What are payment rails? A guide to the major payment networks

Last updated on July 25, 2023
  1. Introduction
  2. What are payment rails?
  3. Popular payment rails
    1. ACH
    2. SWIFT
    3. SEPA
    4. CHIPS
    5. FPS
    6. Fedwire
    7. Interac
    8. RTP
    9. Card rails
    10. Mobile payment systems
    11. Cryptocurrencies and blockchain

Businesses today face increasing pressure to meet the ever-evolving demands of customers. For example, providing an intuitive, effortless, and secure payment experience is no longer a luxury—it’s a requirement. As commerce becomes more digital and global, businesses of all sizes must understand the intricacies of payment networks and payment processing if they want to retain customers, maintain a competitive edge, and thrive.

Offering diverse and convenient payment options that are also fast and secure can drive customer satisfaction. And providing customers with an exceptional payment experience can help businesses expand their reach to new markets and customer segments, propelling growth and profitability.

In this article, we’ll explore what businesses need to know about payment rails, including the factors they must consider to make informed decisions that align with their unique needs and objectives. By understanding the nuances of payment processing, businesses can create a robust, adaptable, and customer-centric payment environment that supports long-term success.

What’s in this article?

  • What are payment rails?
  • Popular payment rails
    • ACH
    • SWIFT
    • SEPA
    • CHIPS
    • FPS
    • Fedwire
    • Interac
    • RTP
    • Card rails
    • Mobile payment systems
    • Cryptocurrencies and blockchain

What are payment rails?

Payment rails are the underlying infrastructure and systems that facilitate the transfer of funds between parties, such as individuals, businesses, and financial institutions. They enable the secure and efficient movement of money, both domestically and internationally, and are important components of the global financial ecosystem. Without payment rails, it would be difficult for businesses and individuals to conduct financial transactions in today’s global economy.

Payment rails have many names, depending on the context and the specific payment system in question. Additional terms used to describe payment rails include:

  • Payment networks
  • Payment systems
  • Settlement systems
  • Clearing systems
  • Money transfer systems

The term used may vary depending on the region, industry, or specific type of payment.

For businesses, understanding payment rails is important for several reasons:

  • Cost management
    Different payment rails have different fees and transaction costs. By selecting the most suitable payment rail for their specific needs, businesses can minimize expenses and improve overall financial efficiency.

  • Speed and efficiency
    The time it takes to process transactions can vary significantly across different payment rails. Businesses need to be aware of the available options to ensure timely transfers, which can impact cash flow, supplier relationships, and customer satisfaction.

  • Security and compliance
    Payment rails have different levels of security and regulatory compliance. Ensuring the secure and compliant transfer of funds helps protect businesses from fraud, data breaches, and potential legal issues.

  • Global reach
    For businesses operating or engaging in transactions across borders, understanding the available payment rails can facilitate international trade and expansion. By using the appropriate payment rails, businesses can navigate foreign markets and manage cross-border transactions more effectively.

  • Customer experience
    Offering a variety of payment options can enhance the customer experience and increase conversion rates. Familiarity with different payment rails enables businesses to provide the most convenient and accessible payment methods for their customers, improving overall satisfaction and loyalty.

Payment rails play an important role for businesses and the global economy. Understanding these systems allows businesses to optimize their transactions, manage costs, maintain security, and cater to diverse customer preferences.

With the rise of digital commerce and global connectivity, payment rails have become increasingly important for both businesses and individuals. While there are numerous payment rails in use today, some of the most common include:

ACH

The ACH, or Automated Clearing House, is an electronic network for processing financial transactions in the United States. It is a centralized system that facilitates the movement of funds between banks and other financial institutions, enabling transactions such as direct deposits, bill payments, and electronic funds transfers.

The ACH network is managed by the National Automated Clearing House Association (Nacha) and regulated by the Federal Reserve and the Electronic Payments Association. The system streamlines transactions through consolidation and batching, which makes the ACH network more cost-effective and efficient compared to other methods such as paper checks or wire transfers.

How ACH transfers work

The ACH network provides a reliable, cost-effective, and efficient way for businesses and individuals to manage their payments and transfers within the US.

Here’s an overview of how the ACH process works:

  1. Initiation: The process begins when a business, individual, or another entity (the “originator”) initiates a payment through their bank or financial institution (the “originating depository financial institution,” or “ODFI”).
  2. Submission: The ODFI collects the transaction details—such as the receiver’s bank account information, the transaction amount, and any necessary identification codes—and submits the transaction to the ACH network.
  3. Clearing: The ACH network gathers transactions from different ODFIs and sorts them into batches, based on the receiving banks (“receiving depository financial institutions,” or “RDFIs”). Batches are usually processed at predetermined intervals throughout the day.
  4. Settlement: The ACH network processes the batches, transferring the funds from the ODFIs to the RDFIs. The Federal Reserve, which adjusts the respective banks’ reserve accounts accordingly, plays a key role in the settlement process.
  5. Posting: The RDFI receives the transaction details and posts the funds to the receiver’s bank account. This step completes the ACH transaction.
  6. Reconciliation and dispute resolution: Both the originator and the receiver have the chance to review their transactions and raise any disputes or concerns, if necessary.

ACH transactions can be split into two categories: ACH credits and ACH debits. In an ACH-credit transaction, the originator sends funds to the receiver’s account, similar to direct deposit of payroll or government benefits. In an ACH-debit transaction, the originator pulls funds from the receiver’s account, similar to bill payments or recurring subscriptions. To learn more about ACH Direct Debit as a payment method with Stripe, go here.

SWIFT

SWIFT, short for “Society for Worldwide Interbank Financial Telecommunication,” is a global messaging network that financial institutions use to securely exchange information, primarily for international wire transfers. It’s a cooperative organization, headquartered in Belgium, with thousands of member banks and financial institutions worldwide.

SWIFT itself does not transfer funds; instead, it acts as a secure communication platform that facilitates the transfer process by transmitting standardized messages between participating institutions. These messages contain important information such as payment instructions, account details, and transaction details, which enable banks to execute transactions efficiently.

How SWIFT transfers work

Here’s an overview of how the SWIFT process works:

  1. Initiation: A bank customer—an individual or a business—requests an international wire transfer at their bank. In this context, the bank is referred to as the “originating bank.”
  2. Message creation: The originating bank prepares a SWIFT message containing the necessary transaction details, such as the sender’s and recipient’s account information, transaction amount, and type of currency.
  3. Transmission: The SWIFT message is securely transmitted through the SWIFT network, which uses a system of unique identification codes, called “business identifier codes” (BIC) or “SWIFT codes,” to route messages to the correct recipient bank. These codes are usually 8 or 11 characters long and help identify the bank, country, and specific branch involved in the transaction.
  4. Intermediary banks: Depending on the transaction, one or more intermediary banks may be involved in the transfer process. These banks help facilitate the transaction by forwarding the SWIFT message to the next bank in the payment chain, ultimately reaching the recipient’s bank.
  5. Receipt and processing: The recipient’s bank receives the SWIFT message, verifies the transaction details, and processes the payment by crediting the recipient’s account with the transferred funds.
  6. Confirmation: Once the transaction is complete, the recipient’s bank may send a confirmation message to the originating bank through the SWIFT network.
  7. Reconciliation and dispute resolution: Both the sender and the recipient have the opportunity to review their transactions and raise any disputes or concerns, if necessary.

SWIFT ensures the secure and efficient exchange of financial messages between banks and financial institutions around the world, making it an important component of the global financial system.

SEPA

SEPA, which stands for “Single Euro Payments Area,” is a payment-integration initiative aimed at simplifying bank transfers in euros across the European Union, as well as other participating countries such as Iceland, Liechtenstein, Norway, Switzerland, and the United Kingdom. The goal of SEPA is to create a single market for electronic payments in euros, making cross-border transactions as easy to execute as domestic transactions.

SEPA covers different types of euro-denominated transactions, including credit transfers, direct debits, and card payments. The European Payments Council (EPC) is responsible for developing the rules, standards, and guidelines that govern SEPA transactions, ensuring a consistent and unified framework for all participating countries.

How SEPA works

Here’s an overview of how SEPA works:

  1. Standardization: SEPA introduced standardized formats and procedures for electronic payments, which are based on the global ISO 20022 messaging standard. This standardized format enables financial institutions to exchange data with each other, streamlining the way cross-border transactions are processed and reconciled.
  2. Bank accounts: Under SEPA, customers and businesses need only a single EU-based bank account to make and receive payments across the entire SEPA zone. This eliminates the need to open separate accounts in different countries.
  3. IBAN and BIC: SEPA transactions require the use of international bank account numbers (IBANs) and BICs to identify bank accounts and financial institutions. These codes replace the traditional national account numbers and bank codes, making transactions more secure and less prone to errors.
  4. Payment processing: Whether they are domestic or international, SEPA transactions follow standardized processing timelines and fees. This creates a more transparent and predictable payment environment for customers and businesses.
  5. Direct debits: The SEPA Direct Debit (SDD) scheme enables businesses to collect recurring payments in euros from customers across the entire SEPA zone, simplifying the management of recurring billing and subscriptions.
  6. Credit transfers: The SEPA Credit Transfer (SCT) scheme allows for the transfer of funds in euros between accounts within the SEPA zone. These transfers are typically processed within one business day, ensuring quick and efficient payments.

SEPA makes it easier for customers and businesses in participating countries to conduct transactions across borders, which fosters economic integration, promotes competition among payment service providers, and facilitates trade and commerce within the region. For more information about using SDD as a payment method with Stripe, go here.

CHIPS

CHIPS, or the Clearing House Interbank Payments System, is a real-time payment network specifically designed for large-value transactions in the US. Owned and operated by The Clearing House, a private organization, CHIPS is used by banks for both international and domestic wire transfers, as well as for settling transactions in US dollars.

CHIPS plays an important role in moving large sums of money between financial institutions. These transactions are typically for business purposes, such as settling securities trades, making loan disbursements, or transferring funds between banks. It’s designed to process high-value transactions quickly, securely, and accurately.

How CHIPS works

Here’s an overview of how the CHIPS process works:

  1. Initiation: The originating bank initiates a large-value transaction, such as an international wire transfer or a high-value domestic transfer, on behalf of its customer.
  2. Submission: The originating bank sends the payment instructions, including the transaction amount and the recipient’s bank account information, to CHIPS.
  3. Real-time processing: Unlike processing systems such as the ACH network that use batching, CHIPS processes transactions in real time. Each transaction is settled individually as soon as the necessary funds are available in the participating banks’ accounts. This ensures that time-sensitive, high-value payments are processed promptly.
  4. Settlement: CHIPS settles the transaction by transferring the funds from the originating bank’s account to the recipient bank’s account. The Clearing House maintains settlement accounts for participating banks at the Federal Reserve Bank of New York, and these accounts are used to facilitate the transfer of funds between the banks.
  5. Confirmation: After the transaction is settled, CHIPS sends a confirmation message to the originating bank and the recipient bank, notifying them that the transaction was completed successfully.
  6. Reconciliation and dispute resolution: Both the originating bank and the recipient bank have the opportunity to review their transactions and raise any disputes or concerns, if necessary.

CHIPS processes a large volume of transactions every day, with an aggregate value that can reach trillions of US dollars. Its real-time gross settlement mechanism ensures that large-value transactions are executed swiftly and securely, reducing settlement risk and enhancing the overall efficiency of the financial system.

FPS

The FPS, or Faster Payments Service, is a UK-based payment system that enables near-instantaneous electronic fund transfers between participating banks and financial institutions. Launched in 2008, the FPS has transformed the way people make domestic payments in the UK, providing a faster, more efficient alternative to traditional payment methods such as Bacs or CHAPS (Clearing House Automated Payment System).

The FPS is designed for low-value transactions, such as everyday payments between individuals or businesses. It operates 24/7, allowing for real-time processing of payments and ensuring that funds are typically available within seconds, even on weekends and holidays.

How FPS works

Here’s an overview of how the FPS process works:

  1. Initiation: An individual or business initiates a payment through their bank or financial institution’s online or mobile banking platform, or via a payment service provider that uses the FPS infrastructure.
  2. Submission: The customer’s bank or payment service provider submits the payment instructions—including the recipient’s bank account information, transaction amount, and any necessary reference details—to the FPS central infrastructure.
  3. Real-time processing: The FPS processes transactions in real time and does not use batching, meaning that each transaction is executed and settled individually as soon as it is submitted.
  4. Settlement: The FPS settles the transaction by transferring the funds from the sender’s bank account to the recipient’s bank account. Settlement takes place across accounts held at the Bank of England, ensuring the secure and efficient movement of funds between participating institutions.
  5. Confirmation: Once the transaction is settled, the sender’s bank or payment service provider and the recipient’s bank receive a confirmation message from the FPS, notifying them of the successful completion of the transaction. The recipient’s bank then makes the funds available to the recipient.
  6. Reconciliation and dispute resolution: Both the sender and the recipient have the opportunity to review their transactions and raise any disputes or concerns, if necessary.

The Faster Payments Service has significantly improved the speed and convenience of domestic fund transfers in the UK. It caters to different types of transactions, such as person-to-person (P2P), person-to-business (P2B), and business-to-business (B2B), providing a flexible, secure, and efficient solution for real-time electronic payments.

Fedwire

The Fedwire, also known as the Federal Reserve Wire Network, is an electronic funds transfer system operated by the Federal Reserve in the US. It facilitates the electronic transfer of large-value funds between participating financial institutions, including banks, credit unions, and other eligible entities. The Fedwire is primarily used for high-value, time-sensitive transactions. It plays an important role in the settlement of interbank obligations and the implementation of monetary policy related to money supply, interest rates, credit availability, and other US macroeconomic objectives.

How the Fedwire works

Here’s an overview of how the Fedwire process works:

  1. Initiation: The originating financial institution initiates a Fedwire transaction on behalf of its customer, usually for high-value or time-sensitive payments.
  2. Submission: The originating institution sends the payment instructions—including the transaction amount, the recipient’s bank account information, and any necessary identification codes—to its local Federal Reserve Bank.
  3. Real-time processing: The Fedwire processes transactions on a real-time, transaction-by-transaction basis, rather than in batches. This means that each transaction is executed and settled individually as soon as it is submitted, ensuring that high-value and time-sensitive payments are processed promptly.
  4. Settlement: The Federal Reserve settles the transaction by debiting the originating institution’s reserve account and crediting the recipient institution’s reserve account.
  5. Confirmation: After the transaction is settled, the Federal Reserve sends a confirmation message to the originating institution and the recipient institution, notifying them of the successful completion of the transaction.
  6. Reconciliation and dispute resolution: Both the originating institution and the recipient institution have the opportunity to review their transactions and raise any disputes or concerns, if necessary.

The Fedwire enables financial institutions to process high-value transactions—such as the settlement of interbank obligations, securities trades, and the disbursement of loans—with speed and accuracy. By providing a reliable and efficient mechanism for the settlement of payments, the Fedwire contributes to the stability of US financial markets.

Interac

Interac is a Canadian interbank network that facilitates electronic financial transactions, such as debit card payments, online banking, and money transfers. Founded in 1984, Interac operates through two main services: Interac Debit and Interac e-Transfer.

How Interac Debit works

Interac Debit is a point-of-sale (POS) service that allows customers to make purchases using their debit cards, both in-store and online. When a customer uses their debit card to make a purchase, the transaction is processed through the Interac network, which connects the customer’s bank with the business’s bank. The funds are then transferred from the customer’s account to the business’s account.

  1. A customer makes a purchase using their debit card.
  2. The business’s POS terminal or online payment gateway communicates with the customer’s bank through the Interac network.
  3. The customer’s bank verifies the account’s available balance and confirms or declines the transaction.
  4. If approved, the funds are transferred from the customer’s account to the business’s account.
  5. The business receives confirmation of the transaction approval, and the purchase is completed.

How Interac e-Transfer works

Interac e-Transfer is a popular service for sending and receiving money electronically between individuals or businesses within Canada. People often use it to pay bills or send money to friends and family. The service is available through participating financial institutions and can be accessed through online or mobile banking platforms.

  1. The sender logs into their online or mobile banking account and selects the “Interac e-Transfer” option.
  2. The sender enters the recipient’s email address or mobile phone number, along with the amount they want to send and an optional security question.
  3. The sender’s financial institution sends a notification to the recipient through email or SMS, informing them that they have received an Interac e-Transfer.
  4. The recipient clicks on the link in the notification and selects their bank from the list of participating financial institutions.
  5. The recipient answers the security question (if required) and chooses the account where they want to deposit the funds.
  6. The funds are transferred securely and instantly between the sender’s and recipient’s accounts.

Both Interac Debit and Interac e-Transfer provide efficient, secure, and reliable means for conducting electronic financial transactions in Canada. They have become an integral part of the country’s financial infrastructure and continue to evolve to meet the changing needs of customers and businesses.

RTP

RTP (Real-Time Payments) is a payment-rail system that enables the immediate transfer of funds between banks and financial institutions, facilitating instant payment processing and settlement. The RTP system is designed to provide faster, more efficient payment services, compared to traditional payment methods.

How the RTP system works

  1. Initiation: A sender initiates a payment request through their bank or financial institution, which includes the recipient’s account information and the transaction amount.
  2. Validation: The sender’s bank validates the transaction details, checks the available funds, and ensures compliance with applicable regulations and policies.
  3. Transmission: If the transaction is approved, the sender’s bank transmits the payment message to the recipient’s bank using a secure communication channel.
  4. Processing: The recipient’s bank processes the incoming payment message, verifies the transaction details, and credits the recipient’s account with the transferred funds.
  5. Confirmation: The sender’s bank and the recipient’s bank both send confirmation messages to their respective customers, notifying them of the successful transaction.
  6. Settlement: The banks settle the transaction between themselves, typically through a central clearinghouse or settlement system.

The RTP system operates 24/7, allowing for instantaneous payments and settlements regardless of weekends, holidays, or regular business hours. This real-time processing offers numerous benefits, including improved cash flow, reduced transaction costs, and enhanced financial transparency.

Card rails

Card rails, also known as “card networks” or “card schemes,” are the infrastructure and systems that facilitate electronic card transactions such as credit, debit, and prepaid card payments. Major card networks include Visa, Mastercard, American Express, and Discover. These card rails establish the rules, standards, and procedures for processing card transactions between parties, including cardholders, businesses, acquiring banks, and issuing banks.

How card rails work

Here’s how card rails operate in a typical card-payment transaction:

  1. Cardholder initiates payment: When a cardholder makes a purchase, they present their credit or debit card for payment. This can be done in person—by swiping, dipping, or tapping the card—or digitally, for online and mobile payments.
  2. Business processes the transaction: The business’s POS system or online payment gateway captures the card information and transaction details, and then it transmits this information to the business’s acquiring bank.
  3. Acquiring bank forwards transaction: The acquiring bank (the business’s bank) forwards the transaction information to the relevant card network, which routes the transaction to the cardholder’s issuing bank.
  4. Issuing bank authorizes the transaction: The issuing bank (the cardholder’s bank) verifies the card details, checks available funds or credit, and assesses potential fraud risks. If everything is in order, the issuing bank authorizes the transaction and sends an approval message through the card network to the acquiring bank and then to the business.
  5. Business receives authorization: Once the business receives the authorization, they can complete the sale. The cardholder’s account is debited, and the funds are held for eventual settlement.
  6. Settlement: At the end of each business day, the business sends a batch of authorized transactions to the acquiring bank, which forwards them to the card network. The card network routes each transaction to the respective issuing banks, and funds are transferred from the issuing bank to the acquiring bank. The acquiring bank, in turn, deposits the funds into the business’s account, minus any fees and charges.

Through this process, card rails enable easy and secure payment transactions worldwide, ensuring that cardholders, businesses, and financial institutions can effectively conduct business and exchange funds.

Mobile payment systems

Mobile payment systems are digital financial services that enable users to make electronic transactions with mobile devices, such as smartphones or tablets. These systems have gained popularity in recent years due to their convenience, speed, and security. Some well-known mobile payment systems include Apple Pay, Google Pay, and Samsung Pay.

How mobile payment systems work

  1. Account setup: To use a mobile payment system, a user must first set up an account with the service provider. This typically involves linking their bank account, credit card, or debit card to the mobile payment app.
  2. Device compatibility: The user’s mobile device must be compatible with the mobile payment system, which means the phone must have the necessary hardware, such as an NFC (near-field-communication) chip, and software, such as the corresponding mobile payment app.
  3. Payment initiation: When making a purchase, the user selects the mobile payment option at the business’s POS system or during online checkout. In the case of contactless payments, the user simply taps or holds their mobile device near the POS terminal, which is equipped with NFC technology.
  4. Payment authentication: The mobile payment system authenticates the user’s identity and verifies the payment details. Authentication methods may include biometrics (such as fingerprints or facial recognition), a PIN, or a password.
  5. Transaction processing: Once the payment is authenticated, the mobile payment system processes the transaction by securely transmitting the payment information to the business’s acquiring bank. The acquiring bank then forwards the transaction to the card network (if applicable) and the user’s issuing bank for authorization.
  6. Authorization and confirmation: The user’s issuing bank authorizes the transaction, and a confirmation message is sent back through the chain to the mobile payment system and ultimately to the business. The business completes the sale, and the user receives a confirmation notification on their mobile device.
  7. Settlement: As with traditional card payments, mobile payment transactions are settled between the acquiring bank, the card network (if applicable), and the issuing bank. The business receives the funds, minus any fees or charges, in their bank account.

Mobile payment systems offer numerous benefits, including increased convenience, faster transactions, enhanced security through encryption and tokenization, and the ability to digitally track and manage expenses. As technology evolves and mobile devices become even more prevalent, mobile payment systems will likely continue to grow in popularity.

Cryptocurrencies and blockchain

Cryptocurrencies are digital or virtual currencies that use advanced security techniques to prevent fraud and counterfeiting. They are built on a technology called “blockchain,” which is a secure and decentralized network that records transactions across a network of computers, creating an immutable and transparent record of all transactions. This technology makes it very difficult to tamper with or alter transaction records.

Bitcoin, Ethereum, and Litecoin are examples of popular cryptocurrencies that can be used in online payments and, in some cases, in-person transactions. Unlike traditional payment methods, cryptocurrencies don’t require intermediaries such as banks or payment processors. Instead, they use a network of computers to verify and record transactions, making these transactions more secure and less prone to fraud.

How cryptocurrencies and blockchain work

Here’s how cryptocurrencies and blockchain work in the context of payment rails:

  1. Wallet setup: To use cryptocurrencies for transactions, users need to set up a digital wallet, which is a software application that stores their public and private keys. The public key acts as the user’s address for receiving payments, while the private key is required to authorize transactions.
  2. Transaction initiation: When a user wants to make a payment with cryptocurrency, they input the recipient’s public key (address) and the transaction amount into their wallet application. The transaction is then cryptographically signed with the sender’s private key.
  3. Broadcasting to the network: The signed transaction is broadcasted to the cryptocurrency’s network, where it is validated by “nodes,” which are computers running the blockchain software. These nodes ensure that the sender has sufficient funds and that the transaction adheres to the network’s rules and protocols.
  4. Adding to the blockchain: Once validated, the transaction is grouped with other transactions into a new “block.” Users compete to solve a complex cryptographic puzzle to add this new block to the existing blockchain. When a miner or validator successfully adds a block, it is confirmed, and the transaction is considered complete.
  5. Decentralized settlement: Unlike traditional payment systems, cryptocurrencies do not require a central clearinghouse or intermediary for settlement. Instead, the distributed nature of the blockchain allows for direct transactions between users, with the network maintaining a secure and transparent record of all transactions.

Cryptocurrency- and blockchain-based payment rails offer several benefits, including lower transaction fees, increased security and privacy, faster transaction times, and global accessibility. However, they also face challenges, including price volatility, regulatory uncertainty, and limited acceptance by businesses.

It is likely that cryptocurrencies and blockchain will play an increasingly significant role in the global payment landscape. To learn more about how Stripe is enabling payments and payouts for platforms using cryptocurrencies, read more here.

Overall, payment rails have revolutionized transactions across the globe, facilitating a wide variety of payment methods in diverse markets. From traditional card networks and ACH transfers to innovative mobile-payment platforms and digital wallets, these networks have transformed the way customers make purchases and expanded the boundaries of commerce. Whether it’s a contactless payment at a local store, an international remittance sent instantly, or an online purchase completed with a few clicks, the versatility and reach of payment rails have connected businesses and customers like never before.

As technology continues to advance and economies become increasingly interconnected, we can expect payment rails to further evolve, offering even more simple and secure transaction experiences worldwide.

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