If you’re brand new to PAD (Pre-Authorized Debit) processing, you might not be aware of how the “authorization” part of PAD works. No problem, we’ll walk you through everything you need to know. Here’s what you can expect.

 

  1. Learn the mandatory requirements of a PAD agreement
  2. Acceptable formats
  3. Notification requirements
  4. Three practical examples
  5. BONUS: Free tool to make your own electronic or paper PAD agreement

 

Before we get into it, I just want to make sure we’re all on the same page. Because PADs are called many different names, it’s important to know that PAD processing is the same as EFT (Electronic Funds Transfer) processing, direct debits, automatic withdrawals and pre-authorized payments.

A pre-authorized debit is a bank to bank transfer initiated by the payee (your business) when the payor (your customer) gives permission to do so.

 

If you’re new to pre-authorized debits and want to learn the basics, here’s a beginner’s guide to help you through >>.

 

Okay, now that we have that taken care of, let’s dig into agreements!

We’ll start with the most important part: If you want to accept pre-authorized debits from your customers, you are legally required to receive authorization and document it.

Sounds a bit complicated, but it’s not. Let me explain.

The Canadian Payments Association is the governing body that outlines and regulates the rules of pre-authorized debits in Canada. Rule H1 is a document that outlines every requirement. Because Rule H1 is a very long, technical guide, we’ve broken it down. Here’s an easy explanation:

REMEMBER: The entire point of a pre-authorized debit agreement is to make sure the payor (your customer) and the payee (your business) are on the same page. So when you withdraw money from their bank account, there are no surprises.

Mandatory Requirements of a Pre-authorized Debit Agreement

This is a what a PAD agreement looks like, along with the required elements as outlined by the Canadian Payments Association:

 

 

If you follow along with the number guides, here’s an explanation of the 8 requirements of a PAD agreement.

 

Contact Details – So the payor can get in touch with you.

PAD Category – Is the payor a person or a business?

Timing – This outlines to the payor when the payments are to be taken out (i.e. weekly, monthly, bi-monthly, annual, on set dates or otherwise.) You also need to explain if each payment is to be triggered by a specified act, event or other criteria. If it’s to be triggered by a specific act, it needs to be clear on what that is clarified.

Amount – So the payor knows how much is being taken from their account. If it’s an open or variable authorization, it needs to be clearly stated.

Authorization Statement – A clear statement that outlines authorization to withdraw funds from a particular account.

Recourse Statement – So the payor understands their rights to stop the agreement.

Cancelation Details – So the payor knows how to cancel the agreement.

Date of Agreement & Signature (if in a physical paper form).

Acceptable Pre-authorized Debit Agreement Formats

In-Person, Pen & Paper

The most common type of authorization is a paper form, completed by the payor in person. The payor typically provides a void cheque along with the completed agreement to verify their ID and provide their account details. Simple to process, simple to verify. The only problem is that not every business gets to see their customers in person and on a regular basis.

For paper agreements, it’s a good idea to keep on file for at least one year from the final date of the agreement.

Electronic, Online, Phone

Another acceptable format is electronic, but there are some additional requirements to consider when you receive authorizations online.

You are responsible to verify the identity of the payor

Here are three ways to verify the identity of your customer if you accept electronic PAD agreements.

  1. Established Email Address
    If you already do business with a customer, you’ve likely communicated with that person via email. You could send an electronic PAD form directly to that email address and confidently link the ID of the email to the customer. This would establish reasonable means to identify the customer.
  2. Microdeposits
    When a payor completes an authorization online, many PAD processors provide a way for the payee to send a micro deposit (credit) into the payor’s bank account without telling the payor the amount of the deposit. When the payor identifies the correct amount of the deposit back to the payee, it can be determined that the payor is, in fact, the owner of that bank account.
  3. Online Banking Verification
    The most recent trend is to verify ID through online banking credentials. In this method, a user enters his or her online banking credentials through a third party technology set up by the processor. Credentials are securely passed to the financial institution and account details are pulled. The technology ensures it is “read-only” access.

A copy of the PAD agreement must be sent to the customer at least 3 days before the first payment process date (email is acceptable)

This is pretty straight forward. The only exception is if the customer waives their right to pre-notification which is what we will talk about in the next section.

 

Here’s an example of an electronic PAD agreement

 

Pre-authorized Debit Agreement Notification Requirements

The Canadian Payments Association is very specific about the lead time required for you to notify your customers when the payments are coming out (remember what I said earlier about how the point of PADs is to have no surprises?).  It all depends on the type of agreement you have in place. The other option is if the payor and payee mutually agree to waive or shorten the notification period.

For Variable Amounts (open authorizations)

With variable amounts, you must give notice of the amount at least 10 days before the payment is processed. You must also give notice if the payor asks you to change the amount.

Set Amounts on a Fixed Schedule

You are required to give at least 10 days notice before the first recurring withdrawal, which outlines the amount and payment schedule. No further notifications are required, assuming the amounts are never larger than the agreed-upon amount.

 

If included in the PAD agreement, the payor and payee can mutually agree to waive or shorten the notification period.

 

Okay, we’re through the technical details now! Let’s move on to some real examples…

 

Payor Defined Pre-authorized Debit Agreement

Industry Examples: Charities, Churches

Key Difference: The payor outlines the specific amount and timing of the payments

 

Fixed Pre-authorized Debit Agreement

Industry Examples: Fitness Centres, Property Management

Key Difference: The payee outlines a very specific fixed amount and timing of the payments

 

Open or Variable Pre-authorized Debit Agreement

Industry Examples: Utility Company, Accountant, Digital Agency

Key Difference: The payor agrees to allow the payee to debit their account anytime the payor owes money.

 

 

Congrats! You now have all the tools and information to go out and build your own PAD agreement!

 

There are no rules on how you build it or how it should look. As long as you have the necessary requirements, you are good to go and can make it your own.

FREE BONUS

Here at Rotessa, we’ve built an online tool that makes it really easy to build and collect pre-authorized debit agreements. The best part, it’s 100% free to use. The tools lets you customize a PAD form with your logo, text and fields you want to include. Here’s a sneak peek of the tool in action.

 

 

 

Want to give it a try? Simply set up a free Rotessa account (don’t worry, your Rotessa account is 100% free) and set up your very own PAD agreement.

Create Your Own PAD Form