As the name suggests, a pre-authorized payment is when a customer gives you permission to automatically charge them for their goods or services. For companies, this type of approach is a convenient way to ensure a steady cash flow. When bills are due, your administrative staff members don’t have to chase anyone for their monthly payments.
To see how these payments work in practice, we’ll take a look at pre-authorized payment examples, see the steps involved in processing payments, and learn about the benefits associated with them.
TL;DR
- Pre-authorized payments allow customers to automatically pay for the goods and services they purchase from your company.
- These payments can be for fixed or variable amounts. For instance, Netflix subscriptions are fixed payments, and utility bills have variable costs.
- These payments are often used with subscriptions, gym memberships, utility bills, mortgage payments, student loans, and insurance premiums.
- A pre-authorized payment agreement must be completed before the payment can be processed.
- With pre-authorized payments, you can enjoy having more consistent cash flow, a lower risk of fraud, less admin work, and fewer late payments.
- Because pre-authorized plans are easier to use with ACH, you can also reduce your overall payment processing costs.
- As an added benefit, customers can enjoy having a more convenient payment process and added payment options.
What Are Pre-Authorized Payments?
So, what is the meaning of a pre-authorized payment?
When it comes to payment processing, a pre-authorized payment is when a customer gives you permission to charge them automatically in the future. These payments can be set up so that they are the same amount every month, or they can be used for variable payment amounts. For example, recurring Netflix subscriptions cost the same each month, but your utility bill can vary.
You can set up pre-authorized debit or pre-authorized credit payments with your customers. These payments can also be set up to happen on a weekly, monthly, or yearly basis.
To be legal, you’ll need to complete a pre-authorized payment (PAP) agreement. Besides telling customers when the payments will occur, it also tells them how the payments can be canceled.
What Are Pre-Authorized Credit and Debit Payments Used For?
Pre-authorized payments can be used for a variety of purposes in the travel, hospitality, transportation, utilities, student loan, debt repayment, and insurance industries. From streaming services to mortgage payments, many of the bills we pay each month are automatically processed as a pre-authorized debit or credit payment.
The following are just a few common examples of this type of payment.
- Water bills
- Mortgage payment
- Netflix, Hulu, and Disney+ subscriptions
- Pre-authorized retirement contributions and investments
- Hotel rentals
- Car rentals
- Tuition payments
- SaaS subscriptions
- Delivery services, such as Amazon Prime or Walmart+
How Pre-Authorized Payments Work
Whether you need payments for a monthly subscription service or travel bills, there is a process you have to go through to set up pre-authorized payments. Before you can automatically charge your clients, you first have to get their permission. You also need to work with a secure payment processor and payment gateway so that your clients’ information remains secure.
- Complete a PAP Agreement: First, you need to get permission to automatically process payments each month. In this document, the customer will detail the payment method, when the payment will happen, and how much the payment will be.
- Store Information Safely: Next, your payment processor, like PayCompass, will make sure that the payment details are safely stored for future use. Through high-level encryption and fraud detection tools, our team ensures that nefarious actors can’t access your customer information.
- Collect the Payment: When the agreed-upon payment date arrives, you have to initiate and collect the payment. If you are working with an experienced payment processor, this will be done automatically by the payment system so that you don’t have to manually key in information.
- Receive the Funds: After the payment has been withdrawn from the client’s account, it will move through the payment network and into your merchant account.
Release Unused Funds: Sometimes, the charges end up being less than expected. If the final cost was less than the funds held, those unused funds must be released back to the customer.
Industry-by-Industry Examples of Pre-Authorized Payments
To give you a better idea of how this payment process works in the real world, here are a few pre-authorized payment examples in different industries.
| Industry | Examples of Pre-Authorized Payments | The Benefits of Using Pre-Authorized Payments |
| Retail | Loyalty memberships, meal kits, clothing subscriptions, and buy-now-pay-later (BNPL) agreements | Offers a more convenient experience for customers and a consistent source of cash flow for the business |
| Healthcare | Health insurance premiums, dental insurance premiums, and chiropractic treatments | Reduces the amount of admin time spent on billing and ensures a consistent revenue stream |
| Hospitality | Vacation club memberships, pre-authorized deposits to pay off future hotel stays, and hotel memberships | Creates an easier check-in experience and decreases the likelihood of no-shows |
| Travel | Recurring payments for future travel, car rentals, and monthly payments for travel memberships | Makes high-dollar purchases more affordable for clients |
| Subscription Services | Streaming services, SaaS platforms, and online media | Generates revenue from future billing |
| Fitness | Yoga class subscriptions, gym memberships, and personal training subscriptions | Ensures clients are committed to your business and makes it easier to collect membership dues |
| Charities and Nonprofit Organization | Recurring fundraising campaigns and ongoing donor contributions | Improves donor retention and builds a consistent cash flow |
| Education | Learning app subscriptions and tuition payment plans | Makes education more accessible to students on a budget and generates ongoing revenue for the business |
The Benefits of Pre-Authorized Payments
Thanks to pre-authorized payments, you can improve your company’s revenue stream and cash flow. These payments can enhance your company’s financial management in a few key ways.
- Better Cash Flow Predictability: By far, this is the most important benefit of pre-authorized debit and credit card payments. Because these payments are processed automatically, you can predict your future cash flow with a great deal of accuracy.
- Lower Processing Costs: When you process payments automatically instead of entering them manually, you end up spending less on your overall processing costs.
- Fewer Funding Delays: Because the payment is scheduled in advance, you don’t have to worry about funding delays.
- Reduced Administrative Labor: Your company can spend less on labor by automating some of its payments.
- Increased Number of Payment Options: While customers don’t want to use ACH for day-to-day payments, entering ACH information for a pre-authorized payment is simple and allows your company to enjoy the lower processing fees.
- Reduced Fraud Risk: Pre-authorized payments are verified before they’re processed, ensuring a lower level of fraud.
- Fewer Late Payments: Unlike traditional payment processing, you don’t have to worry about whether the customer will actually pay their bill on time or not.
How PayCompass Can Help With Your Pre-Authorized Payments
At PayCompass, we have a unified platform that allows you to easily process payments. You can set up pre-authorized debit and credit payments with your clients. When the day of the payment arrives, we automatically process the correct amount. Then, we release any extra, unused funds back to the customer.
Through our services, you can enjoy better chargeback and fraud prevention. From global payment processing to high-risk merchant accounts, we can simplify your company’s payment acceptance and help you improve your cash flow.
Final Thoughts
While there is extra paperwork upfront, pre-authorized payments can reduce the amount of time and effort your company spends on payment processing. Through this payment option, you can ensure a consistent stream of revenue and fewer late payments.
By partnering with PayCompass, you don’t have to worry about all of the legal paperwork involved in setting up pre-authorized payments. We have the tools you need to complete PAP agreements and process payments on a set schedule. Thanks to our enhanced fraud prevention, chargeback deterrence, and payment gateway features, your company can enjoy a smooth, easy payment process.
Find out more information about pre-authorized credit and debit payments by reaching out to our payment processing experts today.
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