What merchants should know about payment rails

Discover the different types of payment rails and their application for ensuring frictionless online payments.

Payment rails play an increasingly important role in the daily transactions of both companies and individual consumers. But what are payment rails – and what do merchants need to know in order to optimize online payment processing flows and get more payments approved?


First things first: a payment rail is a payment platform or network that enables the transfer of funds between entities. Among other things, payment rails enable international payments with local currencies. If not for payment rail technology, international business operations would not be feasible at their current level.


If you’re a business owner interested in expanding your e-commerce offerings and expanding your customer base through convenient online payment methods, you’ll find plenty of useful information and advice in the following article, which provides an overview of key technologies in the payment rail space.



Table of contents

What are payment rails?

Why are payment rails important?

7 most popular payment rails

Summary: The future of payment rails

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What are payment rails?

A payment rail is a piece of payment network infrastructure that enables digital money transfers between payers and payees – regardless of the country, currency, or payment method. It also doesn’t matter if the payer or payee is a business or a consumer. 


Each payment rail differs in the method it uses to carry out this process based on the type of payment. Factors such as speed, technology, geography, and payment methods are all relevant.

Why are payment rails important?

Payment rails are used for both business and personal transactions. The financial technology community refers to payment rails as the “far side” of a transaction. The platform is the “hidden” portion of the transaction – as opposed to the “near side” of the transaction, which refers to the parties transferring or receiving funds. 


The adoption of innovative payment networks and railway technologies has led to a surge in the development of payment technology. Real-time, multi-rail strategies for instant b2b cross-border payments are a good example of the current innovation in payment rails.


Such strategies use digital and mobile technologies to deliver a convenient, reliable, and quick payment settlement service.

7 most popular payment rails


The Society for Worldwide Interbank Financial Telecommunication (or SWIFT) provides services related to carrying out financial transactions and payments between banks all over the world. It allows individual customers and businesses to accept or transfer money internationally.


SWIFT has more than 11,000 global member institutions sending an average of 42 million messages daily across the network. 



How does SWIFT work?


Although SWIFT has become an integral part of the global financial infrastructure, it is not itself a financial institution but a messaging network that transmits payment instructions between institutions participating in a transaction. 


SWIFT assigns every organization a unique code containing 8 or 11 characters. Take the following transaction for example: an HSBC account holder based in London wants to send money to a German-based Commerzbank account. The London-based account holder would prepare a transfer including the receiver’s account number as well as Commerzbank’s unique SWIFT code for its Frankfurt branch. HSBC will then send a payment transfer SWIFT message to Commerzbank’s branch over the secure SWIFT network.


When Commerzbank receives the message about the incoming payment, it clears and credits the funds to the receiver’s account.



Automated Clearing House (ACH)

The Automated Clearing House network is supervised by the National Automated Clearing House Association (NACHA) and is one of the largest players on the payment rail scene. In 2021, ACH processed 29.1 billion payments amounting to $72.6 trillion in payment value. 


ACH serves a transaction category that includes automated bill payments and direct payroll deposits. ACH transactions usually take two to three days. Customers can also use Same Day ACH and Next Day ACH for faster payment settlements. 



How does ACH work?


Banks use the ACH Network to transfer funds. The party requesting the transfer sends a copy of the transaction details to their bank. The bank then sends these details to the central clearinghouse in the ACH Network. Once they reach the clearinghouse, the bank gets notified and can then proceed to debit or credit the right account. 


Banks must act as Originating Depository Financial Institutions (ODFIs) for all ACH transactions, which are essentially bank transfers. The responsibility for verifying whether the bank account exists and has sufficient funds to perform the transfer falls to the individual consumer or company transferring funds.



Card network rails

Credit cards run on an independent network operated by companies that deliver the technology to power their transactions. Visa, Mastercard, American Express, and Discover are examples of major credit card companies in the United States and beyond. 


Real-time payment systems are experiencing increasing demand worldwide, and card networks are evolving to support new technologies that allow faster transaction settlement. Push-to-card is one way companies leverage existing networks. 



How do credit card rails work?


The bank or company sponsoring the card is called the issuing bank or sponsor bank. The acquiring bank processes credit card payments on behalf of a merchant. 


When a customer uses a card, the transaction goes first to the acquiring bank. The acquiring bank then routes the transaction through the card network to the issuing bank on the consumer’s end of the transaction. 


Next, the issuing bank reviews that consumer’s account to ensure they have enough funds or available credit. If that is the case, it authorizes the transaction. The issuing bank later routes the transaction back via the card networks to the acquiring bank. The acquiring bank can then accept the movement of funds from the consumer’s account in the issuing bank into the merchant’s account. 


A push-to-card transaction flows through the card network from the merchant’s payment processor to the consumer’s bank in real time.

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The Single Euro Payments Area (SEPA) is a framework that harmonizes cashless payment transactions between countries that use the euro currency. It enables consumers, agents, and businesses to carry out payments by direct debit, instant card transfer, and credit transfers across Europe. The goal of the SEPA project is to make cross-border electronic payments as cost-effective and seamless as domestic payments. 



How does SEPA work?


All SEPA transfers use the IBAN and BIC numbers of the sender and recipient bank accounts to transfer funds. 


There are three types of SEPA transfers, each with its own use case:


  • SEPA Credit Transfers – they allow for funds to be transferred between banks, typically within one business day. 


  • SEPA Instant Credit Transfers (also referred to as SEPA Instant Payments) – they allow for near real-time fund transfer that happens in less than ten seconds. Once the payment provider sees that the SEPA transaction is an instant payment, it clears the amount instantly instead of in batches like regular credit transfers.


  • SEPA Direct Debit Transfer – this option is available in some countries that are part of the European Union. It allows a person or business to set up recurring payments – for example, to pay monthly rent, internet or electricity bills, or cover regular loan repayment installments. To use this system, the sender needs to sign a contract that allows the recipient of funds to repeatedly take money out from their account. The recipient sends a request to their bank to pull the recurring amount, and the bank validates the pull request and settles the transaction.




PayPal is a cross-border payments company that streamlines payments between parties through online transfers. Founded in 1998, PayPal is responsible for a massive chunk of cross-border payments made today as it processed around 5.34 billion payments in the fourth quarter of 2021 alone. 


PayPal lets customers register with an email address connected to their card or bank account. Once they confirm their identification and proof of funds, users can start sending or receiving payments to and from other PayPal accounts. 



How does PayPal work?


PayPal verifies the user and account information before allowing a customer to use the service. A user connects their bank account or credit/debit card to PayPal. 


The user can then select which account to debit when making an online payment. PayPal processes the transactions behind the scenes, connecting to the Automated Clearing House (ACH) and acting as the ODFI for the ACH transaction.


PayPal serves as a wallet too since funds received can sit in this virtual wallet and be used for point of sale (with a PayPal card), e-commerce, transfers between users, or transfers back into a bank account. Since PayPal places a hold on the card when a transaction is initiated, it ensures that even if the transaction is initially declined, it can still acquire money later on.



The Clearing House RTP

The Clearing House RTP Network is a network that transfers money electronically and immediately between banks in the United States. The electronic payments processing network launched in November 2017, and its purpose is to provide real-time payments for retail, commercial and institutional customers. Financial institutions that hold 75% of U.S. demand deposit accounts (DDAs) can use the RTP network’s real-time payment capabilities. 



How does RTP work?


The Federal Reserve Bank’s Clearing House Department processes all real-time payments and manages the network that facilitates these transactions. The RTP system is based on a liquidity model where members of financial institutions must maintain a minimum account balance with the Federal Reserve to ensure immediate funds transfer. 


For example, when a consumer pays their monthly utility bill using RTP, the bank sends a message to the network that includes the payment details. The Clearing House checks the bank’s liquidity and processes the message; it then routes it to the utility company’s bank account. 


RTP uses ISO-20022 standard messages for initiating payments and retrieving transaction status. These transactions happen instantaneously and once completed, the network immediately decreases (or debits) the consumer’s financial institution’s balance and increases (or credits) that of the receiver’s institution.



Crypto rails

Crypto rails rely on a technology called blockchain – a decentralized, distributed database of encrypted records shared among several computers linked in a peer-to-peer network. Blockchain technology allows information to be recorded securely, ensuring that data cannot be manipulated or corrupted. 



How do crypto rails work?


Blockchain has so far been used to develop a number of financial products such as cryptocurrencies, stablecoins, NFTs, and more. Stablecoins can be exchanged via a crypto rail and offer more stability than volatile coins like Bitcoin as they’re backed by regulations. 


By using crypto rails in an e-commerce store, merchants can significantly increase the speed of cross-border transactions that tend to be expensive and slow when using traditional bank systems.

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Summary: The future of payment rails

Payment rail technologies are rapidly expanding on the wave of technology advancements happening across the payments industry.


The next generation of payment rails will allow businesses to develop outstanding payment products and services that follow customers wherever they are, understand and anticipate their needs, and then solve them by increasing payment availability, convenience, and efficiency. Payment rails play an important role in the ecosystem of online payments as innovation continues to improve the speed and success of cross-border transactions.