FAQs for Billers: Billing by Pre-Authorized Debit

DO I NEED TO SWITCH BANKS?

No!

WHAT IS A PRE-AUTHORIZED DEBIT (PAD)?

A pre-authorized debit (PAD) is a withdrawal from a customer’s bank account, which has been pre-authorized by the account holder in written or electronic form. PADs are often used as a convenient way for a business to obtain payment from a customer on a recurring basis.

WHAT ARE THE DIFFERENT TYPES OF PAD’S?

Personal PADs are used by consumers to pay companies or other organizations for goods or services.

Funds Transfer PADs, on the other hand, are used to move money between accounts held by the same person at different CPA member financial institutions. Common examples include contributions to investment accounts, mutual funds and registered savings plans.

Business PADs are used to pay for goods or services related to a business or commercial activity of the Payor, for example payments between franchisees and franchisors, distributors and suppliers, or dealers and manufacturers.

Cash Management PADs are used to consolidate or reposition funds between accounts held by the same business or closely affiliated businesses at different financial institutions. For example, a parent company may use a Cash Management PAD to draw funds from an account of its subsidiary.

WHAT TERMS MUST A PAD INCLUDE?

The agreement must specify the amount of the PAD if it is fixed or indicate that the amount will vary. It must also specify the timing as well as the account from which the funds are to be withdrawn. It should also indicate the procedure for cancelling the PAD 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; if so, be sure to write “VOID” in ink on the front of the cheque, and do not sign it.

CAN THE AMOUNT OF A PAD AGREEMENT BE CHANGED?

Can we add extra charges? If a customer signs up for additional goods/services, can these fees be added to an existing agreement?

Yes, you can change the amount of a PAD agreement, if you inform your customer ahead of time within a specified time period in accordance with Rule H1.
If the payments are at set intervals, you must notify your customer at least 10 calendar days before the change in amount, unless the agreement specifically allows for a change in amount (if requested by the customer) or if you and your customer agree to reduce or waive the notification period.

Keep a copy of the changes with the original agreement for a minimum of one year following the last debit to the account.

Detailed information is available in sections 14 and 15 of Rule H1.

IS A ONE-TIME PAYMENT ALLOWED? DO I NEED TO HAVE AN AGREEMENT IN PLACE?

Yes, one-time pre-authorized debits are allowed and you do need to have an agreement in place. Rule H1 applies to both recurring and one-time PADs.

CAN THE AMOUNT OF A PAD VARY DEPENDING ON HOW MUCH THE CUSTOMER OWES?

Yes, but you must state this clearly in the payor’s PAD agreement.

For variable amounts PADs at set intervals (e.g. monthly), you need to notify the customer at least 10 days before each payment, unless you and your customer mutually agree to reduce or waive this “pre-notification” period in the payor’s PAD agreement. The waiver has to be prominently displayed in a paper agreement (e.g. in bold print, highlighted or underlined), or expressly communicated to your customer in the case of an electronic agreement.

DO PADS HAVE TO OCCUR AT SET INTERVALS (E.G. MONTHLY)?

No. PADs can also be triggered by a specified act, event or other criteria – for example, every time a customer uses a particular service. This act, event or other criteria must be clearly described in the payor’s PAD agreement. PADs can also be sporadic, meaning that they occur occasionally, irregularly, intermittently, infrequently or periodically.

WHAT CAN I DO IF A PAD TO MY CUSTOMER’S ACCOUNT IS RETURNED NSF?

If a PAD is returned due to insufficient funds, the biller may re-present the payment item only once, and this must be done within 30 days of the original transaction date. If the biller chooses to re-present the PAD that was returned NSF, the PAD must be for exactly the same amount as the original transaction (i.e. it cannot include service fees charged by the biller). if the Payor’s PAD Agreement provides for variable amount PADs, the Payee may add NSF charges to the outstanding balance the next time a PAD is withdrawn from the Payor’s account, provided the pre-notification provisions are satisfied.

WHAT HAPPENS IF A PAD IS INCORRECTLY PROCESSED TO MY CLIENT’S ACCOUNT?

Your customer should inform you immediately if any withdrawal from their account is not in accordance with the terms of the Payor’s PAD Agreement (e.g. different amount or date), or processed after they have cancelled the agreement.

If the customer is not successful in resolving the issue with the biller, or if the PAD was originated by a biller with whom they did not have an agreement, the customer may request that their financial institution reverse the transaction and return the funds to the client’s account.

  • For personal PADs, the Payor has 90 days from the date of the withdrawal to report the problem to their financial institution and seek reimbursement. Once the client has provided the reason for the claim, the Payee’s account will be debited and the funds will be restored to the client’s account.
  • For business-related PADs, if there is no contract between the business and the biller, the business has 90 days from the date of the withdrawal to report a problem to their financial institution and seek reimbursement. Any other discrepancies (e.g. incorrect amount) must be reported to the financial institution within 10 business days.
  • If a business uses PADs for cash management purposes (e.g. to withdraw funds from the account of an affiliate or subsidiary), the financial institution will reverse a PAD only if no agreement exists between the two entities and the problem is reported within 90 days of its occurrence.

WHAT IF THE CUSTOMER'S ACCOUNT INFORMATION CHANGES?

If your customer tells you about the change, you can update the existing agreement or you can set up a new one. Remember to keep a record of their instruction to change the information along with the original agreement.

If your financial institution tells you via a Notice of Change (NOC), you should update the customer’s information as soon as possible. You don’t need your customer’s authorization to make the change.

REQUIREMENTS WHERE A THIRD-PARTY SERVICE PROVIDER IS RESPONSIBLE FOR THE ACTUAL DEBIT PROCESSING?

The intent of the Rule is to ensure that the Payor knows who is debiting their account (i.e. that the Payor can recognize the name appearing on their account statement). Thus, if the service provider’s name would be shown on account statements as the originator of the PAD, the Payee would need to disclose this arrangement in the Payor’s PAD Agreement.

The intent is not to require the Payee to disclose all legal agency agreements it may enter into with processors, where there is no effect to the Payor. (See Rule H1, Appendix II, and Supplementary Elements for further details).

CAN I MASK MY CUSTOMER'S BANK ACCOUNT INFORMATION IN MY CORRESPONDENCE WITH THEM?

Yes. The ideal balance is to give enough information for your customer to understand the details of the agreement, while ensuring that enough of their bank account number is masked to help protect their privacy and security.

CAN MY CUSTOMER REVERSE A PAYMENT?

Yes, if the PAD isn’t in accordance with the terms of the payor’s PAD agreement such as wrong date or amount) or if no agreement exists.

If your customer can’t resolve the issue with you or if they wish to contact their financial institution first, they can make a claim for reimbursement. They can do this up to 90 days after the payment. Once the customer gives the reason for their claim, their financial institution will reverse the PAD and restore the funds to their account, resulting in the funds being taken from your account.

WHAT TO DO IF A PAYMENT IS RETURNED “NO AGREEMENT EXISTS".

This must be addressed outside of our rules, as per section 24 of Rule H1.

WHAT IF I SELL OR BUY A COMPANY? CAN THE NEW OWNER CONTINUE THE PADS?

Yes, but the new owner will need:

  1. A Letter of Undertaking – The new owner might already have one in place with their financial institution. If not, your Letter of Undertaking could be transferred, or “assigned” to the new owner, if the financial institutions involved agree to this arrangement.
  2. Payor’s PAD agreements – many payor’s PAD agreements (or written confirmations) include an assignment clause. This is a prominent statement (e.g. bold, underlined or highlighted) that allows for transfer or “assignment” of the agreement in the future.

If the agreements with the business’ current customers contain an assignment clause, the new owner can continue the PADs, if the business’ financial institution “signs off” on the existing agreements (as well as any new ones). You must also send a written notice giving full details of the transfer to your customers (including the name and contact information of the new owner).

If the existing agreements don’t contain an assignment clause, the new owner will need to give a written notice of the full details of the assignment (including the name and contact information for the new owner) at least 10 days before withdrawing funds from their accounts. The new payee can also set up a new agreement with each customer.

More details are available in section 25 of Rule H1.