debit payments (PADs)
Pre-authorized debit payments (PADs) are electronic, and allow your business to withdraw money directly from your customer’s bank account.
The term pre-authorized refers to an agreement between your business and your customer. In the agreement, the customer will give permission for you to withdraw money from their account based on the terms outlined. This can work for recurring payments on a set schedule and for variable amount payments.
Pre-Authorized Debits work over a computerized network through Payment Canada’s federally-secured Automated Clearing Settlement System. This network connects all of Canada’s financial institutions.
Once you have an account set up with a processor, the first step is to collect a PAD agreement from your customer. This agreement outlines the payment terms and gives you the proper authorization to initiate payments.
Next, you can set a transaction schedule based on your payment terms. Payment instructions are sent to the bank one day in advance of the process date, the details are exchanged within the Automated Clearing Settlement System (ACHSS) and the appropriate funds are withdrawn from your customers bank account, and deposited to yours.
What are the advantages of using pre-authorized debit payments?
There are 3 advantages for business owners to collect payments through pre-authorized debits.
- They are automated. PADs can be scheduled in advance so you never have to worry about getting paid. On the scheduled dates, payments are withdrawn from your customer’s bank account.
- You gets to initiate the payments. As a business owner, you never have to wait on customer initiated payments and you won’t have to chase them down for being late. This will result in improved cash flow and a much better relationship with your customer.
- Cost savings. Most PAD processors charge a flat rate per transaction, not a percentage like credit cards. This can save you hundreds, or even thousands of dollars every month.
Are pre-authorized debits secure?
Pre-Authorized Debits payments are very secure due to the electronic protocol required by banks.
All of the information is encrypted and sent through Canada’s federally-secured Automated Clearing Settlement System which means it can’t be redirected, read, or tampered with.
PADs are also regulated by the Electronic Funds Transfer Act, which details the rights and liabilities of PADs. In addition, PADs have a very clear mandate to ensure any unauthorized debit can easily be reversed through the bank.
How to start accepting pre-authorized debit payments.
To start accepting PADs, you will need to sign up with a pre-authorized debit processor. This will either be your bank or a third party.
Some banks offer this solution as part of their larger cash management platform. Every bank has different requirements for setting up an account. Typically banks work best with large transaction volumes and are best suited for enterprise clients. Banks don’t offer API solutions for custom integrations and you can expect a sign up fee, monthly fees, and batch fees.
A second way to collect PADs is to sign up through a third-party payment processor, like Rotessa. Third-Party processors are usually more accessible to small businesses, have a better customer experience, and offer advantages such as APIs and other integrations.
Once you’re setup with a processor, you can offer your customers the convenience of automatic bank payments. This all starts with a simple authorization to outline the payment terms.
Learn more about pre-authorized debit payments by visiting our blog or jump to a specific article through the the links below.
What kind of businesses are best suited to use authorized debits?
What is an authorization and why do I need it for pre-authorized debits?
