Payment Fundamentals I: Faster Payments, BACS and CHAPS explained in 2 minutes
The UK has more than 100 banks who hold individual accounts for their customers, in total there are an estimated 65 million* active current accounts in the UK. Money can be transferred from one account to another be that within the same bank (intra-bank transfer) or between banks (inter-bank transfer). If money moves internally from one account to another then that’s easy, the internal software that that bank is using simply deducts a number from one account and adds it to another. But what if money needs to be transferred to an account that is held at another bank? In the UK there are three separate bank transfer schemes for that purpose: BACS, CHAPS and Faster Payments.
What are Faster Payments, BACS & CHAPS?
Traditionally there was only BACS, which allows you to request money from someone else (you “pull” money out of the account, called Direct Debit) or send money to someone else (you “push” money out of your account into someone else’s account, a Direct Credit or Bank Transfer). BACS operates on a 3 working days cycle, meaning if you initiate a transaction on Monday it will arrive in the target account on Wednesday. Why 3 days? Well, it used to be 5 days and rumour has it that’s the time it took a courier to ride from the northern boarder of England to London. In any case, the system works in the following way: on the first day payments are submitted to BACS, on the second day BACS processes the payments and on the 3rd day the recipient’s bank credits the money to the account. A typical use case for BACS is to regularly pay salaries to employees.
As there is a need to transfer money faster than 3 days the CHAPS system was introduced, which transfers money instantly (always a “push” out of your account). However, using CHAPS is very expensive (around £25 per transfer) and is nowadays only used to transfer very large amounts (£250,000+). Since it involves more manual checks it is considered more secure. A typical use case for CHAPS is to make the money transfers for buying a house. This is often done in person at a branch or by your attorney.
Because CHAPS is prohibitively expensive and BACS transfers take too long the UK set up an additional payment scheme called Faster Payments. Once a transaction is sent out (always a “push” out of your account to pay someone else) the money arrives in the recipient’s bank account within minutes, though to be on the safe side it can take as long as 2 hours. The highest amount you can send with one Faster Payment is £250,000 but some banks lower the limit to £100,000. Faster Payments is already widely used by consumers, e.g. one friend reimburses the other for a shared cab ride, but it is also more and more being used for business purposes: for example, contractors may only work for a couple of days and expect to get paid more or less immediately after they finished a job, something which is only possible and economically viable with Faster Payments.
How do I get access? Direct Access, Indirect Access and Payment License
By now you are probably asking yourself how you get access to these payment schemes. It is important to know that payments is a highly regulated industry, in the UK regulated by the Payment Systems Regulator and the Financial Conduct Authority (FCA). To get access to the payment schemes itself requires you to be licensed with the FCA as a Payment Institution, E-Money Institution or Bank. These are very heavy-weight application processes with a lot of initial and ongoing requirements around capital, compliance and procedures. For any company that is not in the business of making payments this is not a realistic route in most cases.
What if I am not a Payments Company?
Most companies do not have a payment license and need to work with someone who does. Traditionally this would be a bank — to be fair, not all banks would have direct access themselves, most would connect through other banks but that’s a different story.
As a consumer you basically have the choice between traditional banks (Barclays, Lloyds, HSBC etc.) and one of the new so called challenger banks who are “app only”, meaning they have a great app but not a branch. Notable examples of these are Starling Bank, Tandem or Monzo (please note I invested in Monzo’s crowdfunding) and you also have Payment Institutions that are not a bank but still allow you to make Faster Payments such as Revolut, Loot or Monese and finally you also have p2p payment apps to send money to your friends, such as Circle or Barclay’s Pingit.
As a business it’s a bit more complicated. You have the choice between traditional banks — there is also one challenger bank in the UK called Tide — and crucially you can also work directly with Payment Companies, such as GoCardless for Direct Debit via BACS and of course, Telleroo for Faster Payments. These providers have various advantages and disadvantages, which I will address in my next blog post.
Did you find this information helpful? Do you have any questions? Please leave a comment below or contact me directly via email under Fabian AT telleroo.com
*Source: Personal Current Accounts market study by the Competition and Markets Authority in 2014https://assets.publishing.service.gov.uk/media/53c834c640f0b610aa000009/140717_-_PCA_Review_Full_Report.pdf