Money Makers

BACS is one of the most-used words in the payroll vocabulary, with good reason. On average, three out of every four UK employees are paid their wages and salaries direct into their bank accounts and the word "BACS" appears on their payslips. Strictly speaking, the use of the word "BACS" in this way in incorrect. This method of payment is "direct credit", one of the two key services offered by BACS Ltd, the Edgware-based clearing house owned by UK banks and building societies. The other service, direct debit, is the reverse process, whereby monies are withdrawn from customer's accounts.

A two-way street

During 2000, the number of payments made by direct credit reached one billion in a year for the first time. By far the majority of those payments were wages and salaries. The use of direct credit for trade payments, however, has a long way to go. Although the number of cheques for this purpose is dropping, only 5% of all business payments are made by direct credit.

There is clearly scope for businesses to make greater use of direct credit. Nearly a half of all weekly-paid employees are still paid by cash or cheque, despite the security issues and costs involved. Peter Blake of BACS identifies a number of areas where businesses have considerable potential for further financial and efficiency savings. "In the context of payroll", he says, "there are opportunities for companies to extend direct credit from purely wages and salaries to payment of expenses and commission. More generally, the scope for savings by making supplier payments by direct credit is considerable. We are currently encouraging companies to make dividend payments by direct credit, rather than send out more than 40 million dividend cheques each year."

To help businesses identify the year-on-year savings that can be achieved by making their payments by direct credit instead of by cash and cheque, BACS have just released a new Savings Calculator. It can be ordered from the BACS helpline on 0800 191191. The BACS website, www.directcredit.co.uk, also gives details of available publications.

On the horizon

A new use for direct credit arises from the introduction of stakeholder pensions in October 2001. By that time, employers with five employees or more must choose a scheme from a pensions provider and offer a pension to their employees. The pension contributions for those employees joining a scheme will be deducted from their pay, as with current schemes, and then sent monthly to the scheme provider.

Employers who already have schemes may not think that this is a big deal but, as Peter Blake points out, the number of companies that will become involved with pensions for the first time is enormous. "It is estimated that up to half a million employers will have to provide a stakeholder pension and most of them do not yet make payments through BACS. We expect many pension providers to require contributions to be paid to them by employers by direct debit. Other employers may prefer to use direct credit and we have already published details as to how the standard BACS payment record can be used for such payments."

What options will be available for paying contributions over to the pension scheme provider? As most of the companies with schemes will have few employees, with only a few of them actually taking up the scheme, the providers are likely to require contributions to be paid by direct debit, thereby giving them control over collecting the payments. The procedure will require the employer to send a listing of each employee's contributions for the month to the supplier and for the debit to take place a week or two later.

That rather cumbersome process is not likely to suit larger employers who are already using direct credit to pay employees and suppliers. It is common for payments to pension and share schemes to be made by cheque, accompanied by a computer listing of the amounts for each employee. That process can be replicated using direct credit by sending a single bulk payment covering multiple contributions, with the employee listing supplied separately. The major disadvantage of this method to the providers is that the cost of manually updating each employee's pension record may exceed the limited amount they are able to charge.

The more attractive option for the pensions supplier is for employee level details to be provided in a format that allows the employee's pension record to be updated automatically. The BACS payment record has been redefined for this purpose and the details are available in an Operational Guidelines booklet available from the BACS helpline. However, the cost of sending large numbers of individual transactions - and, where both employer and employee are contributing to the scheme, there will be two transactions per employee - will exceed both the cost of raising a cheque and the cost of a single, bulk direct credit transaction.

The most acceptable option for all concerned is likely to be the use of the Internet to send individual employee transactions to the pension provider. The employee's pension record can be updated automatically, and the cost to employers will be minimal. A standard format for this has not yet been agreed, although the interested parties are talking.

These options mean that payroll systems developers will have to build two methods of outputting electronic transactions, one in the BACS format, the other in a standard Internet format. For employers who wish to send their payments by cheque or single direct credit transaction, there will also be a need for a standard computer listing.

New technology

One of the major changes prompted by technological developments was the scrapping of magnetic media as the means of supplying payment transactions at the end of 1998. For many years, transmissions using BACSTEL was not viable for very large numbers of transactions. Large businesses and bureaux would supply their transactions on computer tape or cartridge because it took too long to send the files electronically. Only BACSTEL transmissions are accepted now, bringing an end to an era of anecdotal stories about courier deliveries.

Further measures are being introduced to reduce the paperwork involved when payments cannot be allocated to the correct accounts. There are two new acronyms to learn, AWACS - short for Advice of Wrong Account for Automated Credit Service, and ARUCS - short for Automated Return of Unapplied Credit Service.

If the bank account details provided as part of the direct credit transaction are incorrect, two situations can arise.

Firstly, the employee's bank may know the correct account and be able to place it. In this situation, the employer receives an individual voucher by post, providing the new account details so that the next payment will be to the correct destination. The process has now been automated and, as each sponsoring bank brings the service on-line, employers will be sent an AWACS listing, rather than individual advices.

Alternatively, if the payroll system has been enhanced, employers may opt to receive the new details electronically, allowing the payroll record to be updated automatically.

If the employee's bank cannot allocate the payment, perhaps because the account has been closed, the employer will receive a single ARUCS advice, listing all of the payments that could not be applied. At the same time, the payment will be returned to the employer's bank account and will appear on the account statement. The employer will then have to find the correct account number and re-submit the payment.

Peter Blake explains, "Users do not have to do anything to take advantage of these new ancillary services, unless they wish to update their records automatically by receiving the electronic advices. As the banks are able to introduce them, they will further improve the accuracy and speed of the BACS direct credit service."

Accuracy

The validation routines built into BACSTEL software should ensure that the recipient's bank sort code and account number are in the right format. Whether or not they are accurate depends on the details provided by the employee initially and the care taken to input the details into the payroll system.

Transactions received by BACS are screened to pick up invalid sort codes and wrongly structured account numbers. A book of current sort codes is available from the employer's bank and an electronic version can be obtained from BACS on 0870 165 0019.

Stats…

76% of UK employees are paid by direct credit. Only 9% of monthly-paid employees, 1.3 million, are still paid by cheque. Cash and cheque are still very common for weekly-paid employees with only 55%, 5.3 million, being paid by direct credit.