What Is a BACS Payment? Complete Guide to BACS in the UK

BACS, or Bankers’ Automated Clearing Services, is an electronic payment system used for bank-to-bank transfers in the UK. It’s one of the most popular online payment methods, particularly for recurring bills like subscriptions and rent.

BACS can be much cheaper for businesses compared to credit card payments, so it’s worth knowing about this payment system and how it works. In this guide, we look at what a BACS payment is and explain when to consider using one.

What Is a BACS Payment?

A BACS payment is an electronic transfer from one UK bank account to another. In 2022, more than 4.7 million BACS payments were made in the UK.

BACS payments take place using the BACS payment network, which is operated by Pay.UK. Pay.UK also runs the Faster Payments network, which can transfer funds quicker than BACS, but also costs more.

There are two types of BACS payments: direct debits and direct credits.

Direct Debits

BACS direct debits are used by companies to take payments from customers’ bank accounts. Direct debits are frequently used to take recurring payments such as rent, utility bills, or subscriptions and memberships.

Direct Credits

BACS direct credits are payments from a business’ bank account into customers’ or employees’ bank accounts. Direct credits are frequently used to pay employees’ salaries or pensions, to process returns, or to make one-time payments for invoices.

How Do BACS Payments Work?

BACS payments work slightly differently depending on whether you’re taking direct debits or sending direct credits.

How Do Direct Debits Work?

Direct debits enable your company to take funds directly from a customer’s bank account to pay an invoice or bill.

To set up a direct debit, you must get authorisation from a customer with a Direct Debit Mandate form. This form can be completed online or on paper. It should include a customer’s bank account details and their signature, indicating they consent to direct debits by your company.

Once you have a customer’s authorisation, you can initiate a BACS direct debit with your merchant account provider. Your provider must notify customers in advance before transferring funds. BACS direct debits typically take three business days to reach your account.

How Do Direct Credits Work?

Direct credits are payments from your bank account to someone else’s account. You can initiate these transfers within your bank account by providing a recipient’s account details. You don’t need a merchant account to make direct credits.

If you’re using direct credits to pay employees’ salaries, you can also make direct credits through your payroll provider.

How Much Do BACS Payments Cost?

BACS payments are very inexpensive, especially compared to credit and debit card payments. Fees vary by merchant account provider and bank, but you’ll typically pay 5p to 50p per transfer. For comparison, credit card payments typically cost 1.5%-3.5% per transaction.
When you take a direct debit, there’s no additional cost to your customers. If you send a direct credit, there’s no cost to the recipient.

When Are BACS Payments Used?

BACS payments are commonly used for recurring payments, as these situations enable customers and employees to provide their bank details once and then make or receive payments repeatedly. Here are a few common use cases for BACS payments.

Household Bills

BACS direct debits are frequently used to take payments for household bills, like mortgage, rent, and utility payments. These payments are ideally suited for BACS since they repeat every month.

Subscriptions

Many companies offering subscriptions and memberships also take payments using BACS. While companies can process recurring payments with a credit or debit card, card payments have much higher fees compared to BACS direct debits.

Payroll

Most UK businesses pay employees’ salaries using BACS direct credits. This is more efficient and lower cost than sending physical cheques. BACS direct credits are also safer since cheques can be lost or stolen in the mail.

Pensions

Many companies, as well as the UK’s Department for Work and Pensions, pay retired employees and state pensions using direct credits in lieu of cheques.

When To Use BACS vs Faster Payments vs CHAPS

While BACS is the most popular way to make a bank transfer in the UK, it’s not the only option. Alternatives include Faster Payments and CHAPS.

Faster Payments

Payments made with Faster Payments are available 24/7 and are transferred instantaneously. Payments cost 50p to £2.50 per transaction, so they’re significantly more expensive than BACS payments.

Generally, it’s a good idea to only use Faster Payments if you need to make an immediate payment, such as to improve your cash flow or to ensure a time-sensitive transaction clears.

CHAPS

The Clearing House Automated Payment System (CHAPS) can process payments in hours rather than days, and there’s no maximum limit to the amount you can transfer. In contrast, BACS has an upper transfer limit of £250,000 and many banks set lower limits for their customers.

CHAPS has a minimum transfer amount of £10,000 and costs £20 per transfer. So, it’s usually reserved for one-time, high-value transactions like purchasing property or paying taxes.

How Safe Are BACS Payments?

BACS is considered one of the safest payment methods in the UK. The BACS network has been operating for more than 50 years and only businesses with a merchant account are allowed to initiate direct debits. The BACS network is fully encrypted making it impossible for payments within the network to go missing.

Customers are protected by the UK’s Direct Debit Guarantee, which requires that customers are notified of payments in advance. The guarantee also ensures that customers are entitled to a full refund if a payment is taken in error or fraudulently. Customers can cancel a direct debit authorisation at any time.

Verdict

BACS is a bank-to-bank payment system within the UK. It enables businesses to take recurring payments from customers’ bank accounts for household bills or subscriptions. BACS can also be used to pay salaries and pensions directly to an individual’s bank account.

BACS payments are cheaper than credit or debit card payments. They also cost less than alternative electronic transfer methods like Faster Payments and CHAPS. However, BACS payments take longer to go through, so they’re not ideal for situations in which you need to be paid immediately.

FAQs

Is BACS a bank transfer?

BACS is a type of electronic bank transfer in the UK. Since BACS is the most commonly used type of bank transfer, the terms ‘BACS’ and ‘bank transfer’ are often used interchangeably. However, other types of UK bank transfers exist, including Faster Payments and CHAPS.

What is the difference between BACS and ACH?

BACS and ACH are very similar payment systems for making electronic transfers between bank accounts. BACS is only used in the UK, while ACH is only used in the US.

How long does BACS take?

A BACS payment typically takes three business days to go through. You must initiate the transfer before your bank’s cutoff time (usually 2 pm to 3 pm), or else it won’t be processed until the following day.