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What is Pre-authorized Payment?

Pre authorized payment refers to pre-arranged deductions from the bank account of debtors to creditors. This payment method is very popular in paying loans and other obligations where payment is done on a regular basis.
The article provides information regarding the following:
  1. Pre-authorized debit in Canada

  2. Types of Pre-authorized debit payments

  3. Arrangements involved in pre-authorized debit payments

What is Pre-authorized debit in Canada?

In Canada, the pre-authorized debit is the withdrawal made from one's account by a company or another financial institution that has been authorized by the account holder. It is a special kind of debit that ensures timely payments, gives greater security, reduces paperwork, eliminates the need of reminder notices, and improves fund availability.

The other advantages of pre-authorized debit are saving postage expenses, cutting time for remittances' processing, improving cash management, better management forecasting, and higher levels of internal controls. This is a convenient system to deal with recurring payments such as utility bills and credit cards. It can also be used for charitable donations, insurance premiums or contributions to retirement savings plans. These are regulated by the Canadian Payments Association. 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. The payer has to denote the exact amount of the debit payment that is pre-authorized. 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result in a pre-authorized payment, together with the payer's checking or deposit account from which the amount will be withdrawn.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.

What are the Types of Pre-authorized debit Payments?

There are different kinds of pre-authorized debit payment depending on the type of consumer. The personal pre-authorized debit is preferred by consumers who wish to make payments to various organizations such as 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. The business pre-authorized debit payment involves payments between different kinds of business entities. Cash management pre-authorized debit is used for payments between closely affiliated business enterprises.

What are the Arrangements Involved?

The person making payments should make arrangements for payments directly with the Payee. Both of you have to establish an agreement in which you authorize the withdrawals, either through a written form that you sign, or through an electronic communications channel, such as a web site or over the telephone.

The agreement must specify that the amount of the PAD is fixed or indicate if the amount varies. It must also specify the timing, frequency or event that will result in a PAD, as well as the account from which the funds are to be withdrawn. It should also indicate the procedure for cancelling the pre-authorized debit payment and provide contact information for the biller. The Biller may request a blank cheque to confirm your account details and the transit number for your branch. You need to write the word “VOID” in ink in the front of the unsigned cheque. Keep a copy of the authorization form, or the written confirmation that you will receive from the biller.

Credit Card Pre-authorized Payments

Pre-authorized payments have a distinct advantage. In the case of credit cards, the advantage of using this system of credit card pre-authorization screening is that merchants avoid processing fraudulent payments. They also avoid losing the processing fees of that sale and a chargeback fee should any chargeback arise from the fraudulent order.


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