BACS Vs Faster Payments Explained: What You Need To Know

When it comes to payroll management and paying your employees here in the UK, there are a few options to choose from - two of the most popular ones being BACS and Faster Payments.

Whether you're at a big corporation navigating high-volume payments or a startup looking for flexibility and better cash flow, below we'll break down the key differences between the two systems - including their features, use cases, and benefits, so you can make an informed decision.

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What is a BACS payment? 

BACS stands for Bankers Automated Clearing Services.

A BACS payment is simply a digital method banks use to move money between different bank accounts.

This system is used for all sorts of transactions - like payroll processing, direct debits, and creditor payments.

BACS is overseen by the Bacs Payment Schemes Limited, a regulatory body whose job it is to streamline financial operations like payroll processing, direct debits, and creditor payments. 

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How does it work?

This is what the process of sending BACS payments looks like behind the scenes...

You submit payment instructions: The process begins with an organisation, typically an employer or a business, submitting a payment instruction file to their respective bank.

This file contains details of the transactions to be processed, like the beneficiary information and amounts that need to be sent.

The bank aggregates and processes your transaction: Once the bank receives the payment instruction file, it then bundles multiple transactions into batches.

These batches are then processed by the bank, which debits the payer's account and initiates the fund transfer.

The banks will communicate with one another: The processed batches are communicated to the BACS system, which acts as an intermediary between banks.

This stage involves verifying the validity of transactions and making sure they comply with regulatory standards.

Beneficiary(s) gets credited: The recipient's bank receives the fund transfer instructions - and then will be credited with the designated amount.

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How long does a BACS payment take?

BACS payments will usually take three working days to go through, so long as you send them before 10.30pm.

Here are a few of the factors that will determine how long your BACS payment(s) will take:

• Processing Date: The day on which the payment instruction is processed significantly affects the payment duration. Payments processed on working days will generally be transferred faster.
• Weekends/bank holidays: BACS payments are not processed on weekends and bank holidays.
• Batch processing: Although the batching of multiple transactions generally makes the overall process more efficient, this can potentially cause minor delays depending on how transactions are grouped together.
• Bank-specific processes: Individual banks might have specific internal processes that influence the exact timing of a BACS payment. Variations between banks can lead to minor discrepancies in payment timelines.

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Benefits of using BACS payments

Reliability and security

BACS payment services are known for being fairly reliable and secure

The automated nature of the system reduces the likelihood of errors, and robust encryption protocols safeguard sensitive financial information.

Cost-effectiveness for larger payments

BACS transactions are generally more cost-effective, especially for larger transfers. The bulk processing and batching of transactions help in reducing operational costs.

Suitable for large payments

BACS works well for larger payments and transactions where having funds immediate availability is not critical.

Convenient for recurring payments

BACS excels in handling recurring payments such as monthly salaries and subscription renewals. Its automated nature streamlines these repetitive processes. 

Predictable processing time

BACS transactions have a predictable transfer time (typically three business days) - and this predictability helps manage cash flow.

Risk management

The structured processing time of BACS payments gives banks time to thoroughly verify transactions, so there should be a reduced risk of errors or fraud.

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Limitations of BACS payments

Three day processing time

The structured processing time for BACS payments can cause headaches for transactions that require immediate fund transfers, especially in time-sensitive situations.

Lack of instant availability

Due to the rigid processing time, funds transferred through BACS payments are not immediately available to the recipient.

Not cost-effective for small payments

For small payments, the fees associated with BACS might make it actually ens up costing you more than other options due to the way they're batched.

Limited flexibility

BACS payments are typically processed on working days, excluding weekends and bank holidays.

This means processing can be a limitation if you need transactions to occur outside regular working hours.

Not ideal for real-time financial management

If your business requires up-to-the-minute financial management or immediate updates on account balances, the processing time of BACS payments can prevent you from getting a real-time overview.

What is a Faster Payment?

As the name suggests, Faster Payments is a speedier alternative to BACS.

They're basically a means of sending money from one bank account to another that usually takes just a matter of seconds - as opposed to BACS which tend to take three working days.

When you use Faster Payments, you don't have to wait for hours or days for the money to arrive. Once you initiate the transfer, the money generally appears in the other person's account right away.

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How does it work?

Here's how Faster Payments typically work (when using for payroll):

You prepare your data: To kick off the process, you'll need to prepare your payroll data (salaries, tax deductions, benefits, etc).

Pay is calculated and approved: You'll then need to calculate the net pay for each employee after taxes, deductions, and any other factors (which a dedicated UK payroll software will take care of for you 👀).

Once the calculations are reviewed and approved, the total payroll amount is ready for transfer.

You initiate the payment: Using your banking portal or payroll software, you then initiate the Faster Payments transfer.

This typically involves uploading a file containing the employee payment details, such as their bank account numbers, sort codes, and the corresponding amounts.

Your bank will verify the transfer: Your bank verifies the availability of funds in your account and checks for any security or fraud concerns.

Once the verification is completed, your bank authorises the payment.

Payments are processed and credited: The Faster Payments service processes your payment instructions and sends the funds to each employee's bank account in near real-time.

Your employees get notifications: Typically, your employees will receive notifications (via email or SMS) confirming the successful receipt of their salary.

You're advised to keep records: We recommend you keep records of all payments made - including the transaction details and confirmation receipts. These records are important for financial reporting, tax purposes, and auditing.

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How long does a Faster Payment take?

Faster Payments are completed in minutes. Sometimes they might take up to two hours, but will always be  credited by the end of the following business day.

These are some of the factors that might dictate how long your Faster Payment takes:

• The banks involved: You and your employees' banks will have different processing speed and efficiency. Some banks might have more streamlined systems, which means quicker transfers.
  
  
• Network traffic: The overall volume of transactions being processed by the Faster Payments system when you're trying to send money will have an impact on how long it takes. If there's a volume of transactions, your payment might be slightly delayed.
  
  
• Cut-off times: Banks tend to have cut-off times for processing Faster Payments. If you initiate your transfer after the cut-off time, the payment might be queued for the next processing window, which could result in a delay (sometimes as late as 5:30pm).
• Technical issues: Occasionally, technical glitches or issues in the payment network or banks' systems might cause delays, although this is fairly rare.

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Benefits of using Faster Payments

Speed and efficiency

Faster Payments enable near-instantaneous fund transfers between accounts.

This means that you can easily make urgent payments, such as payroll, supplier payments, or time-sensitive transactions.

Improved cash flow

The Faster Payment method helps improve cash flow by ensuring that funds are available to recipients more quickly.

This may be especially helpful if you're a SME that needs funds readily available.

24/7 availability

The Faster Payments system is usually available 24/7 (including weekends and bank holidays).

This gives you more flexibility to initiate payments at your own convenience, without being constrained by banking hours.

Reduced admin 

Using Faster Payments should cut down on manual admin work - automating things like payment instructions.

Employee satisfaction

Faster Payments will mean that employees receive their salaries on time.

Real-time notifications

Faster Payments usually come with real-time notifications to both senders and recipients so you can keep track of your transactions.

Emergency payments

If you're ever unlucky enough to be faced with an emergency or unexpected situation, Faster Payments can be used to quickly transfer funds.

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Limitations of Faster Payments

Transaction limits

Some Faster Payments systems may have transaction limits, which will restrict the amount that can be transferred in a single transaction.

This limitation might not be suitable for large-value payments or bulk transactions.

Transactions are irreversible 

In most cases, Faster Payments can't be reversed once processed.

If an error occurs or if a fraudulent transaction takes place, it can be challenging to recover the funds.

Limited international reach

Faster Payments systems are typically designed for domestic bank payments within a specific country.

For international payments, you might need to use alternative methods like SWIFT or international wire transfers.

Costs

While Faster Payments can be cost-effective for many transactions, there may still be associated fees. For bulk transfers, BACS transfers might be cheaper.

Recipient bank participation

Faster Payments require both you and your recipient's banks to participate in the system.

If the recipient's bank is not part of the network, the payment might be processed through a different method, potentially causing delays.

Lack of payment details

Faster Payments might not support detailed payment information, which could be an issue if you require specific payment references or invoice details to be included with transactions.

Integration challenges

You'll need to integrate your systems with banks' platforms to initiate Faster Payments.

This integration process can sometimes be complex and time-consuming.

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Is Faster Payments safe? Are they more risky than BACS?

Faster Payments are generally considered safe and secure.

The system is designed with several security measures in place to protect transactions and the personal information of users.

Here some of the measures in place to keep Faster Payments safe:

• Encryption: Faster Payments transactions are encrypted to ensure that the data transmitted between banks remains confidential and cannot be easily intercepted.
  
  
• Authentication: Banks employ strong authentication methods to verify the identity of users initiating transactions.
  
  
• Fraud Detection: Banks and financial institutions have advanced fraud detection mechanisms in place to identify and flag suspicious or unauthorised transactions.
  
  
• Industry standards and regulations: The Faster Payments system is regulated by financial authorities and government bodies to ensure compliance with security and privacy standards.
  
  
• Bank guarantees: In many cases, banks provide guarantees that customers will be reimbursed for unauthorised transactions or fraudulent activities.
  
  

Due to the longer processing time of BACS payments, they may be somewhat more secure just due to the length of the processing.

Faster Payments' quicker processing time can introduce certain risks around fraud detection and customer awareness...

But these risks can be easily mitigated through strong security measures and monitoring.

Both Faster Payments and BACS are regulated and monitored by financial authorities so if safety is a top priority for you, there's really not much difference between the two systems on this front.

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🚨 TL;DR: What is the difference between BACS and Faster Payments?

Speed: As you'd expect, Faster Payments will be significantly quicker than BACS... taking just seconds/minutes as opposed to several working days.

Risks factor: BACS may be marginally more risk-free but there is nothing inherently more risky about using Faster Payments. Both are safe and secure.

Costs: BACS are generally cheaper with lower transaction fees or no fees for users - especially when you're sending payments in bulk.

Making changes: Due to their instantaneous nature, Faster Payments are irreversible, whilst BACS payments can be changed within a limited window.

Transaction size: BACS are often used for higher-value transactions, whilst Faster Payments tends to be used for lower to medium-value transactions due to how fast they're processed.

Availability: Faster Payments are available 24/7, including weekends and holidays. The BACS only operates during banking hours on business days

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The verdict: it all comes down to your specific needs

Ultimately, whether you opt for BACS or Faster Payments depends on your specific preferences - there is no objective right answer.

BACS is broadly known for being trusty but often requires batch processing and manual intervention... whereas Faster Payments emphasises automation and real-time processing.

It really just depends on where your priorities lie...

BACS: Better for reliability, cost-effectiveness, and handling recurring payments.

Faster Payments: Better for real-time transfers, immediate availability of funds, and flexibility.

BACS tends to be favoured by:

• Large corporations
• Government agencies
• Utility companies
• Subscription services
• Financial institutions

And Faster Payments are more popular with:

• SMEs
• Online retailers
• Freelancers and consultants
• Startups
• Digital services

If you're still in need of a deeper dive into all the payment options available to you, check out HMRC's Payments Landscape Review.

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No matter what payment systems you choose - Pento can help streamline your payroll process

Pento is a UK payroll software that makes payroll management a straightforward, stress-free process - supporting both BACS and Faster Payments.

Here's how Pento can help simplify your payment processing:

Automated payroll calculations: Pento automates complex payroll calculations like taxes, deductions, and benefits.

Real-time updates: We'll provide you with real-time data for complete control over your payroll process.

Direct integrations with banks: Pento directly integrates with banks and payment systems to facilitate direct deposits.

Tax and compliance management: We help manage tax withholdings, contributions, and reporting, so your businesses will always stay compliant with the latest HMRC laws and regulations.

Data security: With Pento, your data is encrypted to stay safe and secure.

Expert support: Need real human support? Have a CIPP-certified expert on-hand to help with all things payroll processing.

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BACS vs Faster Payments FAQ

Which is faster, BACS or Faster Payments?

Faster Payments are significantly quicker - taking just. a few seconds. BACS may take several working days to be processed.

Do faster payments work on weekends?

Yes, Faster Payments work on weekends, not just during business hours when banks are open.

Do Faster Payments work on bank holidays?

Faster Payments can be made 24/7 - including bank holidays.

When are BACS typically used?

BACS is commonly used for non-urgent payments and bulk payments.

When should I use Faster Payments?

Faster Payments are ideal for time-sensitive payments like urgent salaries, supplier payments, or immediate transactions.

Are there differences in transaction fees?

BACS often has lower or no fees, while Faster Payments might have higher transaction costs due to its speed and convenience.