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What are payment rails?

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Rails or payment rails are the infrastructure or platforms which move money between a payer and their payee. You can think of them in the same way as physical rails, connecting financial organizations and banks with other businesses and consumers. Rails are used to transfer digital payments between two entities.

How do payment rails work?

Because payment rails enable digital transactions, rails exchange data between financial entities. Exchanged data can include:

  • Customer account information
  • Merchant identification numbers (MIDs)
  • Instructions to the financial institution
  • Information regarding the transaction

For the payment rail to go through, the payer and recipient’s bank accounts must be part of the same network. Each payment rail may have its own transaction fees and settlement times (also known as the time between when the transaction is initiated and when the funds appear in the recipient’s bank account).

What types of payment rails are there?

Rails will have unique characteristics from one other, depending on their type. For example, some can transfer funds immediately, (known as real-time rails), while some may take 3-5 days or longer.

Choosing a payment rail will involve considering specific needs, such as settlement time, geographic region, ease of use, or which rails work for your payee.
The most common types of rails include:

SWIFT: SWIFT or the Society of Worldwide Interbank Financial Telecommunication, offers an easy way to pay in multiple currencies and to any global bank. One drawback is that transactions can take between 3-5 business days and have a higher cost attached.

How it works

  • SWIFT assigns all financial organizations a unique code between 8 to 11 characters.
  • During a SWIFT transaction, a customer goes to their bank with the receiver’s account number and SWIFT code.
  • The payer’s bank will send a payment transfer SWIFT message to the recipient’s bank over the SWIFT network.
  • When the recipient’s bank recieves the message, they will clear and credit the money to the recipient’s account.

ACH: ACH is a well-known payment rail which manages payments between bank accounts in the United States. There are several parties involved in ACH transfers including a payer, recipient, originating and receiving depository financial institutions (ODFI and RDFI), and an ACH operator that routes and processes the payment. These usually have a settlement time of 1-2 business days, making them a fast option for domestic payments.

How it works

  • A payer authorizes a payment.
  • The ODFI sends the transaction details to the ACH operator to start the payment. Payment instructions are sent in batches instead of individually.
  • The ACH operator processes the transaction and routes the payment to the recipient’s bank.
  • The RDFI deposits the money in the recipient’s account.

Credit cards: The credit card payment system has a number of payment rails, each owned and managed by a card network such as Visa or Mastercard. The network will charge for processing payments using their rails. Credit cards are faster payment methods than ACH transactions because they are authorized immediately.

How it works

  • When a customer uses a card to pay for goods, the transaction is sent to the acquiring bank.
  • When the acquiring bank receives the transaction, it routes it to the consumer’s bank (or issuing bank) through the card network.
  • When the issuing bank receives a transaction, it checks the consumer’s account has enough funds or available credit to authorize the transaction.
  • The issuing bank routes the transaction through the card networks to the acquiring bank. The acquiring bank accepts the funds from the consumer’s account into the merchant’s account.

Electronic payment systems: PayPal, Venmo, Zelle and others are examples of electronic payment rails which allow for quick and intuitive payment transfers. These often have high transaction fees, and are also only used for peer to peer transactions.

How it works

  • A user links their bank account or credit/debit card to PayPal’s system.
  • When making an online payment, the user chooses which card to use and PayPal processes the transactions.
  • On the backend, PayPal connects to the Automated Clearing House (ACH) and functions as the originating depository financial institution (ODFI) for the transaction.
  • PayPal operates as a wallet; money received can sit in the PayPal account and be used for point of sale (with a PayPal card), e-commerce, transfers, or a bank account.

SEPA: The Single Europe Payments Area allows for easy cross-border payments between the 27 EU member states and 9 other countries. Payments can be made based on common rules and standards.

How it works

  • SEPA Credit Transfers allows fund transfers between banks, typically within one business day.
  • SEPA Instant Credit Transfer (also referred to as SEPA Instant Payment, is an almost real-time fund transfer (completing in less than ten seconds). Once the payment service provider recognizes the SEPA instant payment transaction, it processes and clears the amount immediately instead of in batches.
  • SEPA Direct Debit Transfers are for recurring payments such as rent, internet, utility bills, or loan repayment instalments. Before the transaction, the sender needs to sign a “mandate,” to grant the recipient to take money out from the sender’s account each month or on recurrent events.

Wire transfers: Wire transfers are direct transfers between institutions typically for larger transactions, such as property sales. International wire transfers are widely used because they can be sent in local currency.

How it works

  • The payer authorizes a payment.
  • The ODFI sends the transaction details to the ACH operator and starts the payment process. Payment instructions are sent in batches.
  • The ACH operator processes the transaction and routes the payment to the recipient’s bank.
  • The RDFI deposits the money into the recipient’s account.

Trending, (nearly) instant payment rails

During the last several years, several rails have disrupted the payment method infrastructure, offering instant or cutting-edge methods to meet consumer needs. From RTP to FedNow, here’s what’s currently challenging industry practices.

Real time rails: Real-Time Payments (RTP) rail sends irreversible, instant payments 24/7. To ensure security and payment authorization, only payers can approve RTP payments.

All federally insured U.S. depository institutions can use RTP. Contractor payments, loan disbursements, and payroll are common uses for RTP. The Clearing House—which also serves as an ACH Operator—operates RTP.

How it works

  • The payer begins the payment process through a bank or fintech app.
  • The payer’s bank sends the details to the RTP network, confirming the payer can cover the amount.
  • The RTP network contacts the recipient’s bank to accept the payment. RTP finalizes the payment and the recipient’s bank adds the funds to the bank account.
  • The payer is notified that the payment went through.

Cryptocurrency: In cryptocurrency, Blockchain’s technology is peer-to-peer-based and doesn’t involve financial institutions. Payments can be sent quickly and securely using Blockchain, and each form of cryptocurrency will be its own payment rail, meaning you can’t exchange one for another. Additionally, each block has a unique digital signature and the signature of the block before it, making it permanent and irreversible.

How it works

  • During the this payment method, a record of a new transansaction (its digital signature) is transmitted to all the participating computers on that network.
  • Every computer in a blockchain network must solve complex equations (cryptography) to vouch for the transaction’s digital signature and validity.
  • Once approved, the transaction is included in a block with information about the transaction.
  • Each block has its own storage capacities and when filled, closes and links to the previously filled block, forming a chain of fixed data, called the blockchain.
  • The transaction is communicated as completed to the entire network.

FedNow: The Federal Reserve’s FedNow is an instant payment rail, available 24/7. Payments are irreversible and only work with banks that participate in the FedNow network.

How it works

  • A payer requests the payment from their bank, which must be participate in the FedNow network. The payer specifies the amount, which account they’re using, and the recipient’s contact information and bank.
  • The paying bank ensures the payer can cover the transaction and notifies the recipient’s bank.
  • The recipient validates their account.
  • In a message, the receiving bank confirms their details to the payer’s bank, and funds are sent.
  • The payer receives notification that the funds were sent.

What are real-time payment rails?

Not to be confused with RTP, a type of real-time payment rails, the latter provides instant digital payents. Aside from RTP, other examples of real-time payments include ACH and SEPA instand payment. Real-time payments set themselves apart from other methods due its:

  • Speed: Businesses or individuals receive funds immediately, improving cash management, forecasting, and planning.
  • End-to-end communication: Instant payment confirmation notifications keeps all parties informed.
  • Innovation opportunities: Companies can expand their business— as in the case of Uber Instant Pay.

What is a multi-rail payments strategy?

A multi-rail strategy allows businesses to make instant, digital global transfers between B2B buyers and sellers.
Multi-rail payments involves building payment applications on top of payment rails (such as ACH, credit card networks, blockchain, and so on). Using an open API layer, these applications can use multiple rails, allowing them to route payment transactions based on speed, cost, and security. This dymanic structure provides users an optimized payment experience.

The importance of payments rails

Understanding how payment rails work behind the scenes is essential for any business. The right payment rails strategy can help to speed up settlement time, reduce costs, and build stronger relationships with business partners, vendors, global workforce, and clients.

Better cash flow

Instant payments allow for immediate access to cash. For businesses, this means being able to access funds right after each sale. Instant cash flows can help companies better understand their finances.

Extra payment options

Consumers aren’t using cash to pay for goods as much as they sued to. Payment rails allow businesses to accept alternative forms of payment, such as checks, credit and debit cards, and even cryptocurrency.

Easy reoccurring payments

Service-based businesses can use payment rails for recurring payments, such as subscription-based services, designers, or contractors who receive payment for long-term projects.

International market access

Payment rails allow organizations to conduct business internationally. By leveraging their benefits, Companies can work with international customers and businesses, creating new profitable opportunities.

Ultimately, payment rails can make business and personal transactions smoother and faster. A global payroll payments platform can help organizations pay employees on the correct date, in their preferred currency, and ensure compliance.

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