UK startups have many different payment rail options, but which one best suits your business?
The digital banking revolution has made banking easier than ever before. Within minutes, money can be moved between bank accounts seamlessly and at little cost. However, there’s still a long way to go before banking truly meets the needs of modern businesses.
Banking can be confusing, messy, and even downright annoying at times. So that’s why we’re diving into the three different UK payment rail options: Faster Payments, BACS payments, and CHAPS payments in this article so you know which is right for your needs.
A type of electronic transfer, Faster Payments are used to speed up money transfers between UK bank accounts. Everyday transactions are the most common type of payment processed via the Faster Payments service. Though this sounds like the best payment rail for everyday transactions, there are some limits—for example, all banks impose a transfer limit of up to £250,000 on Faster Payments. As the name suggests, Faster Payments are much quicker than traditional BACS payments and CHAPS payments, taking up to two hours for funds to transfer.
So, when and why might startups use Faster Payments? For one thing, small businesses that accept Faster Payments can receive funds from sales immediately. This can be a great benefit for startups and small businesses needing to carefully control their cash flow.
Faster Payments also often involve a “credit push”, that is, it’s a requirement that the payer has sufficient funds in their account before making a payment. This means that startups are less likely to deal with payment reversals due to insufficient funds.
BACS stands for Banker’s Automated Clearing Services and is a payment system for clearing financial transactions between banks, building societies, and other financial institutions in the UK. It’s the most common payment method for businesses and is most often used to pay wages, salaries, and pension pots.
BACS payments are much slower than Faster Payments and CHAPS payments, taking up to three days to arrive. Having said that, BACS payments are cheaper than CHAPS transfers, often being free, and are better for long term and regular payment instalments.
Not all small businesses and startups may benefit from BACS payments as they’re used for larger transfers such as to pay numerous salaries or pensions. However, startups may benefit from using the Direct Debit service run by BACS. Implementing Direct Debit cuts down the cost of financial administration by eliminating billing paperwork. It can also improve cash flow for startups since payments are collected on a specific date, meaning you know exactly when and how much money will be in your account. By controlling ingoing and outgoing funds in this way, startups can plan more carefully and accurately.
🙌 Connecting your different bank accounts according to your own needs
🎯 Giving real-time metrics to keep track of all your payments
CHAPS stands for Clearing House Automated Payment System and is part of the traditional banking sphere, having been around for over 30 years. It’s primarily used by businesses to transfer large amounts of money within the UK in a short space of time—guaranteed to be delivered on the same working day.
Making a CHAPS transfer is more costly than both a BACS payment or Faster Payments, costing up to £20 to £30 for the service. However, CHAPS payments are quicker than BACS payments, usually taking up to one working day to transfer funds. There is also no limit to the amount of money that you can transfer using CHAPS, unlike Faster Payments.
CHAPS are useful for businesses transferring very large amounts of money within a time-sensitive window. Benefits to CHAPS include being able to pay suppliers, taxes, and individuals quickly and efficiently. Startups may not fully benefit from using CHAPS transfers, as they are better suited to larger companies transferring significant amounts of money. For this reason, Faster Payments and BACS payments are far better suited to startups and small businesses.
You can’t always choose your payment rail when you make a transaction, but it’s really useful to know the difference between them and how you can use them for your specific needs. Faster Payments, for example, is the preferred choice for regular quick transactions whereas BACS and CHAPS are better suited for large money transfers, such as paying salaries or pensions with CHAPS usually taking a day to process.
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