Understanding electronic payment systems in the UK

Every day in the UK, millions of pounds are moved between bank accounts. This complex ecosystem is dominated by three main domestic payment systems – Bacs, CHAPS, and Faster Payments – which are used by individuals and businesses alike to electronically transfer money ranging from a few pence to millions of pounds.

Despite advances in technology, the major players in UK payment clearing and settlement have not changed all that much in decades, with Bacs being introduced more than fifty years ago. CHAPS was introduced in 1984, providing same-day clearing for high-value transactions, but it was another twenty-four years before Faster Payments came along to handle high-volume, low-value payments in the UK.

These schemes underpin the transactional capabilities of banks and other financial institutions such as payment service providers (PSPs) to ensure the secure transfer of funds. Despite the systems being built upon legacy infrastructure, they are robust, and accessible.

What is Bacs?

Bacs is the oldest of the UK payment systems. Despite its age, Bacs is still responsible for the vast majority of high-volume, regular payments in the UK, and is the scheme of choice for making and collecting regular payments such as salaries, utility bills, benefits, and subscriptions. For individuals, there is no charge to make or receive Bacs payments, and for businesses, the cost per transaction is low. For these reasons, Bacs remains the most popular way for businesses and organisations to make bulk payments in the UK.

Utilised for credit transfers via Bacs Direct Credits (AKA bank transfers or direct deposits) and Direct Debit payments (an instruction made to a bank by a customer that permits an organisation to make authorised collections), Bacs transfers typically take three days to complete. Deposits and collections are only made Monday to Friday.

The pros and cons of Bacs payments at a glance:

Pros:

  • Long established, trusted method of making and receiving payments
  • Great way of collecting recurring payments via Direct Debits
  • Widely accepted as a method of payment
  • Low transaction fees for businesses, no charges for individuals
  • Bacs files are supported by all accounting/payroll software
  • Longer processing time means transactions can be cancelled up until midday of the second day in the cycle

Cons:

  • Three working day processing time, so not good for time-critical payments
  • Inflexible cut off times – most payment requests must be submitted before 17:00 or they will roll over to the next day of the processing cycle
  • For businesses sending Bacs payments via banks, there may be fees for file processing and charges when files contain errors

What is CHAPS?

CHAPS (Clearing House Automated Payment System) is a real-time gross settlement system (RTGS) that was introduced to speed up payment processing of high-value transactions in the UK. Providing instructions are received before the specified cut off time on a working day, funds will be processed on the same day. Urgent real-time settlement of funds is also available.

CHAPS is often used for the transfer of one-off payments, such as property purchases, wholesale financial payments, corporate treasury, and other high-value payments, however, there is no minimum or maximum payment limit. While fast and reliable, CHAPS is not cheap, with some banks charging end users up to £35 per transaction. Additionally, once a payment is instructed, it is irrevocable between direct participants (bank to bank), meaning that it is not possible to revoke the payment. Financial institutions including PSPs access the system indirectly with payments being routed via direct participants.

The pros and cons of CHAPS payments at a glance:

Pros:

  • Capable of settling critical high-value transactions in real-time
  • Guaranteed same-day if instructions are received weekdays before 14:00
  • No cap on transaction value

Cons:

Significantly more expensive than Bacs transfers
Inflexible cut off times
Not available as a payment method at all banks
Payments are irrevocable

What is Faster Payments?

Faster Payments (FPS) is the new kid on the block, celebrating its 10th birthday in 2018. The first new payment system to launch in more than 20 years, Faster Payments was introduced to enable the instant transfer of funds made in Sterling between UK financial institutions participating in the scheme.

The scheme provides a way of sending and receiving low-value, real-time payments with no fees, and can be completed online, via banking apps, in branch, and by phone. Faster Payments are usually free, and as the system is capable of processing a high volume of transactions, it can be utilised not only for instant transfers, but also standing orders, bill payments, and forward payments. Online and mobile banking benefitted hugely from the introduction of Faster Payments, with customers able to send funds in real-time at the click of a button.

The downside to Faster Payments is that it is capped at £250,000, though most financial institutions will set their limit far lower than this cap. This means that businesses and consumers are still tied to using CHAPS if they need to make a same-day payment, or Bacs if they have some flexibility on settlement times.

The pros and cons of Faster Payments at a glance:

Pros:

  • Capable of handling significant payment volume
  • Fast way of sending and receiving low-value payments
  • Lower cost real-time processing for businesses than CHAPS
  • No charges for individuals
  • Commonly used when making payments via mobile apps and online banking
  • No cut-off times – 24/7 service

Cons:

  • Higher cost per transaction than Bacs for businesses
  • Maximum transaction limit capped at £250,000, with lower limits imposed by banks
  • Faster Payments is not available via all banks and will revert to Bacs if the payment method is not supported
  • Payments are irrevocable

Banking Circle provides its members with access to all three UK domestic payment systems, as well as SEPA and domestic EU payout capabilities, and SWIFT for B2B cross border payments. Get in touch to find out more.

Get in touch

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