Exploring the UK’s electronic payment system options Exploring the UK’s electronic payment system options

Exploring the UK’s electronic payment system options
18 Jul 2018

While payroll software may have changed how employee benefits, tax contributions and salaries are calculated, manual processes are still a big bugbear in terms of generating unnecessary costs.

For example, according to an online survey of more than 90 UK payroll professionals jointly conducted by Modulr and UK payroll publication, Reward Strategy, a huge 44% consider manual payments to be their largest, single payroll overhead.

But high levels of regulation do not help either. As one payroll manager said: “Non-stop regulation is also a cost to payroll. It takes longer to run than it ever did before because of compliance-checking.” Legislation here ranges from pension auto-enrolment to real-time information reporting to Her Majesty’s Revenue & Customs and the European Union’s (EU) General Data Protection Regulation.  

But the need to manually reconcile and check accounts for cleared incoming funds is likewise viewed by 37% of those questioned as an additional unnecessary overhead. While most companies either use off-the-shelf or in-house software to manage complex payroll calculations and prepare payroll files and customised reports, about 40% of employers and 20% of bureaux still rely on spreadsheets to complete their payroll processing.

“We don’t have a back-end portal, so clients submit data in Excel,” said one payroll bureau that handles more than 50,000 payslips a month for 1,500 clients. “It comes back in Excel and we import it and check it. If there was a better way to do it, we would.”

These findings suggest that payroll managers are caught between two worlds: one in which some aspects of payroll processing are partially or fully automated, and the other, in which they are still highly manual. 

Meanwhile, there are three main electronic payment systems in the UK: Bacs, Faster Payments and CHAPS (Bank of England's Clearing House Automated Payment System). Here is some information about each one:

1. Bacs 

Having been around for almost 50 years, Bacs is the UK’s oldest electronic payment system. More than 150,000 businesses in the country currently use Bacs Direct Credit to pay their salaries and wages. Even though it takes three days for funds to reach a beneficiary’s account, just under nine out of 10 survey respondents said they relied on it.

But submitting payments to Bacs can be time-consuming and potentially error-prone. Batch payment files must be created and exported manually before being authorised. Most of the payroll managers questioned said they accessed the system directly using either approved software or a banking platform, which requires authorised payment files to be manually uploaded to their bank’s online portal.

One payroll manager was quite happy about the delay though, saying: “Bacs gives us the security of knowing we have a three-day lag so we can rectify any errors.” But when errors do occur, the relevant funds need to be traced before the issue can be tackled.

2. Faster Payments

If something happens to delay the normal payment processing cycle or a specific one-off transaction has to be processed quickly, you may find that the Faster Payments Service can provide more flexibility.

Faster Payments, which was used by 32% of our survey respondents, first launched in 2008. In theory, it should have made payroll managers’ lives much easier as payments typically reach a beneficiary’s bank account within a matter of minutes, if not seconds, depending on whether their financial institution is a direct participant in the Faster Payments scheme or not.

This speed offers significant advantages when processing weekly payrolls or handling situations where hours and payments are variable and so need to be calculated very close to the payment date, for example in the case of so-called ‘gig economy’ workers.

But restrictions do apply. Faster Payments are not always easy to access, with set-up arrangements and costs varying from bank to bank. Most of our survey respondents accessed the system via a banking portal, which required a manual login and payment authorisation. Banks sometimes also provide Direct Corporate Access, which is more highly automated but can be difficult to come by.

Moreover, depending on the cut-off times imposed by each individual bank, using Faster Payments may not necessarily lead to next day payments. Another inhibiting factor is the wide range of bank fees, which range from £0.30 to £5 per transaction, to send payment files – and it is this more than any other reason why most payroll professionals continue to use Bacs. Although slower, it is generally cheaper.

As a result, Faster Payments tends to be used by companies as a back-up or contingency scheme in case something goes wrong with a Bacs payment.

3. CHAPS 

CHAPS is worth a mention as it is a same-day system for settling ‘high-value’, wholesale sterling payments as well as ‘time-critical, lower-value’ payments such as paying a deposit on a property. While there are no value limits on a transaction, the average cost is between £15 and £30 per transaction, which means the scheme tends only to be used for emergency or large payments that need to get there on time.

Fresh alternatives

But the winds of change are sweeping through the financial services industry. This has led to the introduction of initiatives such as the EU’s Revised Payment Services Directive (PSD2) and the UK’s Open Banking scheme, which have paved the way for independent payment service providers to offer an instant, automated alternative to the incumbent banks. It has also resulted in payment schemes opening up their doors to them for the first time.

 Myles Stephenson

Myles Stephenson is chief executive and an investor in Modulr, a business-to-business payment platform that enables businesses to automate payments and simplify complex business payment flows. He was formerly managing director of WEX Europe and a board director for WEX Europe Services, the firm’s joint venture with Radius Payment Solutions. Myles also co-founded commercial prepaid solutions providerCorporatePay in 2008, which he later sold to WEX.

 

OTHER ARTICLES THAT MAY INTEREST YOU 

Four considerations when getting to grips with international payments

Demystifying payment systems in sub-Saharan Africa

The challenges of cross-border payment in Latin America

 

 

 

While payroll software may have changed how employee benefits, tax contributions and salaries are calculated, manual processes are still a big bugbear in terms of generating unnecessary costs.

For example, according to an online survey of more than 90 UK payroll professionals jointly conducted by Modulr and UK payroll publication, Reward Strategy, a huge 44% consider manual payments to be their largest, single payroll overhead.

But high levels of regulation do not help either. As one payroll manager said: “Non-stop regulation is also a cost to payroll. It takes longer to run than it ever did before because of compliance-checking.” Legislation here ranges from pension auto-enrolment to real-time information reporting to Her Majesty’s Revenue & Customs and the European Union’s (EU) General Data Protection Regulation.  

But the need to manually reconcile and check accounts for cleared incoming funds is likewise viewed by 37% of those questioned as an additional unnecessary overhead. While most companies either use off-the-shelf or in-house software to manage complex payroll calculations and prepare payroll files and customised reports, about 40% of employers and 20% of bureaux still rely on spreadsheets to complete their payroll processing.

“We don’t have a back-end portal, so clients submit data in Excel,” said one payroll bureau that handles more than 50,000 payslips a month for 1,500 clients. “It comes back in Excel and we import it and check it. If there was a better way to do it, we would.”

These findings suggest that payroll managers are caught between two worlds: one in which some aspects of payroll processing are partially or fully automated, and the other, in which they are still highly manual. 

Meanwhile, there are three main electronic payment systems in the UK: Bacs, Faster Payments and CHAPS (Bank of England's Clearing House Automated Payment System). Here is some information about each one:

1. Bacs 

Having been around for almost 50 years, Bacs is the UK’s oldest electronic payment system. More than 150,000 businesses in the country currently use Bacs Direct Credit to pay their salaries and wages. Even though it takes three days for funds to reach a beneficiary’s account, just under nine out of 10 survey respondents said they relied on it.

But submitting payments to Bacs can be time-consuming and potentially error-prone. Batch payment files must be created and exported manually before being authorised. Most of the payroll managers questioned said they accessed the system directly using either approved software or a banking platform, which requires authorised payment files to be manually uploaded to their bank’s online portal.

One payroll manager was quite happy about the delay though, saying: “Bacs gives us the security of knowing we have a three-day lag so we can rectify any errors.” But when errors do occur, the relevant funds need to be traced before the issue can be tackled.

2. Faster Payments

If something happens to delay the normal payment processing cycle or a specific one-off transaction has to be processed quickly, you may find that the Faster Payments Service can provide more flexibility.

Faster Payments, which was used by 32% of our survey respondents, first launched in 2008. In theory, it should have made payroll managers’ lives much easier as payments typically reach a beneficiary’s bank account within a matter of minutes, if not seconds, depending on whether their financial institution is a direct participant in the Faster Payments scheme or not.

This speed offers significant advantages when processing weekly payrolls or handling situations where hours and payments are variable and so need to be calculated very close to the payment date, for example in the case of so-called ‘gig economy’ workers.

But restrictions do apply. Faster Payments are not always easy to access, with set-up arrangements and costs varying from bank to bank. Most of our survey respondents accessed the system via a banking portal, which required a manual login and payment authorisation. Banks sometimes also provide Direct Corporate Access, which is more highly automated but can be difficult to come by.

Moreover, depending on the cut-off times imposed by each individual bank, using Faster Payments may not necessarily lead to next day payments. Another inhibiting factor is the wide range of bank fees, which range from £0.30 to £5 per transaction, to send payment files – and it is this more than any other reason why most payroll professionals continue to use Bacs. Although slower, it is generally cheaper.

As a result, Faster Payments tends to be used by companies as a back-up or contingency scheme in case something goes wrong with a Bacs payment.

3. CHAPS 

CHAPS is worth a mention as it is a same-day system for settling ‘high-value’, wholesale sterling payments as well as ‘time-critical, lower-value’ payments such as paying a deposit on a property. While there are no value limits on a transaction, the average cost is between £15 and £30 per transaction, which means the scheme tends only to be used for emergency or large payments that need to get there on time.

Fresh alternatives

But the winds of change are sweeping through the financial services industry. This has led to the introduction of initiatives such as the EU’s Revised Payment Services Directive (PSD2) and the UK’s Open Banking scheme, which have paved the way for independent payment service providers to offer an instant, automated alternative to the incumbent banks. It has also resulted in payment schemes opening up their doors to them for the first time.

 Myles Stephenson

Myles Stephenson is chief executive and an investor in Modulr, a business-to-business payment platform that enables businesses to automate payments and simplify complex business payment flows. He was formerly managing director of WEX Europe and a board director for WEX Europe Services, the firm’s joint venture with Radius Payment Solutions. Myles also co-founded commercial prepaid solutions providerCorporatePay in 2008, which he later sold to WEX.

 

OTHER ARTICLES THAT MAY INTEREST YOU 

Four considerations when getting to grips with international payments

Demystifying payment systems in sub-Saharan Africa

The challenges of cross-border payment in Latin America