Bacs Payment Schemes Limited now manages the Bankers’ Automated Clearing System, or simply Bacs, which is a regulated payment system. In the United Kingdom, it is one of the most common bank-to-bank transactions.
Everything associated with Bacs, including its different types and applications, will be covered in this blog.
What is a Bacs Payment?
Bacs payment, an electronic system for processing financial transactions, is an essential component of the United Kingdom’s financial infrastructure.
The UK makes it easy to transfer money between banks and other financial organizations. It is commonly used to provide a secure, trustworthy, and efficient payment option for both direct debit and direct credit transactions.
Read about: Most Common Types of Electronic Fund Transfer.
What is the Meaning of Bacs?
This acronym represents “Bankers’ Automated Clearing Services.” This system was created in 1968 to automate the process of processing financial transactions instead of relying on paper.
In the UK, bacs has grown to be the foundation of routine, recurrent financial transactions, processing billions of payments per year.
Types of Bacs Payments
Mainly, there are 2 types of Bacs payments
Bacs Direct Debit
Businesses can take money straight out of a customer’s bank account by using the Bacs Direct Debit technique.
Usually on prearranged dates, the client permits the company to take certain sums out of their account.
What is Bacs Direct Debit used for?
Recurring payments, such as home bills, and memberships, are usually collected by direct debit. On the other hand, Direct Debit is incredibly adaptable and may be used to collect a broad range of payments, such as:
- one-off payments
- invoice payments
- irregular recurring payments
- subscription payments
In the UK, direct debit is a widely used method of payment. In the UK, 90% of people use direct debit to pay at least one recurring payment.
In 2021, 4.6 billion Direct Debit payments totaling £1,243 billion were made, according to UK Finance. By 2024, this is expected to increase to more than $5 billion in payouts.
Read about: Global Payouts: Methods and Providers.
Advantages of Bacs Direct Debit
- Lower cost per transaction than credit and debit cards.
- Excellent for regular payments. After you’ve set up a Direct Debit, you may put it out of your mind.
- Customers are kept safe from fraudulent or incorrect payments by the Direct Debit Guarantee.
- A Direct Debit card is safer for the future than a credit or debit card, which can be lost, stolen, or expired. This reduces the number of unsuccessful payments.
Disadvantages of Bacs Direct Debit
- Direct Debit is not ideal for same-day payments since they take 3 working days to process. However, with the introduction of Instant Bank Pay, this is no longer an issue.
- Direct Debit was previously only available to bigger organizations with sufficient financial and legal resources to comply with the arrangement.
- While Direct Debit offers the convenience of ‘ set and forget’, some clients prefer manual payment management.
- If a customer’s bank account lacks sufficient money, the Direct Debit may not be processed.
Recurring payments like utility bills, subscriptions, and loan repayments are frequently made with it.
Direct Debit guarantees that payments are made on time and eliminates the administrative load for businesses.
Read about: How Credit Card Transaction Processing Works? A Quick Guide
Bacs Direct Credit
Businesses can send payments straight to bank accounts via Bacs Direct Credit, sometimes referred to as Direct Credit. Payroll, dividends, pensions, and supplier payments are among its frequent uses.
The process is straightforward: the payer provides their bank with the payment details, and the bank, within a certain window of time, deposits the funds into the recipient’s account.
What is a Bacs Direct Credit used for?
Businesses in the UK frequently accept Bacs Direct Credit as a form of payment. In the UK, around 2.1 billion Bacs Direct Credit payments are handled annually.
Recurring payments like salary, pensions, governmental benefits, and tax credits are frequently made using it. However, fewer state payments may be paid through Bacs Direct Debit now that Universal Credit has been implemented in the UK.
In the UK, 80% of employee payments are made through Bacs Direct Credit.
Advantages of Bacs Direct Credit
- Bacs Direct Credit is easier to administer than other payment methods like cheques, with automated remittance and reconciliation processes.
- Bacs Direct Credit offers instant cost reductions. In comparison to handling paper money, such as cash and checks, there are fewer security requirements. You also save money on postage when sending out cheques. All of this reduces your carbon footprint and helps you reach your company’s environmental goals.
- Any firm with a UK bank account can use Bacs Direct Credit.
- Bacs Direct Credit also provides improved cash flow. By employing it to execute frequent payments, you get better control and accountability over the money leaving your company. This facilitates precise planning and forecasting.
Disadvantages of Bacs Direct Credit
- Bacs Direct Credit has a three-day clearing period and rigorous payment processing deadlines, making it unsuitable for same-day or quick payments.
- Direct Credit, unlike Direct Debit, is a push payment mechanism. Finally, you are relying on the payer to make the payment on time.
Read about: Instant Settlement Payment Gateway; Comprehensive Guide.
Bacs Payment Cost
Bacs payment, often known as direct debit or direct credit, is one of the most cost-effective methods of collecting payments. However, if you set up Direct Debit directly with your bank, you will need to invest in Bacs-approved software, which will incur additional costs.
Similarly, receiving Direct Debit payments through a bureau will most likely include a fee to cover the cost of the software. As a result, using a Direct Debit platform may be more cost-effective. Here’s what you may anticipate to pay with each Direct Debit option:
- Setup fees at a bank are £5,000, plus the cost of Bacs-approved software (usually £2495+). You will also be charged transaction costs, which can vary from 5p to 50p, plus extra fees paid by banks.
- Setup fees for a Bacs-approved bureau range from £400 to £800, with transaction expenses ranging from 20p to 50p. Additional fees include monthly filing fees, new mandate fees, and penalty penalties.
How long does a Bacs payment take?
A BACS payment typically follows a three-working-day process for completion. Here’s a detailed breakdown of how it works:
Day 1 – Submission
- The process begins when the organization or individual initiates the payment. This entails sending the payment instructions to their bank or payment service provider. This might be for a Direct Debit (collecting payments from an account) or a Direct Credit (transferring cash to another account).
- Submissions must be submitted before the bank or provider’s cut-off time, often late afternoon, to be processed the same day. If the payment is submitted after this time, it will be processed the next business day.
Day 2 – Processing
- On the second working day, the BACS system processes the submitted payment instructions. The system ensures that all payments are validated and prepared for clearing.
- During this time, the banks involved in the transaction (both the sender’s and the recipient’s) perform various checks to ensure the instructions are correct and the sender’s account has sufficient funds.
Day 3 – Completion
- On the third working day, the funds are transferred to the recipient’s account. The payment is cleared, and the recipient can access the funds.
- This day is crucial for the recipient as they see the payment reflected in their account balance.
How safe is making payments using Bacs?
Bacs has been responsible for processing and paying automated payments in the United Kingdom since 1968.
It has processed over 130 billion transactions and, according to recent research, has never lost a payment. Bacs is a very safe method of collecting and sending money and is well-known throughout the world for the safe delivery of electronic payments.
Bacs employs Bacstel-IP, an SSL-encrypted technology. A strong, encrypted password is also necessary, and the system is continuously watched to verify user permission and data.
Customers are protected from fraudulent or unauthorized payments by the Direct Debit Guarantee, and only authorized organizations are permitted to accept Direct Debit payments.
How to make a BACS transfer?
Irrespective if you’re setting up a Direct Credit (to send money) or a Direct Debit (to receive money), doing a BACS transfer requires a few different procedures. This is a thorough tutorial on starting a BACS transfer:
-
Setting Up a BACS Direct Credit (Sending Money)
Step 1: Ensure You Have a BACS Facility
Establishing a BACS facility is necessary to perform a BACS transfer; these facilities are often offered by your bank or a third-party payment service provider. If you are a company, you will often need to apply for this service through your bank.
Step 2: Compile Required Information
The recipient’s bank account information, such as their:
-
- Account name
- Sort code
- Account number
- Reference (optional, for identifying the payment purpose)
Step 3: Enter Payment Details
- Log in to your online banking system or use BACS-approved software to enter the payment details.
- Double-check all information to ensure accuracy.
Step 4: Submit the Payment
- Submit the payment instructions before your bank’s cut-off time for processing. This ensures the payment starts processing the same day.
Step 5: Confirmation
- Once the payment is submitted, you’ll usually receive a confirmation from your bank or payment provider.
-
Setting Up a BACS Direct Debit (Collecting Money)
Step 1: Obtain Approval for Direct Debit Service
- If you’re a business looking to collect payments, you’ll need to apply for a Direct Debit facility through your bank. They will assess your suitability and provide you with a Service User Number (SUN).
Step 2: Obtain Customer Authorization
- Customers must authorize you to collect payments from their account by completing a Direct Debit mandate. This can be done on paper, electronically, or over the phone.
Step 3: Submit the Mandate to Your Bank
- Submit the completed mandate details to your bank for approval and processing.
Step 4: Collect Payments
- Once the mandate is set up, you can start collecting payments. Use your BACS-approved software to submit the collection request.
- Inform your customers of the amount and date of the upcoming Direct Debit at least 10 days in advance.
Step 5: Confirmation and Reconciliation
- After the payments are processed, you’ll receive reports from BACS confirming the status of each transaction. You can reconcile these with your records.
Conclusion:
To conclude, the UK’s financial system relies heavily on Bacs Payments, which are managed by Bacs Payment Schemes Limited and offer a reliable way to conduct electronic bank-to-bank transactions.
Bacs makes supplier payments, recurring payments, and salary processing easier with Direct Debit and Direct Credit, providing a safe and economical option.
Despite the system’s great efficiency and security, urgent transfers may find the three-day processing period to be a disadvantage.
Understanding how to set up and carry out Bacs transfers is crucial for smooth financial management, which makes it a valuable tool for both people and companies.
Read about: What Is A Bank Wire Transfer? How It Works?
Do follow us on Facebook and LinkedIn, to stay connected with us.