By Mariana Almeida Marques
Bacs payments are one of the cheapest and most common bank-to-bank transfers in the UK, both for individuals and organisations. This payment system has multiple uses and it is present in vital parts of our everyday lives such as, for example, when receiving a salary, paying bills or purchasing goods.
In 2019, there were 9.2 billion Bacs transactions with a total value of £7.4 billion, which shows how widely popular Bacs is in the UK. Therefore, it is useful to have a clear understanding of what this payment system is, as well as the advantages and disadvantages of using it.
Bacs stands for “Bankers Automated Clearing Services” and it is owned and operated by Pay.UK, a leading retail payments authority, also responsible for Faster Payments and cheques. Bacs is an electronic system that allows direct payments from one bank account to another. It is the cheapest way to make payments, as well as easy to set up and supported by all payroll software. For this reason, it is the most common payment method that UK organisations use to, for example, pay their employees.
One of the most significant drawbacks of Bacs is the slow payment time. Usually, payments take three working days to reach the recipient’s account. It is also inflexible, as payments can only clear on business days and there are strict cut-off times. For example, you would need to send a payment before 3pm on a Wednesday, if you would like the person to receive it by Friday. Despite this, Bacs is still a widely used and well-established payment system in the UK.
Bacs payments come in the form of direct debit or direct credit. Direct debit is an automated payment method where an organisation is authorised to withdraw money from a customer’s bank account on a given time period, usually monthly. The process is recurring, meaning once the customer has agreed to it, the sum will be taken automatically from the account.
Bacs direct debits are considered the safest payment method in the UK, as they are protected by the Direct Debit Guarantee, offered by all banks that accept direct debit. They are commonly used by individuals to pay household bills, subscriptions or memberships.
Bacs direct credit, on the other hand, is used to deposit money in someone’s bank account. It is typically used by UK organisations to make recurring and regular payments into their employees’ bank accounts, whether that is paying salaries, pensions or tax credits. According to a UK Finance market report, eight in ten employees in the UK are paid via Bacs Direct Credit, which makes this payment method the most popular within organisations.
To use Bacs direct debit, your customers must firstly authorise you to withdrawal money from their accounts and share with you their name, name of their bank, their account number and sort code. You will need the same personal details to use Bacs direct credit.
Payments will initially be submitted to Bacs, processed by the bank, and only then taken from the payee’s account and credited to the recipient account, in a three-day process. Bacs payments use a system called Bacstel-IP, protected by SSL encryption, that requires an encrypted password. The system is constantly self-monitored, so this payment method is extremely safe.
There can be high upfront fees if you set up Direct Debit directly via a bank or via a Bacs-approved bureau. However, the transaction fees only are usually considerably cheap, as they range anywhere from 5 to 50 pence per transaction, plus any additional fees charged by the banks.
Bacs payments take three working days to clear. The intention to pay out is submitted on the first day, the payment is processed on the second day and, on the third and final day, it reaches the receiver’s account (settlement). Usually, the payment arrives on early hours in the morning.
Note that if you send a payment over the weekend, on a bank holiday or outside regular hours (usually from 7am to 10:30pm), it might take longer for it to reach the receiver’s account as it can only be processed on business days. So, if you submit a payment on a Friday, it will only be finalised on Tuesday.
If your company originates its own payment instructions and files, you can access Bacs through the Bacstel-IP delivery channel. This channel is used to submit your Direct Debit or Direct Credit payment files directly to Bacs, track payments and view reports. Find out to use Bacstel-IP here.
However, if your company is not a direct submitter (doesn’t originate its own payment instructions and files through a Direct Debit software), then you can only have indirect access to Bacs. That is, you must use a bank, Payment Service Provider (PSP) or Bacs-approved bureau that can submit the payment files for you. You can still access Bacs to view reports and submission history.
It is mandatory to have a Service User Number (SUN) in order to accept Bacs Direct Debit or Direct Credit payments. A SUN is a six-digits unique number used to identify you as a business and help track Bacs transactions. It makes it easier for the Bacs system to identify you and collect your records, and for you to access them.
You can either apply for one yourself (check your eligibility before applying) or pay a commission to a third-party bank, PSP or bureau so they can allocate one of their own SUNs for you. In this case, you don’t have to apply for a SUN or own one yourself.
To make a Bacs payment, you need to insert the value of the payment and sort code and account number of the receiver. You can also add a payment reference so that the receiver can track the nature of the payment and identify you as the sender.
Bacs is known to be one of the cheapest ways to make payments. The costs of using Bacs depend on the third-party you use and there isn’t a fixed price for all, though usually the transaction fees are only pennies. You won’t be charged for receiving Bacs payments, only for sending them.
If you access Bacs via a bank, you can expect to pay setup fees of about £5,000 plus an extra £2,495 for the Bacs-approved software. On top of that, you have the regular transaction fees which go between 5p to 50p per transaction and additional fees charged by the banks.
If you access Bacs via a Bacs-approved bureau, you don’t need to pay fees for the software, but you still need to pay a setup fee of around £400 to £800, plus transaction fees and additional fees charged by the bureau. Some PSPs are offering competitive pricing for accessing Bacs payments through their system, so you will need to do some research to find before making a decision.
The Bacs payment scheme is considered to be very secure. Bacstel-IP, the delivery channel it uses, is protected by SSL encryption and requires an encrypted password for access. The Bacs system is also constantly self-monitored and research shows that it has never misplaced a payment since it launched in 1968.
If you want to become to a Bacs-approved bureau and offer Bacs payments to your clients, you need to follow a lengthy process. Firstly, you need to contact your bank, who will provide you with an application form. Then, you need to contact Bacs directly and start an inspection process, which includes a detailed questionnaire.
You also need to pay an upfront setup and registration fee of £4,500. Should you be approved as a BAB (Bacs-approved Bureau), you will continue to pay an annual membership fee that depends on how many Bacs transactions you make and can go up to £1,500 per annum. It is a complex and stressful process, however, there are more cost-efficient ways to take Bacs payments, such as through a Payment Service Provider.
Faster Payments and Chaps payments are the most popular alternatives to Bacs, both widely used in the UK. There are some differences between them: Faster Payments, for example, allows you to send money instantly and the transaction takes only a few seconds. You can read more about Faster Payments here.
Imburse supports Bacs payments in the UK, so you can implement Bacs Direct Debits and Direct Credits within a stress-free couple of minutes and with no setup costs. Reach out to us below if you would like to know more about Imburse and the benefits our solution can bring to your business.