Bayliss was the son of a wealthy iron manufacturer in Wolverhampton. In 1881 he entered University College, London, as a medical student but when he failed his second MB exam in anatomy he gave up medicine to concentrate on physiology. He graduated from Oxford University in 1888, then returned to University College, where he worked for the rest of his life, holding the chair of general physiology from 1912. Bayliss was elected a fellow of the Royal Society in 1903 and was knighted in 1922.

He was chiefly interested in the physiology of the nervous, digestive, and vascular systems, on which he worked in association with his brother-in-law, Ernest Starling. Their most important work, published in 1902, was the discovery of the action of a hormone (secretin) in controlling digestion. They showed that in normal digestion the acidic contents of the stomach stimulate production of the hormone secretin when they reach the duodenum. Secretin is transported in the bloodstream to initiate secretion of digestive juices by the pancreas. In 1915 Bayliss produced what became a standard textbook on physiology, Principles of General Physiology.