Moving money: understanding clearing and the UK’s main payment schemes
When transferring money between banks, it involves moving a liability rather than physical cash. For example, when Sally at Bank A sends money to Joe at Bank B, Bank A sends instructions to Bank B to credit Joe’s account. This process is known as ‘clearing.'
Afterwards, Bank A owes Bank B the transferred funds. They can settle this debt by maintaining Nostro and Vostro accounts with each other – essentially accounts that represent their respective funds.
With many banks involved (over 500 in the UK), individual transactions can become complex and inefficient, leading to settlement risks. Clearing simplifies the transaction process by centralising information, allowing for the combination of multiple transactions into net settlement values, thereby reducing overall complexity. Payment schemes facilitate this clearing process in various ways, which are explored in the report.
Key insights
Bacs
Bacs is the bulk payment scheme in the UK and is commonly used for high-volume, recurring transactions. This payment scheme can be used for transactions with a value of up to £20,000,000. There are two primary types of Bacs payments: Direct Debit and Credit.
CHAPS
CHAPS (Clearing House Automated Payment System) is the payment scheme that is predominantly used in the UK for high-value transactions. Although most customers usually only use CHAPS to buy a house, it is worth noting that, despite its smaller volumes, it moves more money than any other payment scheme.
Faster Payment System (FPS)
Faster Payments is the most common UK payment scheme, which allows for electronic payments to be sent and received in near real-time. They’re what most end customers think of as everyday transactions made online, over the phone, in-branch or using a self-service machine.
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Moving money: understanding clearing and the UK’s main payment schemes
