What are payment rails?

Payment rails are the secret courier for global payments: the essential but unseen infrastructure that keeps the global economy ticking by facilitating fast and secure transactions between businesses and consumers.

But payment rails aren’t just one thing. It’s a term for many different networks and systems that link up financial institutions so that they can successfully communicate and send funds.

In this article, we’ll explain how payment rails work, the different types of payment rails, how to choose the right payment rail for your business, and how Checkout.com can help with your payment rail needs.

Payment rails explained?

Like the tracks that ensure the safe passage of trains between railway stations, payment rails are the infrastructure that allows money to move between payers and payees, regardless of currency and payment method.

Unlike railway tracks, payment rails are ‘hidden’, in that you don't see them when you swipe your credit card or enter your bank account information online. However, while unseen, alongside payment processors and payment gateways, they play a vital role in global commerce, enabling fast and secure transactions for both businesses and consumers.

How payment rails work

There are essentially five steps facilitated by payment rails whenever a transaction occurs. These are:

• Initiation - the payer initiates the payment by providing information including their credit card number or bank account number
• Processing - this payment information travels along the payment rails from the payer’s bank to the payee’s bank account
• Authorization - the payee’s bank receives the information and verifies the payer in order to authorize the transaction
• Settlement - the payer’s bank transfers the requested amount from their customer’s bank account to the payee’s bank
• Reconciliation - the amount is credited to the payee and debited from the payer and the transaction is concluded

Types of payment rails

They might share a function in the global economy, but there are different types of payment rail that vary in how they process and transfer funds, the speed of the transactions they allow for, and the regions they’re used in. Here are the most popular payment rails:

ACH

ACH is a network that enables electronic payments between banks. It is the most common payment rail in the United States, and is used for a variety of transaction types, including direct deposits, bill payments, and transfers.

ACH funds are transferred through a clearing house, which clears them in batches, before sending them to each recipient. The whole process usually takes between 2 and 3 working days.

Card rails

For credit and debit card processing, the card networks - such as Mastercard, Visa, or American Express - act as the payment rails. Whenever a card is used for a transaction, the merchant’s acquiring bank communicates with the bank that issued the card to verify the cardholder's details and authorize the transfer of funds. This can take anything from a few days to a number of weeks. The card network charges the merchant a transaction fee for every payment.

PayPal

PayPal is a global payments company that facilitates online transfers between payers and payees. Customers just need to register for a PayPal account and connect a card or bank account in order to make payments. PayPal then transfers any sums directly between Paypal accounts via the ACH.

The Clearing House RTP

Launched in 2017, The Clearing House Real-Time Payments (RTP) is a payment processing network that allows for fast, electronic money transfers between US bank accounts for as little as $0.01.

Here’s how RTP works: the payer’s bank sends a message to The Clearing House with all the necessary payment details, which checks if their bank has enough liquidity to make the payment. The Clearing House then processes and routes the payment to the recipient instantaneously.

Blockchain

The blockchain network is a digital ledger of transactions that acts as the payment rails for the transfer of cryptocurrency. When someone transfers cryptocurrency, the transaction is recorded on every computer participating in the blockchain network. The transaction is validated, then a block is created to represent it. Each block has a particular storage capacity. When reached, the block is closed and linked to the previous block to form a chain.

SWIFT

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a payments network that transmits payment instructions between banks around the world, making it a popular option for international payments. Any institution that wants to send a transaction on SWIFT’s payment rails uses a code that’s specific to their organization, which instructs SWIFT to carry out the payment.

SEPA

The Single Euro Payments Area (SEPA) is a payment rail that facilitates the transfer of euros between bank accounts via direct debit transfer, instant credit transfers, and SEPA credit transfers provided the accounts are in the SEPA zone. The transactions fees are roughly the same as for domestic payments.

Why payment rails are important

Payment rails are vital to the payments ecosystem, and in turn, the whole global economy. They enable the safe, speedy, and efficient transfer of funds for both B2C and B2B payments, offering multiple ways to complete transactions depending on preferences and requirements. This diversity of options ensures everyone and every business has a way to send and receive money.

Without payment rails, there would be no infrastructure by which to transmit money electronically - just independent financial institutions with no way to communicate.

How to choose the correct payment rail for your business

When deciding on the right payment rail for your transactions, you should consider how its functions meet your requirements. Here’s what to look out for:

• Speed - how quickly after the transaction is initiated are the funds settled in the payee’s account? This can vary from instantaneously to weeks, depending on which payment rail you need. For some businesses, prompt payments are not a priority; for others, they’re essential. Find a payment rail with settlement speeds that suit the way you do business
• Requirements - for example, do you meet the technical requirements necessary to properly use the payment rail? Do you operate in the same region as the payment rail? And, does the payment rail facilitate cross-border payments?
• Customers - make sure to use a payment rail that is popular and suits the requirements of your customer base
• Security - identify the specific risk of fraud exposure associated with each rail. All payment rails will have some form of security, but you need to establish whether those measures are sufficient for the type, amount, and volume of transitions you’ll be sending
• Cost - fees vary significantly between payment rails. Depending on your requirements, you may not have the luxury to choose the most affordable option, but you should always compare what portion of your funds are going to be lost to the cost of actually using the payment rail

How Checkout.com’s payment rails work

Checkout.com offers progressive fintechs the payment rails they need to unlock growth like ACH, SWIFT, SEPA, or card rails. You just need to talk to our specialists for more information on any alternative payment rails you want to integrate.

Our flexible payments solutions help to drive your global growth by streamlining your payments, maximizing transaction value, and increasing authorization rates. And if you need any help, our expert customer support team is on hand to help you navigate the complexities of the global payments system and optimize your performance.