The Rise of Automated Payments

If we go all the way back to 1968 and the creation of Bacs – or the Inter Bank Computer Bureau as it was then known – it’s easy to see how far the automated payments industry has come. In the first year of processing, nine million transactions went through the system. At the time, this was considered an exceptional number. Compare that with today and the changes are astounding. In 2007, Bacs hit an all time processing peak and was responsible for the safe processing of 90.3 million payments through the infrastructure in a single day – 10 times the original annual figure and a number that shows just how important payment products like the direct debit and direct credit are in the 21st century.

Looking back over the 40-year history of Bacs, the numbers, unsurprisingly, get even bigger. Since the start of operations, Bacs has been responsible for processing in excess of 68 billion payments via its principle schemes, direct debit and Bacs direct credit. Last year alone, over 5.5 billion transactions went through the system – that’s approximately £4 trillion or, put another way, is over 90 payments for every man, woman and child in the UK.

So when in the last four decades did automated payments really start to take off? Well, the introduction of direct debit in 1970 marked the first real significant leap forward.

Figure 1: Bacs Timeline

Originally designed as a tool to help organisations collect a large number of payments on a regular basis, direct debit quickly proved popular with businesses and consumers alike – 30 million payments were made this way in the first year. Over the next four decades figures climbed, reaching almost 130 million per annum by 1978; over 340 million by 1985; and passing the one billion a year mark in 1995.

In 2007, almost three billion direct debit payments were processed and around 35 million adults in the UK now have at least one direct debit commitment. So why is this payment method so popular? Well one of the key reasons behind its growth is the convenience it offers. In a recent Bacs survey, 92% of respondents agreed that direct debit is a simple way to make payments and 71% agreed it helps to spread bills, making them more manageable.

As well as maintaining the integrity of direct debit transactions over the years, Bacs has also played a role in crediting the majority of British bank accounts. This has been achieved through Bacs direct credit. Mainly used by businesses and public sector organisations for paying wages and salaries, suppliers, pensions, employee expenses, insurance settlements, dividends and refunds, this simple, secure and reliable service, enables large and small organisations to make payments by electronic transfer directly into bank or building society accounts. In fact, over 90% of the UK’s workforce is paid this way and the Department for Work and Pension now uses it to process the majority of its benefit payments.

Use of Technology

With such rates of growth for its two main product lines, how has technology helped Bacs support increases in volume and ensure payments can be processed round the clock? Up until the early 1980s, payments made via Bacs were still submitted on magnetic media. Sent into Bacs in bulk or by private courier, these tapes and diskettes were then manually uploaded to the system by three shifts of employees covering a 24/7 operation.

As the number of automated payments grew organically, so the technology developed to keep pace. In 1983, BACSTEL was launched – a telecoms-based service that revolutionised the way organisations interacted with Bacs, enabling them to submit payments via telecoms rather than by post. This new channel quickly proved popular and signalled the end of the line for magnetic media, which was discontinued in the 1990s.

During the 1990s, the pace changed again with new technological advances like the Automated Direct Debit Instruction Service (AUDDIS). Introduced in 1996, this functionality allowed companies collecting money by direct debit (originators) to submit customer instruction forms electronically rather than having to send in paper-based instructions. The move significantly reduced administrative costs for originating companies and banks and still has a resonance today with organisations looking to reduce their carbon footprint. The 1990s also heralded the creation of paperless direct debit (PDD) – a means for consumers to sign-up to pay by direct debit either via the telephone or online.

Skipping ahead to the 21st century, 2003 was another year of progress at Bacs. The first was the launch of Bacstel-IP, an advanced and highly robust solution enabling businesses to submit payment files via Internet protocols. In addition to providing businesses with faster and more secure access to Bacs, Bacstel-IP also, for the first time, gave companies the chance to track individual payments throughout their lifecycle. After three years of running BACSTEL and Bacstel-IP in parallel, Bacs migrated 100,000 organisations from the old telecoms service to the new system and BACSTEL was subsequently switched off.

The second development was a dramatic change to the organisational structure of Bacs. As part of a governance review conducted by the Competition Commission, BACS Ltd split in two: Bacs Payment Schemes Limited (Bacs) and Voca Limited. Bacs continued to hold responsibility for the integrity of the payment products direct debit and Bacs direct credit, with Voca (now known as VocaLink) working under contract to run and maintain the advanced infrastructure now required.

Although it is difficult to pinpoint a single defining year in the history of Bacs, 2003 was certainly significant. The investment in Bacstel-IP signalled Bacs’ intention to provide an exceptionally robust processing infrastructure that was capable of growing in line with future demand. It also heralded a new way of working with the creation of a scheme company answerable to UK Government and the banking industry, and a separate commercial organisation working under contract to operate the infrastructure.

Looking to the Future

So what does the future hold for Bacs 40 years on from its inception? Well, five years after the creation of separate scheme and infrastructure companies, when Bacs was tasked with managing and enhancing the integrity of the payment schemes it runs, the organisation is operating as an unbiased representative of the UK payment services industry that champions quality and excellence.

Through its stakeholders and affiliates interest group members – largely individuals from member banks, government departments, commercial organisations and technology providers – Bacs is working to ensure that its products are used correctly and that consumers are aware of their rights when it comes to automated payments.

With the number of transactions processed through Bacs increasing daily, the organisation has created a series of sector-specific initiatives that are helping commercial companies improve their collection processes and hone their direct debit marketing communications campaigns.

It has also developed a range of e-learning solutions. Designed to improve the direct debit knowledge of customer facing staff and help them answer consumer questions accurately, the benefits of these projects are numerous and include increased customer satisfaction and retention, plus smoother back office operations.

Working closely with the banking industry, Government organisations and commercial companies, Bacs is also in the process of developing new domestic opportunities where direct debit could be a potentially viable payment option.

Outside of its own scheme operations, Bacs has also been involved with the creation of Faster Payments – a complimentary service that was launched at the end of May. Representatives from Bacs contributed to steering group and communications meetings in the build up to launch. And working in conjunction with CHAPS, the main scheme provider for the new service, Bacs will also help deliver any direct corporate and bureau access that may ultimately be offered by members as an additional service to corporates. As part of its support to CHAPS in this area, Bacs will be responsible for the approval of commercial bureaus and solution supplier products that will allow large businesses to submit files directly into the Faster Payments service.

Internationally, Bacs has also been keeping a close eye on the progress of automated payments and the development of the single euro payments area (SEPA). Although SEPA will not directly impact on UK (sterling) direct debit operations, Bacs has been reviewing the SEPA working group’s proposed scheme, comparing its merits with the UK’s tried and tested practices.

The main point of difference is that the UK direct debit scheme uses a ‘direct access’ model whereby businesses submit their direct debit files directly into the clearinghouse. This method gives corporates additional functionality, such as knowing their files have been accepted for processing at the automated clearinghouse. This route also has a standard interface which makes it easier for businesses to switch banks than if they had proprietary links with a particular bank. In contrast, businesses using the SEPA model will initially submit via their banks, although the rules do not preclude the adoption of a direct access model if individual or groups of banks wish to provide for that.

By the end of 2009, we hope to have automated all key ‘A’ services at Bacs and eradicated the use of paper-based advice notices. This programme for agency and member banks will automate Bacs messaging relating to ADDACS, AWACS, ARUDD, ARUCS and AUDDIS¹ – a step that will improve operational efficiencies for all Bacs users and reduce the levels of payment administration they have to deal with. When these changes take effect, Bacs users will be able to set their systems to automatically download the information they require about changes to direct debit and Bacs direct credit payments enabling straight-through processing.

This development, combined with our work in other areas on quality and training, is proof of the proactive approach Bacs takes when it comes to working with companies that use our products to guarantee the delivery of a consistent service in this exciting and dynamic sector of the banking industry.