The Bankers Automated Clearing System, more commonly known as BACS, was created all the way back in 1968 when a bakery would have sold a loaf of bread for just 16p.
Today, however, BACS accounts for around seven in every 10 regular transfers and subscriptions made to businesses and it is also behind a third of all UK business transactions and facilitates almost every state pension payout [1].
Who can use BACS?
Any business with a sterling bank account at one of the BACS participants can request to be a BACS user.
To use the BACS direct credit system, a company must apply to its PSP for a service user number (SUN). This is a six-digit number that shows the company has approval to process payments via BACS. There is usually a setup fee for this.
How does BACS work?
BACS is an electronic bank-to-bank transfer system that allows payments to be made between businesses and from customers to businesses through their bank, building society or other registered payment service provider (PSP).
As an automated clearing house, it comprises direct debit and direct credit services, which have been run since 2018 by Pay.UK, which oversees the British retail interbank payments system.
Transfers take up to three days to clear and show up in accounts. On day one, the payment order is made and sent to BACS. It’s then processed and sent to the receiving bank on day two. On the third day, the payment is credited to the recipient and debited from the sender.
BACS direct credit vs. direct debit
BACS direct credit is used by firms mainly to pay their employees and suppliers, while direct debits enable them to draw money from the accounts of customers. Users need only know the bank account details of their counterparty and BACS and the banks do the rest.
Direct debits also permit businesses to pull variable recurring funds from their customers’ accounts. This means companies can recover overspends on accounts or increase prices for services without the need to set up a new direct debit mandate.
BACS vs. CHAPS vs. charge cards
BACS permits recurring payments to be made to the same account without setting up the payment details over and over again. In this way, businesses may save on administration costs and time spent making multiple individual transfers. BACS may also be cheaper than some bank transfers, such as processing cheques or collecting cash.
Its drawback is that direct debit payments are likely to be refused if the payer doesn’t have funds to cover the transaction and BACS direct credit relies on a counterparty to motivate a payment. Each of these drawbacks can disrupt a company’s cash flow and payment schedules.
BACS is also relatively slow. Companies wishing to make immediate payments will prefer to use FPS but those wanting to make large, high-value payments may prefer the Clearing House Automated Payment System, or CHAPS. Alternatively, they might choose charge cards.
CHAPS is a same-day service administered by the Bank of England that’s used mostly for time-sensitive payments, such as tax settlements, or to pay for expensive goods, such as a car. The system has higher security provisions and can be used at weekends and Bank Holidays, times when BACS won't process transactions. It’s commonly used by financial institutions to settle money market and foreign currency transactions and is also popular among solicitors and conveyancers for property transactions.
For smaller companies, however, CHAPS has disadvantages. The cost per transaction is higher, at £20, and once activated a transfer cannot be reversed or recalled.
Companies can balance these shortcomings with other payment solutions. An American Express® Business Gold Card offers swift and secure payments and can also be issued to multiple members of a team to pay for sundries as well as larger capital expenses. With up to 54 days to clear your Card balance, you can keep your money in the account for longer and get more flexibility in your cash flow¹.
Moreover, business owners also gain 1 Membership Rewards® point for each full and eligible £1 spent. As well as your regular BACS employee payments, for example, you could use Membership Rewards points to thank your staff in other ways. Points could be used towards a team lunch, or used to purchase Gift Cards to reward your employees².
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
Sources
[1] UK Finance, UK Payment Market Summary, September, 2023
[2] GOV.UK, Government Banking