Pre-authorized debits in Canada: An in-depth guide

Last updated February 5, 2024
  1. Introduction
  2. How do PADs work in Canada?
  3. Where are PADs used in Canada?
  4. What are PADs used for in Canada?
  5. Benefits of accepting PADs in Canada
  6. Costs and fees of PADs in Canada
  7. Security measures of PADs in Canada
  8. Requirements for businesses to accept PADs in Canada
  9. Alternatives to PADs in Canada

In Canada, pre-authorized debits (PADs) are a streamlined method for businesses to manage recurring payments. PADs simplify the payment process by deducting funds automatically from customers’ bank accounts according to predetermined agreements. This method is particularly useful for recurring transactions like subscription services or membership dues. PADs reduce manual billing work for businesses and decrease the number of late or missed payments. For customers, PADs are a convenient and stress-free payment method that eliminates the hassle of keeping up with recurring payments.

There’s a growing preference for digital payment methods in Canada. In 2022, the total value of payment transactions in Canada reached 11.7 trillion Canadian dollars (CAD), with cash accounting for just 0.5% of all transaction value. PADs in Canada offer businesses an efficient and reliable payment option that keeps pace with the move toward digital and automated payment solutions. The service is set to become an increasingly relevant feature in the growing digital economy.

Businesses that want to add PADs as a payment option will need to understand their key features, primary customers, and relevant regulations established by Payments Canada and the Canadian Payments Act. This guide will cover what businesses need to know about accepting this payment method.

What’s in this article?

  • How do PADs work in Canada?
  • Where are PADs used in Canada?
  • What are PADs used for in Canada?
  • Benefits of accepting PADs in Canada
  • Costs and fees of PADs in Canada
  • Security measures of PADs in Canada
  • Requirements for businesses to accept PADs in Canada
  • Alternatives to PADs in Canada

How do PADs work in Canada?

Pre-authorized debits in Canada automatically withdraw funds from a customer’s bank account to pay a business or organization. This payment method is convenient for recurring payments, but it also works for one-time or infrequent transactions. PADs offer customers a hassle-free way to ensure their bills are paid on time, while businesses benefit from a steady and predictable cash flow. Here’s how PADs work in Canada.

  • PAD agreement
    To set up a PAD, a customer must complete a PAD agreement form with the business (the biller). This agreement gives the biller permission to withdraw money from the customer’s bank account, either at regular intervals or on a one-time basis, and includes all relevant terms and conditions, such as the amount that will be withdrawn (which can be fixed or variable), the frequency of withdrawals, and how to cancel the PAD. The agreement will also include the customer’s bank account details and the purpose of the debit. Businesses must obtain explicit and informed consent from customers to set up a PAD, and this consent should be documented and retained as proof of authorization.

  • Notification requirements
    If the amount is variable (like a utility bill, where the amount changes monthly), the biller is required to notify the customer at least 10 days before withdrawing the money to inform them of the amount and the date of debit. For fixed amounts, such as a monthly subscription fee, this notification may not be required.

  • Processing PADs
    Businesses work with a financial institution or a third-party payment processor to set up and manage PAD transactions. They will handle the transfer of funds from the customer’s account to the business account on the agreed-upon date. In most cases, it takes three to five business days for a PAD transaction to be processed and appear on the customer’s bank statement. Businesses should keep accurate records of all PAD agreements and transactions and have a system for tracking each transaction, including the date, amount, and customer details.

  • Canceling a PAD
    A customer can cancel a PAD agreement at any time by following the cancellation process outlined in the agreement. This usually requires notifying the biller in writing. Canceling the PAD does not cancel any underlying service agreement or contract the customer may have with the biller, and they may need to make alternate payment arrangements. Businesses should be prepared to process any cancellations or modifications to PAD agreements that customers request and should notify their bank or payment processor promptly about any changes to the PAD agreements.

  • Disputing a PAD
    If there’s an issue with a PAD—for example, if the incorrect amount is withdrawn or a withdrawal occurs after cancellation—customers can contact their bank to dispute the transaction. Banks have a set timeframe within which customers can dispute a PAD, typically 90 days from the transaction date. Businesses should have clear processes in place for handling disputes or unauthorized debits.

  • Reconciliation and accounting
    Businesses should integrate PAD transactions into their accounting system for accurate financial reporting and reconciliation, as well as regularly review PAD transactions against customer agreements to ensure accuracy.

Where are PADs used in Canada?

In Canada, customers across many business industries use PADs for their convenience and flexibility. PADs are particularly popular for regular bill payments and automatic transactions. Hundreds of millions of PADs are processed annually in Canada.

Businesses that use PADs include those in sectors such as nonprofit, ecommerce, retail, technology, professional services, food and beverage, gyms and fitness, and healthcare. This wide range of industries reflects the utility of PADs across different business models and operational scales. Small businesses in particular benefit from the security aspect of PADs: Payments Canada and the Canadian Banking network oversee these transactions and provide protection against fraud.

PADs are most often used for recurring charges such as rent, tuition, membership fees, subscriptions, or variable amounts like utility bills based on usage. They are also effective for invoice payments and for one-off sales, especially big-ticket items. PADs allows businesses to tailor the payment schedule and amount according to the needs of all parties.

Customers in Canada appreciate the convenience and reliability of PADs, especially for regular expenses like mortgage payments, insurance premiums, utility bills, and membership dues. PADs allow customers to make timely payments without needing to remember due dates or go through the process of manual payment each time.

What are PADs used for in Canada?

PADs are deeply embedded in Canada’s payments scene. Businesses appreciate the reliable and timely cash flow that PADs’ automatic fund transfers provide, and customers value the ability to keep up with recurring transactions effortlessly and ensure uninterrupted service. PADs are most frequently used for the following payments:

  • Subscription-based digital services
    Streaming platforms, online magazines, and software-as-a-service (SaaS) companies use PADs to keep up with recurring account fees.

  • Monthly memberships
    Gyms, yoga studios, and wellness centers manage monthly membership fees with PADs.

  • Childcare programs
    Many daycare centers and after-school programs use PADs for tuition and fee collection.

  • Housing fees
    Homeowners’ associations and condo boards use PADs to collect monthly or annual dues for maintenance and community services. Many people make mortgage and rent payments via PADs.

  • Vehicle payments
    Auto dealerships and financial institutions use PADs for managing monthly vehicle lease payments or loan repayments.

  • Business-to-business (B2B) services
    Companies providing B2B services—like supply chain vendors or professional consultancies—use PADs to streamline their accounts payable processes. PADs automate regular invoicing and payment collection from other businesses.

  • Telecommunications and internet services
    Telecommunications and internet service providers use PADs for monthly billing of their services.

  • Government services
    Local governments and municipal services, such as water or waste management, often use PADs for billing.

Benefits of accepting PADs in Canada

Businesses that accept PADs as a payment method may see the following benefits:

  • Enhanced cash flow predictability: Small businesses often grapple with maintaining consistent cash flow. PADs guarantee timely and consistent payments and a reliable income stream.

  • Cost-effective transactions: PADs typically charge a transaction fee of around 1% of the transaction value, depending on the payment processor. In contrast, fees associated with credit card processing are typically 2% to 4% of the transaction value, making PADs a cost-effective choice for many businesses. This low cost-per-transaction fee means PADs can be particularly advantageous for businesses that handle high volumes of small-value transactions.

  • Streamlined administrative processes: PADs’ payment automation substantially cuts down on the time and resources required for manual billing and follow-ups.

  • Improved customer trust: PADs are a recognized and highly trusted payment method in Canada. Businesses that accept PADs can use this customer trust to help build long-term relationships with customers around recurring billing models.

  • Payment flexibility: PADs are exceptionally versatile at managing both fixed and variable payment amounts. This is an advantage for businesses like utilities or telecoms, in which customer billing varies based on monthly usage.

  • Minimized chargeback risks: The direct authorization process built into the PADs system leads to fewer reversals or chargebacks compared to credit card payments.

  • Integration with Canadian accounting systems: PAD transactions are easily integrated with Canadian-specific accounting software, simplifying reconciliation and financial reporting.

Costs and fees of PADs in Canada

While PAD transaction fees are determined by the payment processor involved, PADs are generally a cost-effective solution for businesses, especially when compared to credit card transactions. If payment processors provide the point-of-sale (POS) terminals or online payment services, they might charge additional fees. Stripe’s pricing structure for PADs in Canada is listed below, as an example of what PAD fees in Canada might look like.

  • PAD transaction fee: 1% of transaction value + $0.40 CAD

  • PAD transaction fee cap: $5.00 CAD per transaction, regardless of transaction amount

  • Instant verification fee: $1.00 CAD

  • Payment failure or dispute fee: $5.00 CAD

Security measures of PADs in Canada

PADs in Canada include several security measures designed to protect businesses and customers. These measures are part of a regulated framework that ensures secure and reliable transactions. PADs’ key security measures include:

  • Encryption and secure transmission
    Financial institutions in Canada encrypt PAD information in a similar way to how they encrypt e-transfer information. The sensitive financial data is transformed into a secure code during transmission, preventing unauthorized access. PADs are processed through Canada’s Automated Clearing Settlement System (ACSS) and adhere to strict safety guidelines.

  • Rule H1 compliance
    Per Rule H1, a signed, written authorization from the payer is required before initiating a PAD, to ensure the payer has explicitly agreed to the terms of the debit. Businesses must have PAD authorization agreements that comply with the content requirements stated in Rule H1. Recent changes to Rule H1 have removed the distinction between electronic and paper PAD agreements, creating a uniform process for all PAD agreements.

  • Pay verification
    Payees must have “commercially reasonable” procedures to verify the payer’s identity. These procedures must be in line with the methods used for verifying identity in similar types of business and payment applications. The definition of “commercially reasonable” has been revised to allow payees to use verification methods tailored to their business and PAD arrangement.

  • Written confirmation
    Payees must provide written confirmation of the PAD details to the payer at least 10 days before the first debit in order for the transaction to be processed. This confirmation can be the PAD agreement itself or a summary of its key terms. This measure ensures that the payer is well informed about the agreement terms before any funds are debited​​.

  • Transparency measures
    If a payee is collecting payments on behalf of another entity, the PAD agreement must include a statement describing the arrangement between the payee and the entity providing goods or services to the payer. This creates transparency in transactions where the payee and the provider of goods or services are not the same entity.

  • Automatic termination
    One-time PAD agreements automatically terminate once payment has been completed to prevent unauthorized repeated debits and confirm that each transaction is explicitly authorized​​. Any subsequent PAD transaction requires a new PAD agreement.

Requirements for businesses to accept PADs in Canada

Businesses in Canada that want to accept PADs must adhere to certain required practices for compliance with the regulatory framework set by Payments Canada. These operational requirements are outlined below.

  • PAD agreement
    First, businesses need to establish a PAD agreement that grants permission for withdrawals from the payer’s account. The PAD agreement must specify the amount of the debit, which can be a fixed or variable amount, as well as the frequency of the debit, which can also be fixed (e.g., weekly or monthly) or variable. Businesses must provide their banking information as part of this agreement, and some financial institutions may request a blank check to verify account details. In such cases, writing “VOID” across the check without signing it is a standard practice for fraud prevention. These agreements must also include a date and signature, a statement authorizing the company to debit a specific amount, the PAD category (personal or business), a statement about the right to cancel the agreement (with a clearly outlined cancellation method), and contact information for the issuing company.

  • Written confirmation
    PAD agreements can be set up electronically, in writing, or over the phone. If the agreement is completed electronically or via telephone, the bank is expected to send a written confirmation detailing the agreement specifics at least three days before the first withdrawal.

  • Payment notification
    For PADs with variable payment amounts, the biller must notify the payer in writing at least 10 days prior to withdrawal unless this period is waived or shortened.

  • Payment approval
    If the PAD agreement doesn’t define the frequency of payments, or if the frequency is variable, the biller must obtain approval for each PAD transaction. This might involve the use of a password or a code for authorization.

  • Rule H1 compliance
    Businesses must adhere to Payments Canada’s Rule H1, which outlines the responsibilities and obligations regarding PADs. This includes signing an enrollment agreement, which details the terms and conditions of the PAD service, and preparing and implementing a Payor’s PAD Agreement, commonly known as Direct Withdrawal Authorization, for customers. This agreement should contain all mandatory provisions as required under Rule H1. In cases where a third-party service provider is used for debit processing, the PAD Agreement must identify the service provider’s name as a beneficiary acting on behalf of the actual beneficiary.

Payment processors will have their own requirements to implement PAD payments. Stripe’s requirements for businesses to accept PADs in Canada are outlined below as an example.

  • Mandate collection: Before debiting a customer’s bank account, businesses must collect a Rule H1–compliant customer mandate with details such as institution number, transit number, account number, payment schedule, name, and email. This mandate authorizes the business to debit the customer’s account. Stripe has tools such as Stripe.js to assist during the payment flow in collecting these mandates and bank account details. Stripe also offers instant bank verification.

  • Customer notifications: Stripe requires businesses to inform customers when a mandate is established and of each debit made from their account. Stripe can send these notifications automatically, or businesses can choose to send custom notifications. If opting for custom notifications, businesses must support all required email notifications, including mandate confirmation and debit notifications.

  • Dispute process: Under Stripe’s rules, customers can dispute a PAD through their bank for up to 90 days after a debit on a personal account or up to 10 business days after a debit on a business account. Stripe handles notifications and deductions for disputed amounts.

  • Refunds and payouts: Refunds of PADs processed by Stripe must be submitted within 180 days of the original payment and typically take three business days to complete. Businesses should inform customers about the refund timing to avoid confusion.

  • Statement descriptors: Businesses must provide a business name to be listed on customers’ bank statements for each PAD payment. Businesses can customize this descriptor for each transaction by updating their Stripe account’s statement descriptor.

Alternatives to PADs in Canada

In Canada, businesses have several alternatives to PADs for handling transactions. While PADs are popular for their convenience in recurring payments, other payment methods are used in different markets. PADs’ primary payment alternatives are outlined below.

  • Credit and debit cards: Cards are the most common way to shop in Canada and were used for 33% of all ecommerce transactions in 2022. They represent a significant portion of annual sales and are a dominant payment method in the Canadian market.

  • Online transfers: Online transfers that involve electronic transactions initiated through online services accounted for 5% of payments in 2022, surpassing personal electronic funds transfers (EFTs) in volume for the first time, including direct deposits and PADs.

  • Cash payments: Cash is an ongoing payment option in Canada and was used for 10% of transactions in 2022. Services like Canada Post’s Collect on Delivery (COD) cater to individuals who prefer to use cash for transactions by allowing them to pay cash once an item arrives.

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