Everything about FPS (UK), BACS (UK)
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:
- The Payer Financial Institution
- The Payee Financial Institution
- The Intermediates
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:
- 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.
| Title | FPS | 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 Time | Usually 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 |
What to choose: FPS or BACS?
When choosing between the payment methods, it depends on:
- Nature of the entity
- Nature of the payment
- Urgency
For example, if you want to make payments without the urgency of settlement, you can use BASC. However, if you want to settle payments immediately, FPS would be the right choice.
To pay by BACS or FPS, you need the following information:
- The name of the recipient's bank
- Their account number
- The sort code.
FPS and BACS for Indian Freelancers and Tech Service Exporters
As an Indian freelancer, tech service provider or any other type of business entity collaborating with clients in the UK, both payment schemes make it easier for international clients to make payments. This is because most business entities in the UK have a UK bank account, which they can easily use to transfer funds using FPS and BACS.
However, it becomes cumbersome for Indian freelancers or other service exporters to create a traditional bank account in the UK. Indian service exporters such as freelancers must create a virtual account on third-party platforms such as Skydo.
Using Skydo, you don’t have to open a traditional bank account in the UK and can virtually receive Pound Sterling payments. Once received, you can transfer funds from your virtual BACS and FPS account to your Indian bank account after converting the funds into INR.
Conclusion
In their essence, both FPS and BACS payment schemes have changed the B2B payments landscape in the UK. These play pivotal roles in facilitating seamless and efficient transactions within the country, serving both businesses and individuals alike.
The FPS, with its real-time capabilities, has revolutionized payment processing, offering a swift and secure channel for funds transfer. On the other hand, BACS, with its legacy and stability, remains a vital player and ensures the smooth flow of funds on a scheduled basis.
For Indian freelancers and service exporters, third-party platforms such as Skydo are making it easier to collaborate with UK clients and receive payments virtually, without having to create a UK bank account. You can open your virtual FPS or BACS account by visiting the Skydo website.
FAQs
Q1. Do I need a UK bank account to receive FPS Payment?
Ans. To receive FPS payments, having a UK bank account is typically necessary. The FPS system relies on the UK banking infrastructure, and almost all participants are UK-based. In case you don’t have a UK bank account, some financial institutions and third-party payment providers like offer virtual account solutions for easy cross-border payments.
Q2. Do I need a UK bank account to receive BACS Payment?
Ans. Yes, typically, you would need a UK bank account to receive BACS (Bankers' Automated Clearing Services) payments. To receive BACS payments, you would generally need to have a UK bank account where the funds can be deposited. However, you can use third party service providers like Skydo to create virtual accounts and still receive BACS Payment.
Q3. What is the limit for FPS and BACS transactions?
Ans. Individuals can send up to £1 million using FPS and BACS. Banks set their limit for the maximum amount entities can send per transaction or daily.
Q4. What is the settlement time for FPS and BACS transactions?
Ans. As the name suggests, FPS payments are one of the fastest and are settled almost immediately after payment initiation. However, some payments may take up to two hours. BACS takes three days to settle.
