Pre-Authorized Debit

A pre-authorized debit refers to a withdrawal from one's account by a company or another financial institution that has been authorized by the account holder to do so. Pre-authorized debit is also a special kind of debit that ensures timely payments, gives greater security, reduces paperwork, eliminates the need of reminder notices, and improves fund availability. Other advantages of PAD are saving postage expenses, cutting time for remittances' processing, improving cash management, better management forecasting, and higher levels of internal controls. It is not difficult to figure out that PADs are a convenient instrument to deal with recurring payments such as utility bills and credit card payments. You can also use PADs to make charitable donations, pay insurance premiums or make contributions to your retirement savings plan. While PADs are regulated by the Canadian Payments Association (CPA), it should be known that recurring charges to one's credit card do not fall in the category of pre-authorized debit.

The basic principle of PADs is rather simple – the payer makes an arrangement for pre-authorized debit payments with the payee or with the financial institution, if the pre-authorized debit payment involves the transfer of funds. Under a PAD agreement, the payer authorizes the payee to make regular withdrawals from his or her bank account. A written PAD agreement could be signed in a paper form, and via the Internet or the phone. The payer has to denote the exact amount of the debit payment that is pre-authorized, if it is fixed, or point that this amount may vary. A PAD agreement must also specify the event, frequency, or timing that will result in a pre-authorized payment, together with the payer's checking or deposit account from which the amount will be withdrawn. Should a pre-authorized debit become inconvenient or undesirable, it could be cancelled at any point of time under the terms and conditions specified in the PAD agreement.

On its part, the biller may ask that the payer sends a blank cheque so as to confirm his or her banking details. Confirmation cheques should not be signed by the payer and the word “VOID” should be written in ink at the front of each cheque. It is a responsibility of the payers to retain a copy of all authorization forms that they received from the biller and check their bank statements regularly. In this way, the payers can see if the withdrawals correspond to the ones stated in the PAD agreement.

There are different kinds of PADs depending on the type of consumer: personal pre-authorized debit is preferred by consumers who wish to make payments to various organizations (e.g. utility companies) for the services they have received from them; funds transfer pre-authorized debit is employed to move finances between the accounts of one individual at various financial institutions; business PADs involve payments between different kinds of business entities; finally, cash management pre-authorized debit is used for payments between closely affiliated business enterprises.