The Complete Guide to Bacs and Bacs Payments

What is a Bacs Payment?

A Bacs payment is one of the most common bank-to-bank transfers in the UK. There are two main types of Bacs payment; Direct Debit, where one party has been given permission to pull money from the bank account of another party. The other main type of Bacs payment is Direct Credit, where a party deposits the money in the other party's account.

The service is operated and managed by Bacs Payment Schemes Limited.

What is Bacs?

Bacs is a membership organisation consisting of 16 of the UK's leading banks. In 2020 there were 4.5 billion payments made by Bacs Direct Debit, and around 2 billion Direct Credit payments.

Alongside this, bank-to-bank payments can also be made through Faster Payments and CHAPS. Faster Payments allows for near real-time payments between bank accounts in the UK. Meanwhile, CHAPS is a same-day payment method for high value transactions (e.g. for buying property).

Types of bank-to-bank payment

In this article, we'll discuss how the four types of payment work in the UK. We'll also look at how to make a Bacs payment, how much it'll cost and how long it'll take. We'll also compare the different payment methods so you can choose the most appropriate method based on your requirements.

Direct Debit

If you want to take payments then Direct Debit may be the best option for you. It's a simple and cost-effective way to take recurring (and one-off) payments where same-day payment isn't required.

What is Direct Debit?

A Direct Debit is an instruction from a customer to their bank authorising an organisation to collect payments from their account as long as the customer is given advance notice of the payment amounts and dates. A customer gives this authorisation by completing a Direct Debit Mandate form – this can be a paper form or a web page that you complete online. Once authorised, the organisation can automatically take payments from you (provided that they comply with the scheme rules).

Direct Debit is the safest way of making payments in the UK as the Direct Debit Guarantee means that customers are protected from fraudulent payments.

Direct Debit has traditionally been seen as a payment method only available to large corporations. However, with the advent of Direct Debit providers such as GoCardless, organisations of any sizes can now benefit from the advantages of taking Direct Debit payments. This is possible without the need to go through the long and complex process of getting a sponsor bank and applying for a Service User Number.

What is Direct Debit used for?

Direct Debit is typically used for taking regular or recurring payments like household bills, subscriptions, memberships or charitable donations. However, it can be used for much more – even for one-off payments.

Direct Debit is a popular payment option in the UK. 90% of the UK population pay at least one regular bill by Direct Debit. In 2018 there were 4.4 billion payments made by Direct Debit, with an overall value of £1,327 billion. This is forecast to grow to 4.7 billion payments by 2028.

Advantages of Direct Debit

• Lower cost per transaction than credit and debit cards.

• Great for recurring payments. Once you have a Direct Debit in place, you can sit back and forget about it. 

• With the Direct Debit Guarantee, customers are protected against payments made in error or fraudulently. 

• Unlike credit and debit cards, which can be stolen, lost or expire, a Direct Debit is relatively future-proof. That means failed payments are minimised. The success rate of Direct Debit payments if 95-100%, compared to just 80-95% for cards.

Disadvantages of Direct Debit

• Direct Debit is not suitable for same-day payments, as payments take 3 working days to process.

• Traditionally Direct Debit could only be offered by a few, large businesses. Though Direct Debit still requires Bacs approved software, third-party payment platforms such as GoCardless are making Direct Debit more accessible to more businesses.

• Though ‘set and forget’ is usually seen as a benefit of using Direct Debit, some customers may prefer to keep complete control of their payments, and action each transaction themselves.

• If you do not have the necessary funds in your bank account, then your bank could refuse to pay the Direct Debit. Or it may result in your account going into an unauthorised overdraft, with the potential of penalty fees and interest payments.

Bacs Direct Credit

Bacs Direct Credit (also known as “bank transfer”) is a secure service enabling organisations to make payments directly into another bank or building society account.

What is a Bacs Direct Credit used for?

Bacs Direct Credit is one of the most popular ways for UK businesses to make payments. There are about 2.1 billion Bacs Direct Credit payments made in the UK each year. It's typically used for making regular payments such as salaries, pensions, state benefits and tax credits. However, with the introduction of Universal Credits in the UK, the volume of state benefits paid through Bacs Direct Debit may fall. 80% of the UK workforce is paid using Bacs Direct Credit.

Advantages of Bacs Direct Credit

• In comparison to some payment methods, such as cheque, Bacs Direct Credit is a much easier payment method to administer, with much of the process, including remittance and reconciliation, benefitting from automation.

• There are some immediate cost savings of using Bacs Direct Credit. For example, when comparing it to handling paper money, such as cash and cheques, there are much less onerous security requirements.  You also save on postage costs when sending out cheques. All of which has a positive impact on your carbon footprint and will help you meet your business’ environmental targets.

• Bacs Direct Credit is available to any business with a UK bank account.

• Improved cash-flow is another key benefit of Bacs Direct Credit. By using it to process regular payments, you get a greater control and oversight of money leaving your business. This makes it easier to accurately plan and forecast.

Disadvantages of Bacs Direct Credit

• Bacs Direct Credit takes three working days to clear, with strict cut-off times for processing payments, so it is not suitable for immediate and same-day payments.

• Unlike Direct Debit, Direct Credit is a push based payment method. So ultimately you are relying on the payer to action the payment on time.

Faster Payments

In 2008, the Faster Payments was introduced in the UK. It provides near real-time payments between bank accounts in the UK.

Faster Payments are electronic payments that can be made online, over the phone, in branch or through self-service kiosks. Payments normally clear in less than 2 hours providing both the sending and receiving banks are part of the Faster Payments Service. If either bank is not part of the Faster Payments Service, the payment will automatically be processed through Bacs Direct Credit instead (and will therefore be subject to a longer processing timeline).

The Faster Payments system is operated by Faster Payments Scheme Ltd (FPSL), an organisation consisting of 10 UK banks and building societies.

What are Faster Payments used for?

Faster Payments is primarily used for making large numbers of small value payments. This includes bills, expenses, supplier payments and online transfers. Faster Payments is restricted in size to a maximum of £250,000 but individual banks will normally impose a lower transaction limit. Since the launch of Faster Payments in 2008, over 9 billion payments have been sent using the service, worth over £6 trillion.

Advantages of Faster Payments

• Speed is the key benefit of Faster Payments. Recipients will typically get their money instantly, or within 2 hours of the payer actioning the payment.

• With Faster Payments you are able to send money to a mobile number, with no need for a bank account number or sort code.

• Faster Payments is offered by all the major UK banks and over 400 other financial institutions, meaning more than 52 million current account holders in the UK can access the service.

Disadvantages of Faster Payments

• Faster Payments is not universally available from every bank, and certain types of accounts, such as savings, are not able to use the scheme.

• Payments are limited to £250,000, though banks can set a much lower transaction limit.

• Because of the speed of Faster Payments, once sent, a payment can’t be cancelled.

CHAPS

CHAPS, or the "Clearing House Automated Payment System", is a British company offering high-value bank-to-bank GBP fund transfers.

The CHAPS system guarantees same-day payment so long as instructions are received by 2pm on a working day. There’s no limit to the amount of money you can send through CHAPS, although it's a relatively expensive way to transfer money. Bank charges for using CHAPS vary, but is typically between £25 to £30.

What is CHAPS used for?

CHAPS (Clearing House Automated Payment) is typically used for making high value transactions where same day payment is necessary, e.g. buying property, or to settle money market and foreign exchange transactions. More than 30 banks and 5,000 financial institutions participate in the scheme. In 2018, 48.5 million CHAPS payments were made, totalling, £83.5 trillion. It makes up just 0.6% of all payments made in the UK, but 92% of their value.

Advantages of CHAPS

• The two main benefits of CHAPS are time and value. There is no limit on the amount of funds that can be sent by a CHAPS payment. And, as long as your payment instruction is sent before the cut-off time, it should be received the same day.

• CHAPS is typically designed for businesses and individuals that need to make time sensitive and relatively large one-off payments. As such, there is a strict cut-off time for when a CHAPS payment can be processed that day.

Disadvantages of CHAPS

• Strict cut-off times - CHAPS is typically designed for businesses and individuals that need to make time sensitive and relatively large one-off payments. As such, there is a strict cut-off time for when a CHAPS payment can be processed that day.

• Difficult to cancel payments - Once you make a CHAPS payment, there is little time to cancel the payment. If the payer has made a mistake, there is no guarantee that the bank will be able to recall the funds if they have been received by the beneficiary. 

• Costly - Relative to other payment schemes, CHAPS is expensive to access. For the end-user, costs vary between £25 to £30 per payment.

How do you make a Bacs payment?

Bacs Direct Credit

Your bank allows you to credit another account using either your personal or your business banking service. You'll need the name of the payee, the name of their bank, the payee’s bank account number and sort code. You will need the same details for the account to be debited.

Direct Debit

With Direct Debit, your customer authorises you to take payments from their bank account. You'll need the name of the payee, the name of their bank, the payee’s bank account number and sort code.

If your business wants to collect Direct Debit payments there are three methods you can choose from:

1. You can use the Bacs approved Bacstel-IP software to set-up direct access via a bank.

2. You can use a Bacs approved bureau.

3. You can use a third-party provider, such as GoCardless.

If you’d like to find out more about each of these options you may find our guide to accessing Direct Debit helpful.

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How much does a Bacs payment cost?

Bacs payment - Direct Debit or Direct Credit - is one of the cheapest ways to collect payments. However, if you’re setting up Direct Debit directly with your bank, you’ll need to invest in Bacs approved software, which adds cost. Equally taking Direct Debit payments via a bureau will probably include a fee to cover the cost of the software. So it can work out cheaper to go with a Direct Debit platform instead. Here’s what you can expect to pay with each Direct Debit option:

• Via a bank: setup fees = £5,000 (+ £2495+ for Bacs approved software); transaction fees = 5-50p + additional fees charged by banks

• Via a Bacs approved bureau: setup = £400-800; transaction costs = 20-50p + monthly fees, submission fees, new mandate fees and penalty fees.

• Via GoCardless: see our competitive pricing in full here

Faster Payments costs a little more than Bacs transfer payments but will still cost less than using CHAPS (which costs between £25 to £30 per payment).

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How long does a Bacs payment take to process?

Both Bacs Direct Credit and Direct Debit payments work on a three day cycle, taking three working days to clear. Payments are submitted to Bacs on the first day, processed by the banks on the second day, and simultaneously taken from the sender account and credited to the recipient account on the third day.

With the Faster Payments Service, payments typically take fewer than 2 hours.

How safe is making payments using Bacs?

Bacs is an incredibly safe way to collect, and make payments, and is renowned around the world for the secure delivery of electronic payments:

1. Bacs has been responsible for the clearing and settlement of automated payments in the UK since 1968.

2. It has been used to make more than 130 billion transactions and, according to recent research, has never misplaced a payment.

3. Bacs uses Bacstel-IP, a system protected by SSL encryption. It also requires a secure, encrypted password, and the system is constantly monitored to validate data and user authorisation.

4. With Direct Debit, only approved organisations are allowed to collect Direct Debit payments and the Direct Debit Guarantee protects customers against any payments made fraudulently.

Which type of payment method should you use?

If you want to be in control of when you get paid, then Direct Debit may be your best option. This is because it is a pull payment method, unlike others methods which rely on the payer to action the payment each time. Direct Debit offers a simple and cost-effective way of taking recurring (and one-off) payments where same-day payment is not required.

When you’re considering the best method to make a payment, choosing the right option will depend on the types of payments you want to make:

• If you are making one-off high value payments (of over £100,000) where same day payment is needed then CHAPS may be your best option.

• If you are making a large volume of payments below the limit of £100,000 and need the payment to be processed on the same day, it may be worth considering the Faster Payments.

• If you are making fixed, regular payments, such as salaries, you may want to look at using Bacs Direct Credit.

GoCardless and Bacs

GoCardless is a Bacs approved platform which provides a low-cost and simple way to collect online Direct Debit payments. You can access GoCardless via more than 200 third-party platforms, including all the leading accountancy software providers. Alternatively you collect Direct Debit payments by using GoCardless directly, in two ways.

Learn more about GoCardless pricing and find the right package for your business.