There was a time when sending money involved paying someone to physically carry the money long distances.
This was vulnerable to banditry, con artists, and all matters of danger.
Thankfully, these days you can transfer money to anyone with just a few clicks of a button on your phone, tablet, or laptop.
In the UK, given its status as a financial center of the world, transferring money needs to be reliable, fast, and easy.
That’s where CHAPS and BACS come in.
What are CHAPS and BACS Payments?
CHAPS stands for “Clearing House Automated Payment System,” and BACS stands for “Bankers Automated Clearing Service.”
Both are systems used to transfer money.
Let’s break it down a bit to make it easier to understand.
CHAPS is primarily used for single, large payments from one bank to another.
For example, if you decide to buy a new Jaguar, chances are that CHAPS will be used at some point.
It uses the SWIFT network, which we’ll touch on later.
A key feature of CHAPS payments is that they’re time-sensitive.
CHAPS payments are fast, making them perfect for large business payments where work can’t be started until receipt of funds.
That’s the main point of CHAPS – expediency.
With CHAPS, the recipient typically receives his money the same day (with the obvious caveat that if the transfer happens late enough in the workday, it may not clear until the next day).
This efficiency comes at a price, however – to pay for the expediency and security involved in CHAPS transfers, there is typically around a $25 fee per transfer.
This is another reason that CHAPS handles larger payments – if you buy a salad for $5, you certainly don’t want to pay a $25 fee!
At any rate, CHAPS payments are guaranteed to arrive the same day as long as the payment is set up before 3:30 pm in the bank or before 5:00 pm electronically.
If the payment is submitted after these times, payments are made the next business day; if a payment is made Friday evening, it may not be received until Monday.
BACS is the system that processes credit card and debit card payments.
Needless to say, this is the most commonly used system in the UK, so it’s designed to deal with high volumes.
There are tens of millions of BACS payments handled each day.
If you’ve ever checked your bank account and seen pending transactions, it may be because you’ve purchased something, but the transaction hasn’t finished.
This is because the BACS system is somewhat slower than the CHAPS system.
It makes sense if you think about it – banks aren’t concerned enough about your dinner bill to need to rush payment.
If you buy petrol after eating and somehow it jumps the line and uses up your last pound, it’s not the end of the world. BACS payments can take up to three days to process.
Of course, what qualifies as a small purchase to a bank is somewhat different than what you or I might call small; the BACS payment system can be used for payments up to $250,000.
The fees associated with BACS payments are typically minimal.
Faster Payments and Other Systems
A new system is being developed by UK bankers called the Faster Payments system.
The idea behind the system is that electronic payment processing should finish in minutes or even seconds (Barclay’s claims that you will normally receive the funds immediately, though it could take up to two hours).
Note that both banking institutions have to be members of the Faster Payment System to utilize it.
If you’re wondering whether or not your institution uses the Faster Payments System, use the sort code checker found here.
BACS, CHAPS, and the Faster Payment system dominate UK payment transactions.
The SWIFT Network
SWIFT stands for Society for Worldwide Interbank Financial Telecommunication.
It’s an international banking system that facilitates the transfer of money between banks in different countries.
Although the system’s roots are nearly half a century old, its new Global Payments Innovation (GPI) system is lightning fast.
GPI is relatively new and hasn’t expanded to all corridors, but SWIFT is expanding it rapidly with impressive results.
In some important financial routes such as the US-China corridor, about 40% of transactions are happening using GPI.
These GPI transactions are processed within 30 minutes of when they’re started.
How do I choose which system to use?
You don’t – your bank does.
This process happens automatically; it isn’t something that consumers are typically involved in (beyond paying the CHAPS fee).
Be aware that if you’re transferring money out of the UK, it will likely use the SWIFT network and you will likely be assessed processing fees.
Under some circumstances, these fees can be deducted from the amount that you’ve transferred.
This can mean that your recipient receives slightly less than you intended.
It’s also worth noting that if you send money internationally, the time the transfer is processed may affect the exchange rate.
This can mean that the recipient receives more or less money than you intended.
CHAPS and BACS-Ready Business Accounts
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