Why making payments by Bacs Direct Credit makes sense!

This informal CPD article ‘Why making payments by Bacs Direct Credit makes sense!’ was provided by Movimo, who help organisations improve their Direct Debit and Bacs Direct Credit processes to ensure successful, stress-free payments.

When making payments out of an organisation – for example to pay suppliers for goods or services or to pay staff their salaries and expenses - a business must choose which payment method to use. Often the choice is between:

• Bacs Direct Credit. This is a simple, secure, and reliable electronic payment method, regulated by Pay.UK. Organisations (known as a service users) are sponsored by a bank to use Bacs Direct Credit. They ‘push’ payments from the organisations account to a beneficiaries bank / building society account.
• Faster Payments. This is an electronic payment method widely used by consumers (e.g. via online or banking apps) as well as by businesses. Regulated by Pay.UK, Faster Payments are quick. Money is received within 2 hours of being sent (often near instantaneous).
• CHAPS (Clearing House Automated Payments). These are very secure, same day payments typically used by financial institutions to make wholesale financial payments and by large corporates to make corporate treasury payments. Operated by Bank of England for real-time, high-value payments they can be quite expensive.
• Direct Debit. These are automated, electronic payments where an organisation wishing to receive funds, collects amounts from the payers’ bank account. The collecting organisation – who must be sponsored by a bank – decide on the amount to be collected and ‘pull’ the money from the payers account after giving advance notice. Many businesses will have Direct Debits set-up to pay suppliers for goods and services but as it is the receiving organisation that initiate the collection, it isn’t suitable for all payments (e.g. salaries).

Business payments made via other methods such as cash and cheque are less common in today’s electronic world, while credit cards are often reserved for nominated staff members to use for low value transactions and expenses. Often therefore, the choice of payment method comes down to Faster Payments versus Bacs Direct Credit. Both have a place but when there is a choice, there are several reasons why making payments via Bacs Direct Credit makes sense.

Advantages of using Bacs Direct Credit

1. Efficient for bulk payments. With Bacs Direct Credit, a file of multiple transactions can be submitted to Bacs either through Bacs approved software or via a Bacs approved bureau. Transactions are not sent individually (which might be the case with other payment methods such as Faster Payments), thereby reducing manual workload, saving time, and reducing the likelihood of errors.
2. Payments can be future scheduled. Bacs Direct Credit is ideal for businesses with recurring payments or regular bills. It allows businesses to set up scheduled payments and automate regular transactions on any working day – up to 30 days in advance of the processing date. Whilst Faster Payments operate 24 hours a day, seven days a week – which is useful for consumer payments - most business payments are expected to occur on working days so the slightly longer timeline with Bacs payments (3 days) can be built into the process.
3. Feedback is provided on failures. If a transaction cannot be paid e.g. because the supplier or staff member has provided incorrect bank details, Bacs will generate a report to advise this. This means the organisation can quickly act to obtain the correct bank account details to allow the payment to proceed.
4. Inexpensive. Bacs Direct Credit is often less expensive than other payment methods. Actual costs will depend on the rates agreed with the bank but published bank costs for Bacs Direct Credits are often “pence per transaction” rather than Faster Payments, which are typically “pounds per transaction” and CHAPS which is typically between £20 and £30 per transaction.
5. Convenient for recipients: Beneficiaries that receive Bacs Direct Credit payments will have cleared funds arrive directly into their accounts.
6. Flexible: Bacs Direct Credit allows an organisation to make one-off payments or recurring transactions and to adapt the payment strategy to suit the specific needs of the business.
7. Secure. Transactions made through Bacs Direct Credit operate within a secure network and transactions are approved by nominated contacts. This ensures the safety of funds and reduces the risk of fraud or errors during the payment process.
8. Simple. The process of setting up Bacs Direct Credit payments is straightforward. Once established, it can be easily managed and maintained.
9. Managing errors. Hopefully, errors will not occur but if payments are made incorrectly (e.g. the wrong amount or to the wrong recipient), there is a chance with Bacs Direct Credit that these can be recalled and corrected. This can be undertaken either by requesting a File Extraction, Payment Withdrawal, or a File Reversal. Other payment methods, e.g. Faster payments cannot be cancelled once initiated because of the speed of the transaction.

If you want to make payments via Bacs Direct Credit there are a few factors to bear in mind, for example, Bacs Direct Credit is a sponsored service. This means that the bank needs to approve organisations to make payments via this method and not every organisation will be able to. Also, it is important to bear in mind that Bacs Direct Credit payments take 3 days to occur – a timeline known as the ‘Bacs cycle’. This timeline is fine if the date and amount of the payment is known in advance – for example with salary payments or supplier invoices with 30-day payment terms. Where known in advance, payments can be scheduled. If, however, immediate payment terms apply or an invoice needs to be paid quickly, then a Faster Payment (subject to a 2-hour timeline) might be best.

Conclusion

Making out-bound payments in an efficient, timely and secure way can keep operations running smoothly; ensure the organisation does not lose access to key goods and services and can foster good relationships with suppliers and staff. For many organisations who are seeking to optimise their payments, Bacs Direct Credit is a cost-effective, flexible and trusted payment method.

We hope this article was helpful. For more information from Movimo, please visit their CPD Member Directory page. Alternatively, you can go to the CPD Industry Hubs for more articles, courses and events relevant to your Continuing Professional Development requirements.