Current payment schemes in the UK

What are the main UK payment schemes?

Several new payment technologies are reaching maturity in the UK in 2020, thanks to innovation driven by FinTechs and new regulations such as Open Banking. But for now, the four principal options for bank transfers in the UK remain Bacs, CHAPS, Faster Payments and SWIFT payments (for cross-border transactions). Each of these payment types has its own advantages and disadvantages, so it’s important to understand which is best suited for your business or transaction purposes.

What is Bacs?

What is Bacs?

Bacs is the UK’s oldest payment scheme. The first incarnation of Bacs (Banker’s Automated Clearing Services) began operating in 1968 and its now a part of life for most people in the UK. More than 140 billion transactions have been credited or debited in the UK since its inception. And in 2019 alone, 6.5 billion Bacs payments worth £5 trillion were made.

Thereare two main types of Bacs transactions: Direct Debit and Direct Credit.

  • Direct Credit. This is a service used by businesses to make regular payments directly to bank or building society accounts. It’s commonly used to pay employee salaries, wages, benefits and pensions. Today, 90% of UK employees are paid by Bacs Direct Credit.

  • Direct Debit. This is where customers give their bank permission to make payments to an authorised third party from their account. It’s commonly used by consumers for regular or recurring payments e.g. gym subscriptions and utility bills.

What are the pros and cons of Bacs?

Bacs is widely used by both businesses and consumers for regular payments, largely because it’s affordable. It’s also flexible – you can set up recurring direct debits, and each transaction can be up to 20 million pounds. The downside of Bacs is that it’s slow. Because the technology for Bacs has been around for so long, it’s not optimised for efficiency. Payments take three days to clear.

What is Faster Payments?

What is Faster Payments?

The Faster Payments Service (FPS) was launched in 2008 and has been instrumental in bringing the UK to the cutting-edge of payments innovation. It was originally introduced to meet a need for retail payments that would be faster than Bacs, but the scheme is now offered by more than 30 financial institutions.

Faster Payments allows the transfer of funds between customers’ different bank accounts in just seconds – a significant improvement on the three days taken by Bacs. The maximum amount you can exchange under Faster Payments is £250,000. In 2019 there were over 2.4 billion Faster Payments transactions, totalling more than £1.9 trillion in value.

What are the pros and cons of Faster Payments?

Speed is the primary benefit of Faster Payments. Transactions can take up to two hours in theory, but it’s often quicker. For example, Modulr’s Service Level Agreement for Faster Payments transactions is under 90 seconds. This can yield great benefits for businesses as it enables real-time payment flows. The downside of Faster Payments is that it’s more expensive than older systems like Bacs.

What is CHAPS?

What is CHAPS?

Set up in 1984, the Clearing House Automated Payment System (CHAPS) is used for large payments in both the UK’s retail and wholesale markets. It provides settlement risk free and irrevocable payments in an efficient timeframe. This makes CHAPS suitable for large and time-sensitive payments such as property deposits or significant business transactions.

There’s no set minimum or maximum amount, but it’s unusual for CHAPS payments to be under the value of £10,000.

How long does CHAPS take?

Most transactions are settled instantly, but it’s possible for it to take one working day. CHAPS opens at 6am UK time but users must be able to receive by 8am, payments must be sent by 10am, and the system closes at 6pm for bank-to-bank payments. Consumer payments must be submitted by 5.40pm.

What are the pros and cons of CHAPS?

CHAPS is a reliable method of transferring high-value, one-off transactions which need to be processed same-day. But because of the high fee incurred by each transfer, and the narrow time frames involved, it’s not suitable for regular or low value transactions.

Card payments in the UK

How do card payments work in the UK?

UK consumers love card payments. And usage has increased since the COVID-19 pandemic, as they provide a more hygienic way of paying than cash. In response, VISA has increased the limit for contactless to £45. Paying by card is an easy and enjoyable for consumers – but behind the scenes, it’s anything but a simple process. There are actually many financial players involved making it a complex and expensive type of transaction.

What is a card scheme?

What is a card scheme?

The two major card schemes or networks in the UK are:

  • Visa

  • MasterCard

Both Visa and Mastercard work in similar ways, acting as intermediaries which check and either approve or reject transactions. They oversee much of the payment process and connect the dots between issuers and acquirers – making sure funds travel between the correct accounts.

What is Confirmation of Payee (CoP)?

What is Confirmation of Payee (CoP)?

Authorised push payment (APP) fraud is a growing problem in the UK. APP fraud occurs when people or businesses are tricked or manipulated, often through social engineering techniques, into sending payments to an account controlled by a fraudster. Pay.UK recently launched Confirmation of Payee to help tackle this problem, and financial providers and banks are gradually adopting it.

How does Confirmation of Payee (CoP) work?

Confirmation of Payee (CoP) is a service that checks account names match up to their correspondent account numbers and sort codes, giving businesses and consumers greater assurance that they’re sending payments to a legitimate account.

What are the benefits of Confirmation of Payee (CoP)?

For consumers, the benefits of Confirmation of Payee are obvious – they’re less likely to become victims of fraud or scams. For businesses, Confirmation of Payee can have a number of benefits, including:

  • Reduced losses from fraud. Employees are less likely to make a payment to a fraudulent party, reducing the chance of direct financial losses.

  • Less time investigating fraud. The reduced rate of fraud means less time spent investigating and resolving fraud incidents, which can be an expensive and lengthy process.

  • Cost-effective security. Confirmation of Payee is a more cost-effective and reliable solution than workarounds like bank validation tools.

What impact will Confirmation of Payee (CoP) have in the UK?

Fraudsters and criminals are constantly innovating, so it’s important that regulators and financial providers stay a step ahead. Confirmation of Payee will provide a much-needed safeguard against misdirected payments. It will help to protect UK consumers and businesses from losing millions to APP fraud and help to build a safer payments ecosystem.