Beneath the surface of every financial transaction lies a complex network of systems and infrastructures known as payment rails. These interconnected pathways facilitate the rapid and secure movement of funds between individuals and institutions, powering the global economy.

As consumer demands for faster, more convenient, and secure payment options continue to evolve, understanding the intricacies of payment rails has become essential for businesses seeking to thrive in the competitive marketplace.

In this article, we will explore the diverse payment rails available and delve into how each of them functions.

What are payment rails and how do they impact businesses?

Payment rails are the underlying infrastructure, network, and systems that support the transfer of money between parties. Think of them as the digital highways facilitating the seamless flow of funds across borders and through various payment methods. Just as trains rely on tracks to transport goods efficiently, payments depend on these rails to move money securely and swiftly.

Understanding payment rails is key for businesses seeking to optimise their financial processes. Using the right payment rails can help businesses long-term success for the following reasons:

1. Speed and efficiency

Different payment rails have varying transaction speeds. Leveraging the fastest and most reliable options can accelerate cash flow, improve supplier relationships, and enhance customer satisfaction.

2. Cost management

The fees and transaction costs vary significantly across different payment rails. Businesses can identify the most appropriate payment rail for their specific needs to reduce expenses and maximise financial efficiency.

3. Reach and accessibility

Different rails have varying levels of penetration in different regions.
Understanding these differences allows businesses to reach a wider customer base.

International payment rails: SWIFT, Card, & Blockchain

1. SWIFT

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a messaging network used by financial organisations such as banks to communicate with each other quickly, accurately, and securely, regarding financial transactions.

Here is what a SWIFT transaction involves:

• Unique Identification: Each financial institution has a unique SWIFT code, known as the Business Identifier Code (BIC), to identify itself within the network.

• Message Exchange: Banks use standardised SWIFT messages to communicate payment instructions, trade confirmations, and other financial information.

• Network Processing: SWIFT acts as an intermediary, routing messages between institutions.

• Transaction Settlement: While SWIFT doesn't handle the actual transfer of funds, it provides the critical communication infrastructure that enables banks to coordinate the settlement process through their correspondent banking relationships or other payment systems.

Usually, both the sender’s and receiver’s bank would have a commercial relationship with each other in order to easily communicate via SWIFT messages. If both banks do not have a commercial bank account with each other, they need to find a third bank where both banks share commercial accounts. This third bank acts as the intermediary to handle the transaction. Since there are more steps involved in this process, more time will be needed and more fees might be charged.

If many different currencies are involved during the transaction, some extra time and fees might be needed for the currency exchange.

SWIFT is primarily used for international wire transfers.

2. Blockchain

Blockchain technology offers a decentralised alternative to traditional payment rails. Unlike centralised platforms managed by financial institutions, blockchain establishes a distributed and unchangeable ledger shared across a network of computers, using digital currencies for transactions.

How blockchain works as a payment rail:

1. Users must create digital wallets to engage with the blockchain network.

2. To initiate a payment, a user transmits digital currencies to the recipient's wallet address, triggering a transaction on the blockchain network.

3. Transaction details are disseminated to a network of computers (nodes) on the blockchain.

4. Nodes verify the transaction based on predefined rules (consensus mechanisms) to confirm the sender's fund availability.

5. Once validated, the transaction is appended to a block, becoming a permanent part of the blockchain ledger.

6. Funds are transferred once a transaction is confirmed and added to the blockchain. 

Since blockchain rails operate without a centralised entity and facilitate direct transfers between users, they offer numerous advantages like accelerated settlement times, reduced transaction costs, and heightened security due to the transparent nature of all transactions on the blockchain. Moreover, the use of digital currencies enhances global accessibility to this system, as it only requires an internet connection to engage with these currencies, unrestricted by traditional banking frameworks across various jurisdictions.

3. Card rails

Card payment rails occur in person and online via credit and debit transactions.

Here is how card rails work:

1. A cardholder initiates the transaction by presenting their card information (number, expiration date, CVV) to a merchant.
2. The merchant’s bank, known as the acquiring bank, sends the transaction details to the card network for authorisation.
3. Card network directs the transaction to the cardholder’s issuing bank for approval.
4. The card network manages the transfer of funds from the cardholder's account to the merchant's account within a few business days.

For more information on how a card transaction works, refer to this article Credit Card Ecosystem: Understanding the Key Players

The top local payment rails: ACH, Fedwire, FPS, & SEPA

1. ACH

Automated Clearing House is a payment rail responsible for electronic funds transfers between bank accounts.

An ACH payment involves multiple parties:

• Originator: The individual or business initiating the payment.

• Originating Depository Financial Institution (ODFI): The originator’s bank.

• ACH Operator: A central entity (like The Federal Reserve Bank or Electronic Payment Network) that processes transactions.

• Receiving Depository Financial Institution (RDFI): The recipient’s bank account that authorises the originator to initiate entry into the payment network.

• Receiver: The intended recipient of the funds.

The process begins when the originator authorises a payment through their ODFI. The ODFI sends payment details to the ACH operator, which routes the transaction to the RDFI. The RDFI then credits the receiver's account. This system enables efficient electronic funds transfers within the US.

2. SEPA

Single Euro Payments Area is a payment integration system dealing with euro-dominated electronic payments within the EU and other countries. It covers these payment types: card payments, direct debit, and credit transfers.

How SEPA works:

1. Customers and businesses only need a single EU-based bank account to make and receive payments across the SEPA zone by using IBANs (International Bank Account Numbers) and BICs (Bank Identifier Codes). Businesses no longer need to open a separate bank account in each country.
2. SEPA transactions use standardised processing timelines and fees to create a more transparent and predictable payment environment.

SEPA aims to make cross-border euro payments as easy to conduct as domestic transactions within the participating countries.

3. FPS

Faster Payment System is a Hong Kong-based payment rail used as an alternative to traditional bank transfers. The system connects all banks and e-wallet providers in Hong Kong, thereby allowing money transfers across all participants of the system, on a real-time basis.

How FPS works:

1. Users need to register their mobile number or email address with their bank or e-wallet provider and link it to their account.
2. The sender enters the recipient’s registered mobile number or email address, the amount, and an optional message.
3. The system confirms the receipt details and processes the transaction instantly. Both parties get a notification once the transaction finishes.

FPS payments occur within seconds and is a convenient payment option for consumers and businesses based in Hong Kong.

4. Fedwire

Fedwire is a real-time gross settlement system (RTGS) run 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.

How Fedwire works:

1. Sending bank initiates a Fedwire transfer on behalf of its customer by submitting a payment order to the Federal Reserve.
2. The Federal Reserve verifies the transaction and immediately debits the sending bank and credits the receiving bank.

Fedwire provides immediate settlement of funds for any receiving bank in the US because transactions are processed individually in real-time.

Final thoughts

At Reap, we accept digital currencies like stablecoins (USDC/T) as a source of funds for local (ACH, SEPA, FPS, etc.) or international (SWIFT) payments depending on the recipient’s preferred currency and national bank account. Plus, our users can fund these payments using their Reap Card: a Visa corporate credit card which allows users to take advantage of advanced spend control, expense management, and settling of bills using fiat or stablecoins.

Reap’s mission is to enhance the efficiency of money movement for businesses like yours. We bridge the gap between traditional finance and the digital asset world, offering a seamless experience that combines the best of both. By facilitating payouts in USDC and USDT for local and cross-border payments, and managing payments in fiat currencies, we empower businesses to optimise their financial strategies while catering to the preferences of their customers.

Enjoy the speed, security, and accessibility of blockchain based payments without compromising on the currency preferences of your recipients.

If you want to start using these unique payment rails, click here for an exploratory call with our team today.