BACS, Bank Transfers, Digital Wallets, and Open Banking: How UK SMEs Pay Employees

Running payroll hard but actually getting money to employees involves a separate decision that most small businesses make once and never revisit. The 4 most common ways UK SMEs pay employees in 2026 include:

• BACS file transfers

• Manual bank transfers

• Digital wallet platforms

• Open banking

Each works differently, carries different trade-offs, and suits different business sizes and workflows.

What is BACS, and how is it used for payroll?

BACS (Bankers’ Automated Clearing Services) is a payment scheme operated by Pay.UK that processes bulk payments between UK bank accounts. It’s the traditional method for payroll payments in the UK, used by the majority of medium-sized employers.

How it works: Payroll software generates a BACS payment file, which is uploaded to the employer’s bank or a BACS-approved bureau. The file is submitted to the BACS scheme, which processes payments over a fixed three-working-day cycle.

Key characteristics of BACS payments:

• Payments settle over three working days, requiring submission well in advance of payday

• Businesses either need BACS access set up directly with their bank, or must use a BACS bureau to process files on their behalf

• Suited to bulk payrolls with large numbers of employees

• File creation and upload is a manual step separate from the payroll calculation

• Low or no additional transaction fees beyond bank charges, depending on the arrangement

The BACS three-working-day cycle is a hard constraint. If a payment file is submitted too late, employees won’t be paid on time. For payroll administrators, this requires careful scheduling, particularly around public and bank holidays.

What are manual bank transfers for payroll?

Manual bank transfers are the most basic payroll payment method. Once payroll is finalised, the business owner or payroll manager logs into their business bank account and makes individual payments to each employee.

How it works: The user logs into their online banking portal after each payroll run and enters payment details (such as a sort code, account number, payment amount) for each employee individually.

Key characteristics of manual bank transfers:

• No additional platform is required beyond existing business banking

• No setup time or fees beyond standard bank charges

• Payments arrive via Faster Payments, typically within minutes

• Entirely disconnected from payroll software, so all figures must be re-entered manually

• Error risk increases with team size, as each payment is entered separately

Manual bank transfers are common among very small businesses (one to five employees) where the volume is manageable. For businesses with larger teams, the manual data re-entry creates error risk and a lot of admin overhead.

What are digital wallet platforms for payroll?

Digital wallet platforms (such as Modulr, Telleroo, and Apron) are payment accounts that sit separately from a business’s main bank account. The employer funds the wallet ahead of payday, then uses the platform to send payments to employees via Faster Payments.

How it works: The business opens a wallet account with the provider, completes KYC verification, transfers funds into the wallet before each payroll run, and then initiates payments from within the platform.

Key characteristics of digital wallet platforms:

• Payments are sent via Faster Payments, typically settling within minutes

• No bank-imposed daily payment limits (unlike open banking)

• Requires setting up a new account with the wallet provider, including KYC verification

• Funds must be transferred into the wallet ahead of each payroll run (pre-funding)

• Wallet balances need monitoring and reconciling against the main business bank account

• Some platforms offer a free tier for lower payment volumes (for example, Apron’s free tier covers 50 payments per month)

Digital wallets are well-suited to businesses with high payment volumes or large individual transaction values that might exceed bank-imposed limits.

What is open banking for payroll?

Open banking is a payment method regulated by the Financial Conduct Authority (FCA) that connects directly to a business’s existing bank account via a secure API. Unlike digital wallets, open banking requires no separate account and no pre-funding.

How it works: The business connects their existing bank account to the open banking payment provider (a one-time setup). Each payroll run, they authorise payments through their bank’s own security and funds are sent directly via Faster Payments.

Key characteristics of open banking:

• Payments settle via Faster Payments, typically within minutes

• No new account is required as payments originate from the existing business bank account

• No KYC process or wallet pre-funding

• Payment authorisation uses the bank’s own security protocols, so no login credentials are shared with the payment provider

• Subject to bank-imposed daily transaction limits (typically £100,00-£250,000, depending on the bank)

• FCA-regulated, so open banking providers in the UK must be authorised as Account Information Service Providers or Payment Initiation Service Providers

For most SMEs paying fewer than 25 employees per cycle, bank-imposed transaction limits are not a practical constraint. Open banking removes the pre-funding and account management overhead of digital wallets while delivering the same payment speed.

How do the four payment methods for UK SMEs compare?

Which payroll payment method is right for a UK SME?

The right method depends primarily on team size, payroll frequency, and how much manual admin the business can absorb.

For the majority of UK SMEs, particularly those running monthly payroll for teams of 5 to 50 employees, open banking offers the clearest combination of speed, low setup overhead, and minimal ongoing management.

The most significant shift in recent years is the availability of open banking directly within payroll software. Rather than processing payroll in one platform and then switching to a bank or wallet to make payments, some payroll tools now embed the payment step into the same workflow.

BrightPay’s Embedded Payments feature lets customers pay employees directly from their payroll screen using open banking, without needing to download files or log into their bank separately. The best part? You can be set up in under 10 minutes.

Find out more and join the early access programme.

Frequently asked questions about common payment methods used by UK SMEs

• What is the difference between BACS and Faster Payments?
  BACS and Faster Payments are two separate UK payment schemes. BACS processes payments in a three-working-day cycle and is typically used for bulk payroll and direct debits. Faster Payments processes transactions usually within minutes, and has a per-transaction limit (though this varies by bank). Open banking and digital wallet platforms use Faster Payments. Traditional payroll BACS files use the BACS scheme.

• How long does a BACS payroll payment take?
  BACS payroll payments take three working days to settle. This means the payment file must be submitted to the bank or BACS bureau at least three working days before the intended payday. Bank holidays extend this timeline further.

• Can a small business use open banking for payroll?
  Yes. Open banking for payroll is available to UK businesses of any size. The main practical constraint is the bank-imposed daily payment limit, which is typically between £100,000 and £250,000 depending on the bank. For most small businesses paying fewer than 25 employees, this limit is not a restriction in practice.

• Do digital wallet platforms require a separate business account?
  Yes. Digital wallet platforms require the business to open a separate payment account with the provider. This account needs to be funded (money must be transferred in from the main business bank account) before each payroll run.

• Is open banking regulated in the UK?
  Yes. Open banking in the UK is regulated by the Financial Conduct Authority (FCA). Providers must be authorised as either Account Information Service Providers (AISPs) or Payment Initiation Service Providers (PISPs). Payment authorisation takes place through the bank’s own security infrastructure. No bank login credentials are shared with the open banking provider.

• What happens if an open banking payment exceeds the daily bank limit?
  Bank-imposed daily limits for open banking payments are set by the individual bank, not the open banking provider. Some open banking platforms automatically split payments that would exceed the limit across multiple authorisations to ensure all employees are paid. Businesses with very large payrolls or high-value transactions may wish to confirm their bank’s limits before adopting open banking for payroll.

• What does it cost to use open banking for payroll?
  Costs vary by provider. BrightPay’s Embedded Payments charges £0.60 per transaction, with the first two payroll runs free. Some standalone open banking platforms offer free tiers for lower payment volumes.

BrightPay is UK payroll software used by more than 500,000 employers. Embedded Payments is currently available via an early access programme for existing BrightPay single employer customers.

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.