Pre-Authorized Debit (or PAD) is an electronic payment method that allows your businesses 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 gives permission for you to withdraw money from their account based on the terms outlined. This can work for recurring payments on a set schedule, or variable amounts too.

Pre-Authorized Debits work best for businesses that collect ongoing payments from the same customer. Whether you collect recurring payments on a set schedule or variable amounts from time to time, PADs are a great fit.

A few examples of businesses with recurring payments on a set schedule include: fitness centres — for membership fees, daycares— for monthly dues and Property managers — for rent payments.

There are some cases, however, where the amount of the transaction fluctuates and the timing is not always consistent. Accountants or digital marketing companies are a great example of businesses that use PADs to process variable amounts based on the number of hours they’ve worked.

Unlike Interac or credit cards, pre-authorized debits do not clear instantly and they are required to be scheduled at least 1 business day in advance. This means that Pre-Authorized Debits are not a great choice for businesses that don’t have an established relationship with their customers such as retail or e-commerce.

There are 3 significant advantages for businesses to collect payments through Pre-authorized debits.

Number one, they are automated. PADs can be scheduled in advance so you never have to worry about getting paid. On the scheduled dates, payments will be withdrawn from your customer’s bank account.

Number two, the business 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.

And the third advantage of collecting pre-authorized debits is 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.

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.

When you have an account set up with a processor, the first step is to collect a Pre-Authorized Debit agreement from your customer. This will outline the payment terms and give you the proper authorization to initiate payments.

Next, you can set a transaction schedule based on the agreed-upon payment terms. Payment instructions are sent to the bank one day in advance of the process date. The details are then exchanged within the Automated Clearing Settlement System and the appropriate funds are withdrawn from your customer’s bank account, and deposited to yours.

Pre-Authorized Debits 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.

Pre-Authorized Debits are also regulated by the Electronic Funds Transfer Act, which details the rights and liabilities of Pre-Authorized Debits. Pre-authorized debits also have a very clear mandate to ensure any unauthorized debit can easily be reversed through the bank.

To start accepting Pre-Authorized Debits, 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. However, banks don’t offer API solutions for custom integrations. You can expect a signup fee, monthly fees, and batch fees.

The second way 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 set up 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.

An authorization is a legally required agreement between your business and your customer outlining the payment details of a pre-authorized debit. As part of the authorization, your customer gives permission for you to withdraw money from their bank account and outlines the amount and timing of the payments. The authorization also outlines the cancellation process in the event your customer would like to cancel the agreement.

An authorization can be completed in person, or it can be completed online assuming you have reasonable means to identify your customer such as an email or phone number.

Depending on your processor, Pre-Authorized Debits can take anywhere from 1-4 business days from the process date. It may seem like a while, but the settlement delay ensures that the funds are actually cleared before arriving in the account. This also greatly decreases the risk of fraud and gives you more control over your transactions should you need to cancel or reverse the payment.

You should also be aware that Pre-Authorized Debits only process on business days, and often payment processors have cut-off times. Any transactions made after the cut-off will not process until the next business day.

A reject is when your customer’s payment has been sent to the bank and has failed to process or settle into your bank account. There are various reasons why a rejection can take place, such as insufficient funds, the customer has requested the payment to be stopped, or the wrong account number was entered.

Rejections are easily resolved depending on the reason. In the event of insufficient funds, the business has up to 30 days to resubmit the payment.

Start using pre-authorized debit payments for your business

Try Rotessa Today