A long time ago I signed up for a service and wrote the company a pre-authorized withdrawal. A little later the founder of the company ran away to Colombia. Concerned, I went to my bank to tell them to stop paying the withdrawals, and was extremely surprised to be told that they could not do that. I was even more surprised to be told that the bank would actually pay any requests for withdrawals they received, without checking that I had actually signed a pre-authorization.

This was in Canada. In the UK the equivalent process is called a Direct Debit. It has to be set up with the bank and can be cancelled by the account holder at any time.

  1. Is it true that North American banks will not allow you to stop a pre-authorized payment?
  2. Is it true that North American banks will pay a request for a pre-authorized withdrawal without checking that an authorization has actually been made?
  • 1
    #2 is generally true in the US. The direct debit system doesn't offer any way for the bank initiating the debit to prove that it is authorized. Instead, they warrant that it is authorized, which means, if it later turns out that it was not, they are legally liable to refund it. – Nate Eldredge Nov 9 '15 at 18:48
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    "North American" is not really used in a useful sense here. Canada and the United States have entirely different systems and laws. – Joe Nov 9 '15 at 20:35
  • (As do the other 21 countries, of course, didn't mean to leave any out) – Joe Nov 9 '15 at 21:22

In the United States, the following applies. Other North American countries likely have different rules.

Pre-authorized withdrawals are effectively checks that the merchant (or the merchant's bank) is creating and then cashing. They're similar in how they're processed to an actual check, except that there's typically no actual check printed - it's just the numbers in electronic form (ABA RTN, Account #, and amount). (Of course, many actual checks are also processed that way nowadays as well.)

According to the US Government's banking help site, this is how you should handle cancelling a pre-authorized debit.

Basically, if you know in advance that a particular merchant will make a single withdrawal, you can issue a stop payment similar to how you'd stop payment on a check; but it only works for a particular withdrawal. If a merchant continues to make attempts, you may have to dispute them after the fact with the bank (see the second to last paragraph).

This is basically a tradeoff the banks are willing to make (and you to some extent are willing to have made for you, conditional on you having a checking account): make it far faster and easier to handle and process legitimate requests, at the cost of having some illegitimate ones need to be reversed (or, possibly having expenses you're unaware of).

It's not really different than how credit cards work - a merchant who has your credit card number can charge you whatever they choose however often they want, and your only recourse is to dispute each charge (and eventually the merchant's account will be closed, if enough disputes occur), outside of going to a lawyer or the Attorney General's office.

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    The fundamental difference between a direct debit and a credit card is in the first case the money has moved and you have to swim upstream to undo it, compared to repudiating a charge. – user662852 Nov 9 '15 at 21:33
  • Well, not if you used a debit card, for example, that would in most cases be the same (i.e., the money would leave your account before you have a chance to complain). And your CC charge lowers your credit limit until it's repudiated - so it does reduce your purchasing power similarly, no? – Joe Nov 9 '15 at 21:35
  • Now you mention it I remember being told they could stop any individual payment but not all future payments. – DJClayworth Nov 9 '15 at 22:10
  • @Joe I must say, having lived in a different country, that the American banking system (including the ridiculous ACH-based direct debit) is utterly broken. Not in the least because it is convenient and profitable for the banks to have it this way and the complete lack of regulation to prevent that. – littleadv Nov 10 '15 at 6:58
  • I live and bank in the USA. If I asked my bank to stop future automatic withdrawals and they refused, all my money would depart with me in about three minutes. – chili555 Nov 11 '15 at 21:13

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