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Everything about FPS (UK), BACS (UK)

Everything about FPS (UK), BACS (UK)
prashanth
Prashanth12 January 2024

Among the key players in the United Kingdom's financial landscape, the Faster Payments Service (FPS) and Bankers' Automated Clearing Services (BACS) stand out as cornerstones, facilitating the seamless movement of funds in different ways.

The payment schemes are similar to ACH in the US and SEPA in the Eurozone. The Indian payment system NEFT comes in operations and processing, allowing two bank accounts to transfer funds seamlessly. 

As a freelancer or service exporter in India, it is important to understand both payment methods as your UK-based clients may opt for these payment methods Understanding The Faster Payments Service (FPS)

The Faster Payments Service (FPS) was created in 2008 and reduces the payment times between bank accounts within the United Kingdom. Previously, such electronic payments between UK bank accounts used to take at least 3 business days, which the FPS has reduced to a matter of seconds. 

In 2022, the Faster Payments Service processed transactions worth £3.2 trillion. When making an FPS payment, there are three stakeholders involved in initiating and executing transactions: 

Who is involved in FPS payments
  • The Payer Financial Institution
  • The Payee Financial Institution 
  • The Intermediates 

A successful FPS transaction consists of two vital steps: 

A successful FPS transaction consists of two vital steps
  • Processing: The processing step involves the transfer of payment information from the payer's financial institution, payment confirmation by the intermediary, and payment notification between the three parties. 
  • Settlement: After payment initiation confirmation and notification, the intermediary settles the FPS payment and debits the funds from the payer FI’s bank account to the payee FI’s bank account. 

There is no option to cancel or reverse them after initiation. In case of a mistake, entities can follow the Credit Payment Recovery (CPR) procedures. The procedures are in place to help recover any FPS payment sent due to an error. 

Understanding BACS (Bankers' Automated Clearing System)

BACS, or Bankers' Automated Clearing System, is an electronic payment system allowing participants in the UK to send and receive funds. The electronic network includes 16 main building societies and clearing banks in the UK. Operated and managed by Pay.uk, it is one of the most cost-effective payment methods for entities such as freelancers and small businesses to send and receive payments. 

BACS handles payments within the UK through UK-registered bank accounts and provides the following payment facilities: 

Understanding BACS (Bankers' Automated Clearing System)
  • Direct Debit:  When a bank account holder in the UK initiates a debit request from the bank account to be sent to another bank account. Mostly, such payments are for recurring debits such as bills, and credit card transactions. 
  • BACS Direct Credit: Allows a party to credit funds into another party’s bank account. The facility is mostly used by employers to pay wages and payroll management. 
  • Current Account Switch Service: The facility allows the transfer of balance and all past activity to a new bank account in case an entity wants to transfer the current account to another financial institution.

In 2022, BACS processed direct debits of £4.7 billion and direct credits of £2 billion. Currently, both the BACS payments; Direct Debit and Direct Credit work on a three-day cycle. 

  • Day 1: Payments are initiated and submitted to BACS
  • Day 2: Banks process the transfer request
  • Day 3: The payer account is debited and the funds are credited into the receiver’s account

Similar to FPS, BACS payments also have an upper limit of £1 million. However, banks have the right to set their upper limit on the per transaction and daily amount users can transfer using BASC. 

Comparing FPS and BACS As Payment Methods 

Here is the difference between FPS and BACS as payment methods.

TitleFPS BACS
Transaction Cost Low cost but a little more expensive than BACS transfers. Some banks waive the fee. Usually free or very low cost.
Processing TimeUsually within seconds but may take up to 2 hours. Usually 3 business days from the day of payment initiation. 
Regulatory Authority Pay.uk Pay.uk 
Transfer Area Within the UK Within the UK
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