Insights » Money Basics » What is a CHAPS payment or bank transfer

What is a CHAPS payment or bank transfer

CFPS strives to explain complicated things in a simple way to our users. We are launching a series of articles titled “The ABC of the Financial World”. This time, we will get you familiar with the financial instrument called CHAPS

What is a CHAPS payment or bank transfer?

The Clearing House Automated Payment System (CHAPS) is a UK automated clearing payment system that has changed the way the entire banking sector works. It is this system that helps us make wire transfers. As a rule, the process takes only one working day. However, practice shows that the money arrives in the recipient’s account in just a couple of hours. Banks are required to meet this deadline if they see that the customer makes a transaction via CHAPS.

Initially, 12 major UK banks were connected to the system. Currently all banking institutions in the UK are its participants. CHAPS is most often used to transfer large sums of money, which is very convenient for companies, as well as the business in general. It is fast, easy to use, and most importantly, reliable.

Financial corporations all over the globe have become the main users of CHAPS. Participants include USA companies such as Bank of America (BAC), Citibank (C), and JPMorgan Chase (JPM), as well as UK firms, for instance, Barclays (BARC), Lloyds Bank (LLOY), and Standard Chartered (STAN). You can also find some European companies in the list, like Deutsche Bank (DBK), UBS (UBSG), and BNP Paribas (BNP).

Given its impressive user reach, CHAPS transfers over $500 billion every day.

Who will benefit from using CHAPS?

Sometimes we all face situations when we need to make an urgent card to card money transfer or pay for some services outside the stores. This is especially relevant when the amount is significantly larger than your daily expenses. CHAPS does a great job with this. The system will also be useful when:

  • Corporations or financial institutions need to quickly deal with monetary transactions before the end of the day.
  • You need to make an urgent high-value payment, for example, to pay taxes.
  • Lawyers, financiers, or real estate agents need to close a property deal or make a major investment in a short time.
  • An individual wants to make an expensive purchase, that is, to buy a house or a car.

Despite the fact that the system is new and modern, you have to follow some rules established by your bank to use it. For example, you may be required to be present in person to make a transaction. However, some branches are already abandoning this outdated tradition. It is also important to remember that you will definitely be charged with a fee for a CHAPS transfer. That is why the system is rarely used to transfer small sums of money. Nevertheless, it all depends on the bank policy, your organization, and whether you use the services of your own or a third party bank.

If you want your recipient to get the money on the same day, banks recommend making a transaction via CHAPS before 3 p.m. In this case, the funds will arrive in the card by 5 p.m. If you decide to make a payment after 3 p.m., the money is likely to be received the following morning.

Why do we like fast transfers so much?

In the UK, a similar Faster Payments service is also available, which was introduced in 2008. The system allows you to make bank-to-bank transfers within a matter of hours. It has made long transaction processing and settlement a thing of the past: you just need to open a financial mobile application and select the desired category. Currently quick money transfers are offered by virtually all UK banks. The benefits are no fees and extra charges, but the transaction amount should not exceed the bank limit. It is also worth considering that although the service is free of charge, and transfers are fast, Faster Payments does not guarantee the specific time of payment processing.

Faster Payments and CHAPS can work together. For instance, if you need to transfer a small sum of money, then the former option is perfect, while the latter is more suitable for high-value transactions.

What is BACS used for?

Bankers Automated Clearing Services (BACS) is the most commonly used transfer method among UK banks. The system directly debits or credits transactions to bank accounts without using paper checks and other documents. Money is transferred online via mobile applications. It is this system that helps us in daily banking: regular transfers, payroll and pension payments, and much more. There are no limits: you can transfer any sum of money you want for a negligible fee. According to statistics, BACS is used by about 95% of working UK citizens.

BACS  is most commonly used for payroll payment. Approximately ⅔ of the monthly payments to private and public sector employees in the country are made via this system. All information about transactions is stored on special magnetic tapes, which are transmitted through terminals connected to the computer center.

Direct Credit payments are also processed via BACS. Thus bank customers receive information about account transfers made for loan payments, insurance settlements, and other purposes. With this type of service the system makes transactions through the master file. Processing of all information and the payment itself takes up to three days.

On the first day, all the required data is obtained from credit and debit cards. A medium with this information is delivered to BACS. At the same time, a report is sent to the bank’s accounting department to debit the funds from the customer’s account.

On the second day, the main branch of the bank debits the payer’s account according to the data obtained from the accounting department. Then this information is sent to the media in BACS and returned to the bank.

On the final third day, the recipient banks take all the collected information and credit the money to the payee’s account.

Direct Debit is another popular service among BACS users. It is similar to the Direct Credit service, but the total sum and time of receipt are not fixed and can be changed during the transaction. This allows the account holder to authorize the bank to make payments to certain persons or firms such as the monthly payments to various associations, clubs, and insurance companies.

CHAPS vs BACS: what to choose?

Of course, customers do not have to delve deeply into the complex BACS payment system and the way it works. The main thing is to adhere to the rules established by the bank. For example, it is important to take into account the time for making a transaction. If you send money on Friday, it can only arrive in the recipient’s bank account on Wednesday.

As for CHAPS, it certainly wins in terms of speed, but loses in terms of additional charges. This payment method is most convenient when there is an urgent need to transfer a large sum of money.

Summing up, it can be said that CHAPS is still relevant as a payment method since it provides a guaranteed and instant transfer of funds, and is very convenient for important high-value transactions such as loan repayments. Furthermore, CHAPS features a high degree of reliability and security due to the verification of all transactions through a single clearing center.

Posted on November 1, 2023