Ever wondered about UK payments and how they work?
Who better to explain the UK payments landscape than a payments FinTech at the very heart of it?
In this video we explain the different players and regulators in the UK payments system, tell you about the unsung heroes of UK payments, and show you how payments can be used to build a successful business.
A (very brief) history of UK payments
The story of commerce anywhere in the world is fundamentally that of its underlying infrastructure - bartering, coinage, paper money and electronic money.
This story doesn’t quite happen chronologically because, for instance, bartering still happens today as it can be, in some cases, the only viable method of commerce. Rather, the following timeline should be viewed as a layering of infrastructure.
The layers of commerce – bartering, coinage, paper money and electronic money
Since time immemorial, humans have exchanged items of intrinsic value for other items of intrinsic value. However, as trade developed and economies become larger, you need something that was unperishable, that would ‘stand in’ for the wealth of the last rice harvest. In this way, coins were first minted with their own intrinsic and universally accepted value. These were usually gold or silver. They were more lightweight than cargo and wouldn’t perish. But what to do with all that gold you’ve amassed? Pretty soon you’re carrying all your gold around in a heavy strongbox, or capsa as it’s known in latin, and caisse in French. You might hear an English word beginning to emerge here – cash.
In Italy, which was the financial hub between medieval Europe and the prosperous East, some clever merchants turned those strongboxes into fortresses and employed guards, charging owners a fee to store their gold – that's where banks come from.
And, this is how paper money came about. A merchant would send a piece of paper to their bank requesting the bank pay, from the merchant’s store of gold, the agreed amount to another merchant. This is how notes came into being. By this point, the economy is running on a system of messages between holders of wealth and financial institutions. The next layer in the evolution of commercial infrastructure is all to do with speed and security. Instead of the merchant sending a servant with a piece of forgeable paper to the bank and waiting weeks for a payment to arrive at its destination, messages were now sent electronically between banks.
That brings us onto the next layer which still exists today – electronic payment systems. You should know about these systems because they pay your salary and keep the UK economy moving.
UK payments schemes today: What are the main payment schemes?
You can think of payment systems, also known as schemes, like public transport that takes you from Point A to Point B – but some do it more quickly or more cheaply than others. Knowing which payment scheme is designed to do what, is the first step to understanding how you can use payments in your business.
Bacs is the UK’s oldest payment scheme. It’s been around since 1968! 90% of UK employees are paid using Bacs Direct Credit. Bacs started off on giant tapes, which got smaller over time, and nowadays are on electronic files. But, to this day, at the top of every single Bacs file, it still has TM, or Tape Mark, and to this day if you really wanted to, you could print any Bacs file onto tape. Bacs is used a lot because it’s affordable and allows you to do lots of things like Directly Debit someone’s account. You can send up to £20m in one Bacs payments. The downside is the process hasn’t changed since 1968, so it still takes three days for payments to clear.
Launched in 2008, Faster Payments is the new kid on the block. The benefit of Faster Payments is speed – payments go through in near-real-time and can be processed 24/7. You can currently send up to £250,000 in a single Faster Payment. And, payments at speed means instant cashflow. This offers huge potential for businesses to drive efficiency and deliver better customer experiences, but not all businesses are taking advantage of it yet.
CHAPS aka Clearing House Automated Payments System is what’s used for settling high-value wholesale payments. This is the underlying UK payment system and both Bacs and Faster Payments use CHAPS to settle a few times a day. For consumers, it’s typically used for one-off large transactions like buying properties or business acquisitions. It has strict time limits – payments can only be made during business days between 6am and 6pm and there’s no upper limit to payment value.
Less relevant to businesses is LINK -for cash machines, Cheques Clearing - for cheques - and PayM –is a register of phone numbers associated with bank accounts.
There’s also a brand-new payment scheme coming that will become the UK’s payments infrastructure, called New Payments Architecture.
UK payments: Who does what?
The UK payments system is complex, but here a few of the most important players.
Bank of England (BoE). The Bank of England is the central bank for the UK. That means it issues currency and oversees monetary policy like setting the base interest rate. It processes approximately £155 trillion worth of payments each year.
Pay.UK. All UK payment schemes (except CHAPS!) were recently brought together under the UK’s payment authority – Pay.UK. This includes FPS and Bacs, but also Link, Cheques Clearing and PayM.
Card schemes. The bulk of UK card transactions happen through Visa or Mastercard. They manage the operation and clearing of card payment transactions.
Payment Service Provider. This is an authorised business that provides payment services to other businesses.
Bank. An institution issued with a banking licence by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to perform regulated banking activities, like taking deposits and offering loans.
E-money institution (EMI). This is an organisation that has been authorised by the FCA to issue electronic money. It’s the newest player to the party.
So, which of those categories does Modulr fall into?
We’re regulated by the FCA as an e-money institution. This means we can issue accounts with sort codes and Euro IBANs. The main difference between a bank and an EMI is that a bank takes deposits to lend money out and makes money on the difference (Net Interest Margin), whereas an EMI holds 100% of clients’ funds at all times and makes its money on payments and accounts. Modulr is also a direct participant to the Faster Payments and Bacs schemes, which means we’re able to hold and settle funds at the Bank of England directly. Find out more about why that's important, here.
And we’re a principal issuing member of both Visa and Mastercard. This means our payments service is regulated in exactly the same way as a bank’s payment service, we just don’t deal in interest. But we’re built for innovation and flexibility.
Build a successful business with a payments FinTech
We’re moving towards the Instant Economy – where everything in our lives is consumed and acted upon in real-time. This is having a dramatic impact on both consumer and business expectations.
For any business that accepts or deals with payments, meeting these expectations requires an agile infrastructure, built for innovation. And that’s where the real power of fintech lies. New payment providers can meet the demands of businesses where banks are falling short.
With a modern API-driven infrastructure you can:
- Automate payment flows, including receivables, payables, collections and disbursement.
- Embed innovative payment offerings into your workflows and customer experiences.
- Launch new payment services or even build your own bank.
All of this can help your business to compete effectively in the Instant Economy and make UK payments your competitive advantage.
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