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What are payment rails and how do they work?

What are payment rails and how do they work?

The payment process is one of the most frequent touchpoints between you and your customers. It's also the most crucial. No matter your business model or industry, customers expect faster payments than ever before. Payment rails enable you to give them just that.

What are payment rails, and how do they work? Here's everything you need to know about payment rails and how they can help you process payments smoothly and efficiently.

What are payment rails?

Anytime you send or receive a non-cash payment, you use a payment rail.

Payment rails refer to the payment infrastructures that allow users to send money between the payer and the payee. The term "rail" evokes an image of train tracks, providing the digital infrastructure to connect various businesses and financial institutions.

You can use these payment systems to make both domestic and international payments and offer a defined route when transferring money from point A to point B.

How many payment rails are there?

The United States currently has roughly a half dozen different payment rails. But this number constantly changes, especially as the financial world continues to evolve and develop new and improved ways to send money.

Some of the most common payment systems include:

  • Automated Clearing House (ACH) payments
  • Card rails
  • Technically, even cash would be considered a type of payment rail, though the term is most often used for non-cash and digital forms of payment. But every payment rail is different. Each rail has its own strengths and weaknesses and is best suited for certain situations.

How payment rails work

Since payment rails are designed to facilitate digital transactions, the rail operates by exchanging data between financial entities. This information includes data like:

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

Remember that for the payment rail to work, both the payer and payee's bank accounts must be part of the same network. Depending on which payment rail you use, additional fees may be associated with the transaction. Settlement times can also vary.

How much does it cost to use a payment rail?

Making a non-cash payment will require you to pay some type of fee. The exact amount varies between rails but will generally be a small sum applied to each transaction.

ACH transactions tend to be the most cost-effective, while wire transfers often have higher fees. Similarly, domestic payments are typically more affordable than cross-border payments.

Again, the exact costs and fee structures can differ, so business owners should be mindful to factor these costs into their financial processes.

What is settlement time?

When processing digital payments, you'll need to account for "settlement time," which refers to the delay between when the transaction is initiated and when the funds appear in the recipient's bank account.

Settlement times vary between different rails. Most businesses prefer a short interval, which gives them better access to their operational cash flow.

Real-time payments have only recently become possible through the Real-Time Payment (RTP) network, while other rails offer a settlement time that can last 24-72 hours. However, some banks now offer same-day ACH payments, which ensures that transactions are processed within the same business day.

What are the differences between major payment rails?

Now that you've got the basics down, it might help to look at your payment options to weigh the pros and cons of each payment rail. Here's a brief summary of each major payment rails and how they process non-cash transactions.

ACH rails

The Automated Clearing House (ACH) network allows users to transfer funds between bank accounts quickly and affordably.

ACH transactions are almost universally accepted in the US, and users can make an ACH payment using their account number issued by the bank they bank with. Both the sender and receiver must have a traditional bank routing number and account number—any fintech app that can’t provide this account information can't complete ACH transfers.

Card rails

Merchants appreciate card rails since they facilitate both in-person and online transactions. Card payments are often preferred because customers are more familiar with major card networks than they are ACH transfers or other digital payment methods.

Here's how credit and debit rails work.

What are credit rails?

Credit card payments are another form of payment rails. Common card networks include Visa, MasterCard, and American Express, each of which may be backed by an issuing bank (also known as the "sponsor bank").

When business owners accept credit payments, the card issuer assesses merchants' fees for using their underlying infrastructure. This is usually a flat rate charged in addition to a fractional percentage of each transaction.

What are debit rails?

Debit card payments are typically completed in the same way as card rails. Debit cards are most often linked to a bank account, though they can also be prepaid without an account attached.

Wire transfers

Though there are potentially higher costs involved in a wire transfer, these payment rails are among the most reliable. That's because the banks and financial institutions that handle these transfers guarantee their delivery.

Wire transfers can be made from banks that offer this service, though third-party companies can also transfer funds to their network before sending them to a receiving bank.

The biggest drawback of wire transfers is that there are cost tied to them and the fees can vary widely so it’s important to ask about the fees when you go to make the transfer. This solution is best for large transactions or when other rails are unavailable.

SWIFT rails

The SWIFT network makes it easier to conduct business internationally.

"SWIFT" stands for The Society of Worldwide Interbank Financial Telecommunication. The SWIFT network is ideal for foreign exchange and can handle multiple forms of foreign currencies.

With that being said, the SWIFT network can take three to five business days per transaction and costs a bit more than other payment methods.

Additionally, the European Union already has a rail known as the Single European Payment Area (SEPA) Instant Credit Transfer system, though the U.S. isn't currently participating. This may present challenges when working with countries that prefer SEPA to SWIFT.

Paper checks

While most of these money rails revolve around advanced technology, business owners can hardly ignore the power of paper checks. Checks have historically taken time to process, but most of today's banks allow users to deposit the check online or from their smartphone.

Moreover, checks don't ordinarily require you to pay a fee to cash them. If business owners can handle the mild inconvenience of a check, they can be among the most affordable forms of non-cash payment available. Your customers may even prefer the security of a check to other forms of digital exchange for large payments.

What's the difference between payment rails and payment networks?

The terms “payment rails” and “payment networks” can be used interchangeably since payment networks refer to the broad infrastructure that facilitates non-cash and digital forms of payment. A payment rail relies on a network or platform to complete these transfers.

What is a multi-rail payment strategy?

A multi-rail payment strategy is typically used for B2B payments. A multi-rail strategy enables businesses to make instantaneous international transfers between buyers and sellers.

In the US, for example, this can be accomplished through the payment app Zelle. Mastercard has likewise launched its own platform, which is known as the Mastercard Track Business Payment Services (BPS).

The importance of payment rails

What are payment rails designed to do for your business? Here are a few benefits of using a payment rail in your business.

Better cash flow

Faster payments give you more immediate access to your cash, preventing you from waiting for your funds to enter your account when you make a sale. And if you use real-time methods such as the RTP network, you'll have access to your funds immediately after every sale.

This improved cash flow can help you stay on top of your business finances.

More payment options

According to the U.S. Federal Reserve, American consumers used cash for only 19% of all transactions in 2021. Payment rails enable you to accept alternative forms of payment, including checks, credit and debit cards, and even certain forms of cryptocurrency.

Recurring payments

Service-based businesses can use payment rails to set up recurring payments, which can be ideal for subscription-based services or designers and contractors who are paid for regular work on long-term projects.

International expansion

Payment rails enable you to conduct business internationally. By leveraging their unique benefits, you can work with international vendors and customers, expand your business into new territories, or present new ways of managing your supply chain.

Which payment rail is best for your business?

There may not be one "right" payment rail for your business. Instead, you'll need to consider the pros and cons of each option. For example:

  • Most of today’s consumers prefer credit and debit payments
  • ACH transfers are reliable and fast, though sometimes overshadowed by new fintech
  • Wire transfers are guaranteed, though costly
  • The SWIFT network empowers international business
  • A paper check is still reliable and cost-effective

Ultimately, you'll have to decide which option is right for your business, striving to find a proper balance between speed, cost, and concerns over fraud and data security.

Choosing the right payment platform

The right payment service can make a world of difference for both your business and your customers.

BILL provides an innovative, feature-rich platform that allows you to send invoices, accept electronic payments, and view data about every aspect of your company's finances. And because the system is cloud-based, you'll always have access to your company's most valuable data whenever you need it.

Explore these features today and find out how BILL can transform your business and give you the tools you need to thrive in today's competitive market.

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