Bacs is an electronic system used to make payments directly from one bank account to another. The main two types of payment are Direct Debit and Bacs Direct Credit, and the payments can take up to 3 working days to clear. The service is operated and managed by Bacs Payment Schemes Limited.
Table of Contents
- Types of bank-to-bank payment
- How do you make a Bacs payment?
- How much does a Bacs payment cost?
- How long does a Bacs payment take to process?
- How safe is making payments using Bacs?
- Which type of payment method should you use?
- GoCardless and Bacs
Types of bank-to-bank payment
Bacs Payment Schemes Limited is a membership organisation consisting of 16 of the UK's leading banks. In 2017, over 6 billion UK payments were made through the Bacs system with a total combined value of almost £5 trillion. There are two types of payment within the Bacs system: Direct Debit and Bacs Direct Credit.
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).
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.
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.
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
It's 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 – more than 3.9 billion Direct Debit payments were processed in 2015. 66% of the UK population say they'd prefer to pay most of their bills using Direct Debit.
Advantages of Direct Debit
- Cheap payments.
- Great for recurring payments which can be set and forget.
Disadvantages of Direct Debit
- Not suitable for same-day payments (payments take 3 working days).
- Requires expensive Bacs approved software, a bureau or GoCardless.
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?
It's typically used for making regular payments such as salaries, pensions, state benefits and tax credits (almost 90% of the UK workforce are paid using Bacs Direct Credit).
More than 150,000 UK organisations currently use Bacs Direct Credit with over 2 billion payments being processed through the scheme in 2013.
Advantages of Bacs Direct Credit
- Cheap way of making regular payments.
- Great for making fixed, regular payments.
Disadvantages of Bacs Direct Credit
- Not suitable for same-day payments (takes 3 working days).
In 2008, 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).
What are Faster Payments used for?
Faster Payments are primarily used for making large numbers of small value payments. This includes bills, expenses, supplier payments and online transfers. Faster Payments are 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, more than 5 billion payments have been made through the scheme.
Advantages of Faster Payments
- Payments are normally instant (will take less than 2 hours).
- Generally free.
Disadvantages of Faster Payments
- Not available at all banks (where not available, a standard Bacs transfer will be made).
- Payments are limited to £250,000 (most banks will impose a lower transaction limit).
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 (banks typically charge as much as £35 for a CHAPS transfer).
What is CHAPS used for?
CHAPS is typically used for making high value transactions where same day guaranteed payment is required, e.g. buying property. In 2015, £68 trillion was processed through CHAPS.
Advantages of CHAPS
- Same day payments.
- No limit on transaction size.
Disadvantages of CHAPS
- Not available at all banks (where not available, you'll need to use Bacs payments).
- Expensive (normally costs £15 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 (and will need the same details for the account to be debited).
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.
To collect Direct Debit payments there are three methods to choose from:
- Do-it-yourself/Direct Access via a bank and using Bacs approved Bacstel-IP software.
- Via a Bacs approved bureau.
- Using GoCardless.
If you’d like to find out more about each of these options you may find our guide to accessing Direct Debit helpful.
How much does a Bacs payment cost?
Bacs payments are some of the cheapest ways to collect payments with the cost often being only a few pennies for every payment you take. However, to be able to collect Direct Debit payments you'll either need to use expensive Bacs approved software or you'll need to take payments via a bureau (whose charges will cover the cost of software). This typically means that a Direct Debit payment will cost:
- 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: setup = £0; transaction costs = 1% capped at £2 (or 1-60p plus a £200 monthly fee for GoCardless Pro)
Faster Payments cost a little more than Bacs transfer payments but will still cost less than using CHAPS (which costs between £25 to £35 per payment).
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:
- Bacs has been responsible for the clearing and settlement of automated payments in the UK since 1968.
- It has been used to make more than 100 billion transactions and, according to recent research, has never misplaced a payment.
- 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.
- 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 take payments then Direct Debit may be your best option. It offers a simple and cost-effective way of taking recurring (and one-off) payments where same-day payment is not required.
If you want to make payments then which of the other three options is the right one for you 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 large volumes of payments below the limit of £100,000 and need to be paid same day, it may be worth considering the Faster Payments Service for your payments.
If you are making fixed, regular payments like a salary you may want to look at using Bacs Direct Credit.
GoCardless and Bacs
GoCardless is a Bacs approved bureau which provides a cheap and simple way to collect online Direct Debit payments.
With GoCardless you have two options for collecting Direct Debit payments:
GoCardless. GoCardless is our original product which lets organisations of all sizes from one man bands to larger businesses collect Direct Debit payments without the hassle or the cost traditionally associated with Direct Debit. Set up is free, takes just a few minutes and the whole process can be automated meaning you can access Bacs Direct Debit without you needing to spend months getting set up or days every week submitting and monitoring payments. What’s more it costs just 1% per transaction (capped at £2) so is also an incredibly cost effective way of collecting payments. Current users include Funding Circle, PieMinister, The Foundation of Hearts and Crowdcube.
GoCardless Pro. GoCardless Pro is our product specifically designed for large and multinational organisations. It combines the simplicity of the original GoCardless product with control over the payment pages and process that large corporations need. It takes a little longer to get set up (4-6 weeks) but this includes getting your own SUN and all your processes approved by the banks. Payments with GoCardless Pro cost between 1-60p per transaction plus a £200 monthly fee. Current customers include the Guardian and Lendable.
If you’d like to find out more, please see the GoCardless website.‹ View all tips