Pre-authorized debit vs credit card for recurring billing in Canada

What EFT Rails does

EFT Rails sends payments by electronic funds transfer (EFT) and Interac e-Transfer. It does not process card payments. EFT Rails sends a debit when you create it, for the amount you set, or on a recurring schedule you set up once through the API. The schedule creates debits about a week before their dates. You hold the pre-authorized debit (PAD) agreement with your customer. The API reference describes the payment requests.

How each one works

A pre-authorized debit (PAD) is drawn under the customer's PAD agreement: a continuing but revocable authority, written or recorded and signed or otherwise authorized, that lets the business debit the customer's account.¹

A credit card payment involves the customer, the merchant, the card processor and the bank that issued the card, along with the card network. In some networks, the card processor and the card issuer are the same company.² The card issuer checks the customer's available funds or credit and approves or declines the payment, with the answer returned to the merchant at the time of payment.³

The comparison

A PAD requires notice before collection and before certain changes. Before the first debit, the business gives the customer a confirmation at least 10 calendar days ahead, unless the customer waives it or shortens the period.⁹ For debits at set intervals, the business gives pre-notification of the amount and date at least 10 calendar days before a change to a fixed amount or the dates, and before every variable-amount debit after the first.¹⁰ See PAD pre-notification and how long an EFT takes.

Card fees depend on the merchant's plan with its card processor. A flat or blended plan applies one rate. Otherwise, fees depend on the card brand, whether the card is premium or standard, and the transaction type.¹¹

When a payment fails

A failed collection produces either a returned debit or a decline at the time of payment. A returned PAD carries a return code naming the reason: 901 for non-sufficient funds (NSF), 902 for account not found, 903 for payment stopped or recalled, 905 for account closed, and 908 for funds not cleared.¹²

A debit returned for NSF or funds not cleared can be presented again once, within 30 calendar days, for the same amount.¹³ EFT Rails shows the payment as returned. See handling NSF returns.

For a credit card payment, the card issuer checks the available funds or credit and sends its approval or decline to the merchant at the time of payment.³

Disputes

A customer uses a claim for a PAD and a chargeback for a credit card payment. A PAD customer can claim through their own bank if the debit did not follow the agreement, the agreement had been revoked, or a required notice was not given. The deadline is up to and including 90 calendar days after a personal debit, or 10 business days after a business debit, and the bank reimburses the customer immediately on a best-efforts basis.¹⁴ A claim that no agreement existed at all can be made within 90 calendar days.¹⁵ See the PAD dispute windows.

A chargeback is a customer's request for their card issuer to reverse a disputed transaction. Each card network sets its own chargeback guidelines, and provincial law may also apply. Merchants must be told the fees charged to them for chargebacks.⁸

Cancelling

Cancelling a PAD ends the authority for further debits. When a customer cancels, the business must stop issuing new debits within 30 calendar days of the notice and cannot debit again without a new agreement.¹⁶

Choosing

A PAD suits a recurring amount from a customer who has signed an agreement. A credit card suits a payment where the customer pays at the time. Many businesses offer both. See setting up pre-authorized debits for the collection process.