Payment Systems in the UK Explained

For multinational organizations considering doing business in England, Wales, Scotland, or Northern Ireland, one of the most important factors to figure out early in the process is which of the various payment systems in the UK will best suit their needs. Understanding the language involved and the differences in processing payments is the first step. Here, we examine the payment systems available for UK companies and how they could work for you.

Common UK Payment Systems

Established payment schemes set the rules for how a customer payment is delivered, as well as how quickly it can be processed. The payment scheme you choose will determine the currency used, the timeline for the payment, and the data formats used for messaging between banks. To perform UK transactions, you’ll need to be familiar with the most common payment schemes, including Bacs, CHAPS, and Faster Payments.

Bacs

The Bacs system allows for electronic transfer of funds directly from bank to bank. Managed by Bacs Payment Schemes Limited, the Bacs system processes billions of transactions annually, and BACS payments are fully automated for simplicity. The system offers a streamlined approach for businesses trying to manage accounting processes.

Two types of Bacs payments are available, Direct Debit and Bacs Direct Credit, and the payments generally take up to three working days to clear. Bacs direct debits pull money automatically from customer accounts to cover recurring payments, while Direct Credits allow businesses to move money from one account to another. Almost 90% of the UK workforce is paid through this system, which is easy to track and never delayed or lost. Of all payment schemes, the Bacs system is a critical component of business in the UK.

Bacs is best for:

● automatic payments between you and your customers

● automating recurring business transactions

Bacs isn’t great for:

● larger transactions that need to happen quickly (e.g., real estate down payments)

CHAPS

The Clearing House Automated Payment System or CHAPS provides same-day settlement of bank transfers of any amount and is managed by the Bank of England. Payments made via CHAPS happen nearly in real time, as participant banks exchange money between accounts almost instantaneously, which helps maintain liquidity across a variety of markets. The vast majority of CHAPS transactions occur between banks and building societies, or to settle money market or foreign exchange transactions. Corporations also rely on CHAPS for high-value and time-sensitive payments, such as for tax payments. Outside of business, CHAPS is typically used for high values of money involved in transactions like buying a home or a car. Due to the level of fees involved, however, the system is not well suited for everyday or repeat transactions.

CHAPS is best for:

● large transfers that need to happen quickly

CHAPS isn’t great for:

● smaller payments or regular transactions

Faster Payments

Faster Payments also offers near real-time payments in as little as two hours between banks and businesses. This system is suited to making rapid-fire payments all at once to handle business dealings, for example, or as a way to get smaller amounts of money to a recipient quickly. A Faster Payments transaction requires a reciprocal participating institution; if there isn’t one, the transaction switches to a slower BACS transaction. These payments are also restricted to £250,000 or sometimes lower, depending on the institution.

Faster Payments is best for:

● multiple, fast business transactions (e.g., ordering supplies)

● changing small amounts of money quickly

Faster Payments isn’t great for:

● high sums

Other Systems

Analog payments and older systems still work, including paying with a physical cheque or via Standing Order, which is somewhat similar to a Bacs direct debit. The downside of a standing order is that the customer retains full control and can cancel the payment without telling you. With Bacs, the customer must notify their bank and you before canceling a payment.

Switching to a more modern payment arrangement can provide better protection and control over important transactions. If you’re still processing paper cheques, switching to an alternative payment method could save a lot of money in human hours and resources.

International Payments Using SWIFT/BIC

For international clients, the UK allows payments through the use of SWIFT. These transactions use a SWIFT code, sometimes called a BIC, SWIFT BIC, or SWIFT ID code, to facilitate international exchanges through a series of partners and ensure your money gets to its destination.

SWIFT stands for Society for Worldwide Interbank Financial Telecommunication, and international wire transfers made using a SWIFT code rely on the participating banks to transfer your money from its origin account through connected institutions and into the destination account. This system offers a widely available method of making a simple (if sometimes lengthy) transfer of money internationally, although the series of transfers can result in additional fees and possibly deliver less money than intended to the recipient.

Setting Up a Bacs Payment System

Once you’ve decided to enable Bacs payments, you’ll need to determine which method of access is right for your needs and capabilities – setting up Bacs payments in house or using a direct debit facility.

In-House

Setting up an in-house system for Bacs payments is typically an option only for large organizations because of the turnover minimums required by various banks, which can be upwards of £1 million, depending on the bank. To determine whether your organization qualifies for in-house Bacs, you’ll need to work with your participating bank.

If you meet your bank’s requirements, you’ll need:

● the most up-to-date Bacs software

● appropriate in-house training

● enough capital to cover the setup fees

Direct Debit Facility

If you don’t meet your bank’s requirements for direct access, you can take advantage of an organization that will manage Bacs transactions for you. Some organizations elect to use a bureau service that will handle all the particulars of setting up and managing the payments.

You’ll need:

● a suitable bureau that fits your needs

● a service user number if you’re a corporate business

● a suitable facilities management service if you’re an organization not eligible for SUN

Getting Paid in The UK

Given the variety of established UK payments systems, you’re sure to find one to help streamline your business and reduce the hassle of trying to manage your payments. Bacs payments are some of the most common and easiest to manage, but CHAPS, Faster Payments, and SWIFT transfers can be ideal options depending on your situation and needs. Whichever payment method you choose, you can feel assured in moving on from old-fashioned, paper-based systems that require extra time and attention from your customers and vendors. The UK’s unique system of automatic payments alleviates those frustrations and makes sure that your payday comes easily and quickly.

Find out more about CloudPay's global treasury services.