Many UK employers will be unable to pay their employees by BACS in January 2006. This is the real concern of the organisation responsible for BACS Direct Debit and Direct Credit payments in the UK.

Following the publication by BACS Payment Schemes Ltd of a press release in May this year, a number of press articles appeared, with such headings as "Thousands of major employers are facing a wages crisis unless they act immediately to upgrade payroll systems".

The articles warned that many employers may be forced to pay their employees by cheque or cash if they fail to migrate to BACSTEL-IP, the new payment system for submitting Direct Debit and Direct Credit transactions.

Is this a false alarm? Is the prospect of employers reverting to cash and cheque payments just another millennium-bug scare story? Is it too late to migrate? This article will explore the organisation behind BACS Direct Credit and Direct Debit payments, the reasons for the introduction of BACSTEL-IP, and what is involved in migration to this new submission system.

Introducing BACS Payment Schemes Ltd

In the UK, the facility to make payments by Direct Credit is provided by a single organisation, BACS Payment Schemes Ltd (BACS). It is owned by 13 UK banking groups and building societies and is a 'not for profit", membership-based industry body. BACS has two payment services, Direct Debit and Direct Credit, which are used extensively by UK businesses and individuals.

Direct Debit enables individuals to give authorisation for an organisation to collect periodic payments from their bank or building society account. The service is widely used; 75% of the population make payments by Direct Debit. About 60,000 organisations use Direct Debits to collect payments on bills such as utility bills, insurance premiums, council tax, mortgage payments, loan repayments and subscriptions.

Direct Credit enables organisations to make periodic payments into a bank or building society account, including invoices, wages and salaries, pensions, employee expenses, insurance settlements, dividends, refunds and benefits payments. In the UK, 93% of salaries, 58% of wages and 94% of employer pension payments are paid by Direct Credit.

When UK employees are paid by Direct Credit, the payment method is generally identified on their payslips as 'BACS', as opposed to 'CASH' or 'CHEQUE'. This is strictly incorrect as BACS is the payment organisation, but the term is universally used as a payment method.

Introducing Voca Ltd

Voca Ltd is the automated clearing house employed by BACS to process its Direct Debit and Direct Credit payments in the UK on behalf of its membership base. Voca is a commercial company with its own board of directors and shareholders. Its head office is in Rickmansworth, northwest of London, and it has two highly-secure processing centres.

The organisations and individuals that use the BACS services do not deal directly with Voca. Their contract for these services is with their bank or building society. The banks and building societies are represented by BACS which, in turn, uses Voca to process the transactions on its behalf.

Voca processes 4½ billion (4,500,000,000) transactions a year, with a value of £2.8 trillion (2,800,000,000,000) on behalf of BACS. Up to 65 million transactions are processed on a peak day.

Introducing CHAPS

CHAPS, short for Clearing House Automated Payment System, is a same-day clearing service that is operated by 21 UK and foreign banks and some 400 financial institutions. It is a real-time gross settlement system and handles payments in both sterling and euros.

During 2003, over 90,000 transactions were handled daily, with a value of over £240 billion. As the average transaction value is over £2.5 million and has a relatively high transaction charge (compared to Direct Credit), it is rarely used for the payment of wages and salaries!

A Little History

In 1968, all transactions between banks were paper-based. The first electronic transfer of funds was handled by the Inter-Bank Computer Bureau and its name was changed in 1971 to Bankers Automated Clearing Services, from which the acronym BACS is drawn. The main processing centre was located in De Havilland Road, Edgware, in north London, on the site of the airfield used by the De Havilland Aircraft Company between 1920 and 1934. In 2002, the processing was moved to a new secure site that is shared with the Bank of England.

Transaction data was first received on large magnetic tapes but this was supplemented in 1982 by BACSTEL, a system that allowed transactions to be received by telephone. By the nineties, the use of magnetic tapes had been phased out altogether.

In 1985, the name Bankers Automated Clearing Services was shortened to BACS Ltd.

During 2004, following a Governance review, the business was split into two, BACS Payment Schemes Ltd and BACS Ltd. On 12 October 2004, BACS Ltd was renamed Voca Ltd.

The BACS Processing Cycle

Although the processing cycle for Direct Credit transactions is described as a three-day cycle, the actual minimum period between submission of transactions and cleared payment to the recipient is only 36 hours.

Day One: All of the files that have been queued for processing on this day, and other files that arrive during the day for immediate handling (up to 10:30 p.m.), are processed throughout the day. The individual transactions are sorted and allocated to each of the member banks and building societies.

Day Two: The transactions are sent to each member's computer centre for re-sorting and transmission to its own branches or to non-member banks and building societies.

Day Three: Payments are credited to the recipients' accounts by 9:30 a.m., cleared for their immediate use. At the same time, the originators' bank accounts are debited. The banks and building societies then settle their overall debits and credits by CHAPS.

To ensure that a payment of wages or salary arrives in an employee's bank account on payday, the employer must work backwards to identify Day One of the process. If, for example, an employee's account is to be credited early Friday morning, the transaction file that includes that employee's payment must be received by BACS two days earlier, i.e. on the Wednesday.

Non-banking days, i.e. Saturdays, Sundays and bank holidays, are excluded from the cycle. So, for example, for an employee to be paid on the Tuesday morning following a Monday bank holiday, BACS would have to receive the payment by the previous Thursday evening.

Migration to BACSTEL-IP

By 2002, BACS had decided to replace the BACSTEL telephone submission system by a system that would use the latest technologies. The number of transactions annually had reached 4 billion and it is expected to reach 5 billion by the end of 2005. Following a controlled deployment in late 2002 and early 2003, BACSTEL-IP was made available to the 100,000 direct and indirect users of BACSTEL, with an announced cut-off date of 31 December 2005.

Initially, the selling points for migration to BACSTEL-IP were the benefits brought by the latest technologies, such as fast payment confirmation, the highest levels of security, on-line access to reports and faster transmission speeds. The BACSAFE security device is replaced by a Smartcard or, in the case of submitters requiring automation, a Hardware Security Module.

These benefits persuaded many employers to migrate early. However, by May 2005, when BACS issued its press release, only 45% of businesses had migrated. Research at the time indicated that 13% of small businesses were unaware of BACSTEL-IP and 16% were unaware that the migration deadline was December 2005. Nearly a quarter of small businesses intended to leave it to the last moment to migrate. The statement said: "Unless companies instigate plans to migrate straight away they may well have to resort to making wage and other payments using cheques or even cash."

Moving forward to August, the latest month for which BACS has provided figures, the situation is improving but there are about 35,000 businesses yet to migrate. The benefits from using BACSTEL-IP are still attractive but the incentive must now be the risks from not migrating in time.

Of the 100,000 businesses that must migrate, about 35,000 are direct submitters and 65,000 are indirect submitters. For indirect submitters, migration involves only a simple registration process; for direct submitters, a much greater commitment is required.

Direct submitters

Businesses are "direct submitters" if they generate their own payment instructions, create the transaction file and submit it direct to BACS. Many employers and payroll bureaux are direct submitters. Their computerised payroll systems create a "BACS" file and, using special transmission software, transmit the file by telephone if they still use BACSTEL, or by Internet Protocol if they have moved to BACSTEL-IP. According to BACS, there are still 15,000 direct submitters, including BACS bureaux, local authorities, universities and schools, charities and larger businesses, which are yet to migrate.

There are about 35 approved and tested suppliers of BACSTEL-IP software. For small businesses with a single PC, migration may only take a few days or weeks, especially if they stay with their existing BACSTEL supplier. For larger businesses, migration can be a significant IT project lasting several months, involving the selection of a supplier, installation, development of interfaces and testing. A further complication is that BACS believes that the BACS-approved software suppliers, who are already very busy working on migration projects, will be seriously impacted by the demand for migration in the coming months unless companies make contact immediately.

There must, therefore, be serious doubt about the ability of many direct submitters to complete a migration project by the end of December. Before that time, the banks will communicate with all direct submitters that have not migrated, providing the alternative arrangements they will have to make for paying their employees. If payment is made by cheque, employers will have to make the payment earlier than the normal payday in order for the cheque to clear. Otherwise, the employer may have to compensate employees for bank charges they incur when Direct Debits are paid out before the wage or salary arrives.

Indirect submitters

Businesses are "indirect submitters" if they generate their own payment instructions and send them to a bank or a BACS Approved Bureau, for submission to BACS on their behalf. Many employers use bank services such as Lloyds TSB's Telepay, Yorkshire's Yorpay and Barclays' Payflow. The indirect submitter may generate the transaction file, e.g. from a payroll system, or provide the details on paper or electronic documents so that the bureau can generate the file.

Migration for indirect submitters simply involves completing an application form appropriate to the submitter's bank, providing current BACS user details and business contact information. Around 20,000 indirect submitters have yet to register. The concern is that many indirect submitters think that BACSTEL migration does not involve any action on their part, only on the part of their bank or bureau.

There are two important reasons why every indirect submitter must register. First, it provides access to processing reports on the BACS payment services website. Second, and more importantly, their bank or bureau will not be able to process their payments from January 2006 if they have not registered. If that happens, they will temporarily have to resort to cheque or cash payments until their registration is completed. The banks and bureaux will be contacting all of their customers that have not registered before the end of the year.

Telephone and Internet banking

There are more than 1.2 million employers in the UK but only 100,000 of them are direct or indirect submitters. What of the more than a million employers for whom payment by Direct Credit is a practical option using their bank's telephone or internet banking facilities? The good news is that they are neither direct submitters nor indirect submitters so there is nothing for them to do - except perhaps explore the potential savings can be made by becoming a direct submitter and using Direct Credit for all outgoing payments.

Sources of help

Information about Direct Credit and BACSTEL-IP, including instructions on migration, is available on BACS' website, readily accessible from
http://www.bacs.co.uk/bpsl/directcredit
http://www.bacs.co.uk/bpsl/directdebit
http://www.bacs.co.uk/bpsl/bacstelip