How do Bacs Payments Work? Comprehensive Guide to Bacs

Bacs Payment is, without a doubt, the most widely used system in the United Kingdom for making and receiving commercial payments. Businesses often have questions about Bacs, including what it is Bacs or how long it takes for a payment to clear when using Bacs.

Considering Bacs’s dominance in the UK banking sector, it’s easy to see why the acronym has come to represent all monetary transactions in the country. Bacs software is unrivalled in electronic financial transfers, with more transactions than the total number of persons who have ever walked the globe.

The banking industry is complex, so the queries are understandable. Understanding the fundamentals will assist you in getting up and running more quickly and efficiently, whether you’re fresh to the payments sector or a finance team considering Bacs payment for the first time. So, what does Bacs mean?

What Is a Bacs Payment?

Bankers Automated Clearing Service (Bacs) payments are the most common form of company payment in the United Kingdom. Regular and predictable payments are made using Bacs, which is why it is used to pay wages and government benefits. 

Businesses in the United Kingdom often accept Bacs payments and bank-to-bank transfers inside the country. Every one of the UK’s financial institutions uses Bacs as their central clearing house.

Direct Debit is a Bacs payment in which one party is authorized to withdraw funds from another party’s bank account. In comparison, Direct Credit is a Bacs payment in which one party deposits funds into the other party’s bank account.

Compared to the next-day payment offered by the CHAPS system, the three-day processing time for Bacs can sometimes be inconvenient.

Why Choose Bacs Payment?

Some benefits of Bacs payments over alternative methods include:

• Using Bacs to make a payment is simple and affordable.
• Cash flow is easy to estimate due to the set payment schedule.
• Compared to cheques, they save money and time by not requiring mailing.
• Using Bacs to pay many employees can simplify and secure the process; speak to your Payroll Accountants if you want to do this.

Different Types of Bacs Payments

1.   Bacs Direct Debit

If you need to accept payments, BACS direct debit is among the safer options available in the UK due to its assurances. Subscription and bill payments are perfect candidates for direct Debit BACS, whereby the customer grants permission for the company to deduct the money from their bank account regularly and automatically.

What’s Direct Debit?

Customers may permit businesses to automatically take money out of their bank accounts if they are informed of the exact amount and when the payment will be via a Direct Debit, such as an accountant’s fee that is collected every month. Customers offer their consent by filling out a Direct Debit Mandate, either a paper or an online form. The company may automatically deduct funds from your account after you’ve permitted them to do so. 

With the Direct Debit Guarantee in place, your clients can rest easy knowing their money is protected when making payments by Direct Debit. 

Direct Debit has often been reserved for big businesses as payment. With Direct Debit providers like GoCardless, enterprises of all sizes can reap the economic advantages of these types of payments.

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Where To Use Bacs Direct Debit? 

Bills, membership dues, and charitable contributions are just a few examples of recurring payments that Direct Debit may collect. Still, Direct Debit’s adaptability means You can use it for a broad range of payment types, such as:

• Single transactions
• Cash Receipts
• Payments that are made infrequently and at odd intervals
• Fees Paid Regularly

In the United Kingdom, direct Debit has become a standard payment method. Nearly everyone in the United Kingdom uses Direct Debit to pay almost one recurring expense. UK Finance estimates there will be 4.6 billion Direct Debit payments totaling £1,243 billion in 2021. By 2024, it is expected that this will have risen to nearly 5 billion transactions.

Pros:

• A Direct Debit is more secure than a credit or debit card since it cannot be lost or stolen and has no expiration date. The risk of a payment not going through is, therefore, reduced.
• Excellent for regular expenses. After setting up a Direct Debit, you may put the matter out of your mind.
• It processes transactions at a lower cost than Debit and credit cards.
• The Direct Debit Guarantee ensures that consumers will not lose money due to fraudulent or accidental payments.

Cons:

• Their bank may decline a customer’s Direct Debit if insufficient money is in the account.
• Since Direct Debit payments take three business days, you can’t use them for instant purchases.
• Direct Debit was previously only available from more prominent companies because of the costs and complexity of being scheme-compliant.
• Direct Debit is convenient since it allows users to “set it and forget it,” but other clients want complete control over their finances and handle each payment independently.

2.   Bacs Direct Credit 

Companies often utilize Direct Credit to pay employee wages and government benefits. Using the BACS Direct Credit system is more efficient financially and in managing cash flow; instead of mailing out cheques, you can make payments faster and more efficiently.

Where To Use Bacs Direct Credit? 

To this day, Bacs Direct Credit remains a preferred payment method for many UK companies. About 2.1 billion direct credit payments are processed annually via Bacs in the United Kingdom. 

Wages, pensions, public benefits, and tax credits are only a few of the usual recipients of this kind of payment.

State payments received via Bacs Direct Debit may decrease when Universal Credits are rolled out throughout the UK. Bacs Direct Credit is used to pay 80% of British workers.

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Pros:

• Bacs Direct Credit is a more straightforward payment method than cheques since much of the process may be automated, including remittance and reconciliation.
• By switching to Bacs Direct Credit, you may immediately cut down on the part of your spending.
• Any organization that maintains a bank account in the United Kingdom can use Bacs Direct Credit.
• Bacs Direct Credit also helps with financial flow. You can keep better tabs on the money flowing out of your company if you use it to execute frequent payments.

Cons:

• Because of its three-day clearing period and rigorous payment processing deadlines, Bacs Direct Credit is not an option for same-day or immediate payments.
• The Direct Credit payment mechanism is a push-based alternative to Direct Debit. As a result, you must put your faith in the promptness of the payer to process the payment.

What is the Service User Number (SUN)? 

Any company that wishes to receive or make payments via Bacs must have a SUN or Service User Number. You can’t utilize Bacs to receive or make electronic payments if you don’t have a SUN.

SUNs are only given out to enterprises with Bacs members as sponsors. As a result, you’ll need to either apply for a SUN via your bank or hire a bureau to put one up for you while you maintain complete legal control of the company.

Is SUN Required For Sending a Bacs Payment?

Having a bank provide you with a Bacs Service User Number (SUN) is still being determined. While having your own SUN is highly recommended, certain financial institutions may offer alternatives to sending and receiving Bacs payments that do not need a SUN.

You would only use Bacs if they were to charge so much more. For cheaper transfer rates, you’ll need a SUN.

To process Bacs payments, you must submit a SUN application first. You might expect a lengthy and costly application procedure from your bank.

After getting an SUN, you may use your bank or third-party software to send and receive Bacs payments (Bacs Approved Bureau).

How to Make a Bacs Payment?

Making a bacs payment is different for credit and debit cards.

Bacs Direct Credit Payments:

Your bank’s personal or corporate banking service will enable you to credit an additional account. The payee’s name, the bank’s name, the account number, and the sort code are all required. To debit the account, you’ll need the same information.

Bacs Direct Debit Payments: 

Direct Debit allows your customers to permit you to withdraw money directly from their bank accounts. To send money, you only need the recipient’s full name, the bank name where you will receive the funds, the recipient’s account number, and the sort code. 

There are two options available for businesses looking to accept Direct Debit payments:

1. Direct bank access may be established using the Bacs-approved Bacstel-IP program.
2. Also, a Bacs-approved bureau is acceptable.

Who Can Use Bacs to Pay?

If the recipient’s bank supports Bacs transfers, anybody may send money using this method. Businesses prefer BACS products and services over bank portals because they are more straightforward, quicker, and less tactically naive. Or they may use a Bacs bureau to process the transactions for them.

Are Bacs Payments Protected?

Bacs is well-known all over the globe as a reliable method for sending and receiving electronic payments due to the extreme safety it provides for all parties involved.

From its inception in 1968 till now, the United Kingdom’s automated payment system has relied on Bacs to clear and settle transactions.

Bacs employs the SSL-encrypted Bacstel-IP network. In addition to requiring an encrypted password, the system is continually monitored to ensure data integrity and user authentication.

Thanks to the Direct Debit Guarantee, customers are protected from making fraudulent or illegal Direct Debit payments, and only verified businesses may take these payments.

It has been used for over 130 billion transactions, and the most up-to-date data shows that it has never lost a dime.

What are Bacs Payments Timescales?

How Long Do Bacs Payments Take? This is a common concern. So, here’s the answer: Bacs (credit and debit) payments need three business days to clear.

When a credit or debit instruction is sent to Bacs on Day 1 (the submission day), the transaction is considered to have occurred on Day 2.

The second day, known as the “processing day,” is when the bank handles the request.

The deal closes on the third day (the due date). The sender’s account is debited, and the recipient’s account is credited with the transferred funds.

How Much Does a Bacs Payment Cost?

One of the least expensive means of acquiring funds is via Bacs payment, often known as Direct Debit or Direct Credit. If you want to set up Direct Debit with your bank, you’ll need to spend money on Bacs-approved software. 

Similarly, there will likely be a charge to cover the cost of the software to accept Direct Debit payments via a bureau. A Direct Debit system may be the most economical option. What to anticipate from each Direct Debit payment method:

Through a commercial bank: £5,000 setup fees (plus the $2,495+ price of Bacs-approved software). There will also be transaction costs ranging from 5p to 50p, plus whatever fees your bank may impose.

With a Bacs-approved bureau, you may expect to pay between £400 and £800 for setup, plus monthly fees, application fees, new mandate fees, and penalty fees for each transaction you process.

Does Bacs Equal a Bank Transfer?

A bank transfer, or Bacs as it is more often known, is a banking transaction. You can make bank transfers via Bacs, CHAPS, or Faster Payments in the United Kingdom. These are all monetary transfers occurring inside the borders of the United Kingdom through domestic banks.

Bacs is the only method available for direct debit transactions. Since most nations, like Europe’s SEPA, only have a single bank payment option, tracking the many ways to deposit or withdraw might be challenging.

How Do I Set Up Bacs With My Bank? 

A SUN is required for Bacs participation (SUN). However, most banks will charge you a setup cost of £250 or more, and the application procedure might take a long time. 

They extensively research your company, which might affect your bank loan application. To apply for a SUN, you must first meet with your bank manager.

What Is The Bacs Payment Limit?

BACS payments often involve low-value exchanges since their clearing process is more time-consuming (by banking standards, at least). A maximum of £250,000 may be transferred via BACS at one time.

Can a Bacs Payment Be Recalled?

You, as the payer, have a complete say over the proceedings. You get to choose the schedule for the installment payments. 

For payments that have already been processed, you may cancel them by notifying your bank before a specific deadline. Bacs Direct Credit allows you to schedule payments up to 30 days in advance.

What Are The Alternatives to Bacs Payments?

Other than the payment method bacs, these two options are viable alternatives.

1.   CHAPS

The Clearing House Automated Payment System (CHAPS) is a British corporation that facilitates GBP wire transfers between banks with large transaction values.

As long as payment requests are submitted by 2 p.m. on a business day, they will be processed the same day using the CHAPS system.

The maximum amount you can send with CHAPS is unlimited; however, the fee is higher than with specific other options. The average cost to use CHAPS between banks is £30.

2.   Faster Payments

Faster Payments Scheme Ltd (FPSL), a consortium of UK financial institutions, manages the Faster Payments system. 

The Government first implemented it in the United Kingdom in 2008. It allows for instantaneous transfers between UK bank accounts. 

To make a Faster Payment, you may use your bank’s website, a phone service, a branch, or a self-service kiosk. 

The transaction should be finalized in less than two hours if the sender and receiver banks participate in the Faster Payments Service. It will be paid via Bacs Direct Credit if none of the banks use the services.

Conclusion:

Paying by bacs is the most cost-effective way to pay compared to other options. Salary and government perks are often delivered through Bacs since it enables regular and scheduled payments.

Bacs Payment is your best bet if you need to send dozens or even hundreds of payments each month because of the low transaction fees. However, you won’t find Bacs access at your standard retail bank.

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