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Bacs To The Future

If you’re a payroll professional, you’re probably scratching your head wondering why the rest of the world seems to be riding a technological juggernaut when it comes to payments, but in your work life, it’s more like a horse-drawn cart.

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Your nine to five is probably still dogged by highly manual, slow, batch file (or even Excel spreadsheet)-based processes. And whilst payments are fundamental to what you do, they do not replicate the swipe-of-a-finger or tap-of-a-button experience you’re used to as a consumer.

 

In the UK, more than 150,000 companies use Bacs to pay salaries and wages. Bacs is the oldest electronic payment scheme in the UK having existed for almost 50 years. Payments are made either via Direct Debit, or in the case of payroll, using Bacs Direct Credits. However, it takes three days for the funds to reach the beneficiary’s account – hardly instantaneous.

 

The process for submitting payments to Bacs is also time consuming and potentially error prone – every payroll managers’ nightmare. Payroll managers must manually create and export batch payment files, which need to be authorised and then sent to the processing bank by logging into their e-banking portal. That process needs to be completed by lunchtime on a Tuesday if salaries are to be paid into accounts by the Friday.

 

And if a payment fails for whatever reason, then payroll managers are likely to tear their hair out trying to trace the funds and resolve the problem. For umbrella and payroll companies whose bread and butter is payments, certainty of payment is essential. Failing to pay workers on the day they’ve been promised can mean the difference between losing and retaining clients.

 

When Faster Payments came online in 2008 —the first new payment system in the UK for more than 20 years —it should have, in theory at least, made payroll managers’ lives a lot easier. Instead of taking three days like BACs, payments typically reach the beneficiary’s bank account in a matter of minutes, if not seconds, if their account is with a bank that is a Direct Participant in the Faster Payments scheme.

 

Individual payments up to a threshold of £250,000 can be processed through Faster Payments, but direct participant banks in the scheme, which route the payments, typically have different limits or thresholds they set for payments. In some cases, cut-off times imposed by the banks can mean settlement via Faster Payments can’t be achieved same day.

 

Using a process, similar to the one used for Bacs batch files, companies can submit batches of Faster Payments via their bank portal. In some cases, banks may provide companies with Direct Corporate Access, enabling deeper automation, but this can be difficult to come by.

 

Fees to send payment files via Faster Payments also vary by bank and the cost can be prohibitive, especially for a company that may process around 1,000 transactions per month, but is not big enough to negotiate competitive fees. That perhaps explains why most payroll companies continue to use Bacs, which may be slower, but is usually cheaper.

 

An alternative, however, is available for payroll. The EU Payment Services Directive and Open Banking paved the way for non-bank payment service providers to encourage competition and drive down costs. The payment schemes, which have long been controlled by the banks, are opening their doors to non-bank payment service providers or PSPs, which use open Application Programming Interfaces or APIs to provide a suite of more efficient, cost-effective payment services that reduce the manual overhead of processing payments.

 

Non-bank PSPs are bringing significant innovation to the Faster Payments market – from offering Service Level Agreements (SLAs) for service reliability and true real-time payments, to providing additional treasury and cash management automation capabilities. In some cases, these services can be integrated directly with your payroll software package.

 

If you’re a payroll services provider, umbrella company or payroll bureau, these non-bank options can bring huge benefits — ensuring salary payments arrive on time, removing manual payroll processes and spreading workload across the week. Integration into payroll software packages simplifies processes even further, and can finally deliver that ‘tap-of-a-button’ experience.

 

Download Modulr’s easy-to-understand guide, which explains in more detail how Bacs, Faster Payments and CHAPS — the UK’s three electronic payment systems — work.

 

What is an API and why does it matter?

An Application Programming Interface or API is a defined set of commands and tools that enables computer systems to directly exchange information with one another. Payment providers, such as Modulr,

use APIs to allow customers to trigger payments from accounting, payroll, HR or other software. They also allow these systems to query bank balance information and import statement data, considerably reducing the manual overhead. Some payroll software providers offer out-of-the-box integration via these APIs, minimising the technical effort required on your end.

 

E-money and Payment Institutions: What is the difference?

In addition to banks, the first EU Payment Services Directive and the E-money Directive, created two new categories of payment services providers that are licensed by the UK’s Financial Conduct Authority: e-money and payment institutions. The latter can execute payments (credit transfers, direct debits), remit money, provide foreign exchange. E-money institutions issue electronic money — “cashless payments” or “stored value” — into a customer’s account. E-money institutions must hold client funds in a separate designated account. They can also provide payment services, but they do not lend money.

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