What is the difference between payment systems and banks?

Payment systems and banks are both important components of the financial system, but they have different roles and functions. In this blog, we will discuss the differences between payment systems and banks, as well as the advantages and disadvantages of using payment systems and high-street banks for businesses in the UK.

Banks are financial institutions that receive deposits from individuals and institutions and use the funds to make loans and investments. Banks offer a variety of financial services such as savings accounts, loans, and credit cards. Banks also play an important role in payment systems by facilitating transactions through accounts and payment processing services.

A payment system, on the other hand, is a set of mechanisms and procedures that facilitate the transfer of funds between two or more parties. Payment systems can be divided into different categories such as Cash-Based Systems, Card-Based Systems, and Electronic Money Transfer Systems. Examples of payment systems are electronic bank transfers and digital wallets.

Wise (formerly TransferWise) is one of the well-known online payment systems that enable individuals and businesses to send money internationally at a low cost. Wise has operations in the UK and many other countries around the world. Below you can see an example of how the payment system works for sending money from the UK to another country.

  • The sender creates an account with Wise (you can create via this link to get the first £1000 of bank transfers free of charge) and provides the recipient's bank details and the amount they wish to send. Wise then converts the money into the recipient's currency at mid-market exchange rates. This is the actual exchange rate that banks use to trade currencies;
  • The converted money will be transferred to the recipient's bank account;
  • Recipients will receive the money in their local currency minus any fees charged by Wise. Wise charges low and transparent fees on all transactions. This is typically lower than the fees charged by banks and other payment providers. Wise also offers multi-currency accounts that allow individuals and businesses to hold and manage money in multiple currencies. Overall, Wise offers a fast, affordable and secure way for UK individuals and businesses to send money internationally.

Let’s discuss what benefits can businesses gain from the smart use of payment systems.

  • Improving cash flow: Payment systems allow businesses to receive payments more quickly and efficiently, helping improve cash flow. This is especially important for small businesses that may have limited working capital;
  • Increased sales: By accepting various payment methods, such as credit cards and mobile payments, businesses can expand their customer base and increase sales. This is because customers often prefer to shop at stores that offer convenient payment options;
  • Cost reduction: Payment systems also help businesses reduce costs associated with manual payment processing and collections. Automated payment systems help eliminate errors and reduce the need for manual data entry.

It is important for businesses to choose the right payment system for their specific needs and implement appropriate security measures to protect against fraud and data breaches. While payment systems offer many advantages for businesses, there are also some drawbacks that should be considered. For example, they are:

  • Transaction Fee: Payment systems often charge a transaction fee for each payment processed, which can add up over time and put pressure on a company's bottom line. Some payment systems may charge lower fees than traditional banks, but businesses should carefully compare the costs of different payment options to find the most cost-effective solution;
  • Security risk: Payment systems can also pose security risks as they can be vulnerable to hacking, data breaches, and other types of fraud. Companies should take appropriate security measures to protect clients’ payment information with strong passwords and encryption to prevent unauthorised access;
  • Technical issue: Payment systems rely on technology to process payments. This means that technical issues, such as system crashes or software bugs, can interrupt our operations and cause delays or errors in payment processing. Businesses should develop contingency plans to deal with technical issues and minimise the impact on business operations.

Payment systems offer many benefits, such as improved cash flow and increased security, but businesses must avoid potential risks such as transaction fees, security risks, and technical issues to make informed decisions.

To compare 2 payment methods let’s discuss what is a high-street bank and its pros and cons.

High-street banks are often large, established financial institutions that have a physical presence in the community. You can have multiple branches in different cities and offer a variety of additional services such as ATM access, online banking, and mobile banking apps. High street banks face increasing competition from online and mobile banks but continue to play an important role in the UK banking system and remain a popular choice for many customers.

Here are the advantages of using a high street bank for your business in the UK.

  • Known Reputation: UK High Street Banks are often reputable institutions that have been serving the community for many years. This allows businesses to have confidence in the bank's reliability and stability;
  • Wide range of services: Large banks typically offer businesses a wide range of financial products and services, including savings accounts, loans, credit cards, and insurance. This gives businesses easy access to all the financial services they need in one place;
  • Physical branch access: Large banks typically have a physical presence in the local community, and branch companies can visit in person to conduct transactions, ask questions, or seek advice from bank representatives.

However, there are also some disadvantages as:

  • Fees and Charges: Commercial banks often charge fees for many products and services. This adds up over time and can be costly for your business;
  • Limited flexibility: High-street banks may have strict lending standards or other restrictions that make it difficult for businesses to raise the funds they need. This can be especially difficult for new or small businesses that may not meet the bank's requirements;
  • Security risk: Large banks are vulnerable to security risks such as theft, fraud, and cyberattacks. This can put your company's financial information and assets at risk.

Both payment system accounts and corporate bank accounts have advantages and disadvantages for UK businesses. The best option depends on each business's specific needs and priorities.

Ultimately, choosing between a payment system account and a high-street bank account depends on factors such as the size and nature of your business, your financial needs and priorities, and your tolerance for risk and costs. Combining a payment system with a large bank allows businesses to take advantage of both options with minimal downsides. In addition, businesses should carefully compare the costs and features of various payment systems and lead banks to find the most cost-effective and reliable solution for their needs.

We, as chartered accountants, are happy to discuss your business situation in more detail to offer the best business structure and way of tax and business optimisation. We have partnerships with the UK, Swiss banks and payment systems to provide the best service for our clients. In case you want to book a call with our specialist please contact us via the website or
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