Payment Rails Explained: Types, Trends & Use Cases

Globally, trillions of transactions are recorded every year, and behind every single transaction is a payment rail. 

Each instance where money moves, be it an e-commerce payment or payroll processing, domestically or internationally, between businesses or individuals – payment rails are at work. Despite their universal presence, rails are often misunderstood and hard to navigate. This makes it essential to break down how these rails actually work.

In this guide, we’ll answer all your questions: what are payment rails? What are their common types and use cases? We will look at how these rails are expected to change in the future, and how platforms like Xflow can help businesses optimize their use. With this primer, let’s get started.

• Payment rails are the global infrastructure for money movement, powering ACH, SWIFT, SEPA, UPI, RTP, and card payments. Understanding their types, benefits, and industry use cases helps businesses reduce costs, improve speed, and integrate with modern treasury systems.
• Choosing the right payment rail, depending on use case, or implementing a multi-rail strategy, helps businesses stay flexible and agile in today’s financial ecosystem.
• New developments, such as API banking and rapid global settlements, are transforming the way payment rails operate.

Payment rails are networks that move money between banks, businesses, and individuals worldwide. For example, they provide the infrastructure for ACH in the U.S., SWIFT globally, SEPA in Europe, and emerging real-time and blockchain-based payment systems.

Payment rails are the infrastructures that are responsible for the transfer of money from a payer to a payee. They can involve individuals, banks, and businesses. All payment methods have rails. 

Many names, including payment networks, settlement systems, money transfer systems, and more, refer to these.

Payment rails route payments, handling authentication, compliance checks, and settlement. Money is securely moved from the payer to the payee.

There is a simple workflow when it comes to payment rails:

1. Payments are initiated by a payer, who provides their payment information.
2. Next, payment details are verified by the payment platform.
3. Payment instructions are transferred across the payment rail network.
4. Then, funds are transferred and settled.
5. Both payer and payee receive confirmation.

This basic process changes slightly depending on the type of payment rail in question. Each of these rails has specific protocols and standards, which we’ll cover in later sections.

Using the right payment rail has brought benefits in terms of speed, cost, and transparency. Matching rails to specific business needs can make sure that your payment processes function optimally. Let’s go through each of these benefits.

1. Speed

The first and most obvious benefit of having the right payment rail is the speed. Efficiency and transfer time vary depending on the payment rail you are using. This affects both your operational efficiency and your customers' experience.

2. Cost

The next consideration is the cost. The right payment rail will meet your budget. Make this decision after thoroughly understanding the fees and transaction costs.

3. Transparency

The right payment rail will provide you with information on all your transactions. This can help you spot fraudulent transfers and keep you on top of your financial status.

The benefits don’t stop here. With the right payment rail your customers get multiple payment options. Your business can easily set up recurring payments, and get better access to the internal market.

Today, payment rails are powering and finding uses in diverse industries (SaaS companies, marketplaces, exporting and trade, payroll distribution, and fintech platforms). Let’s see how payment rails have been optimized for each of these industries and their needs.

1. Cross-border SaaS

Local payment rails operate within pre-defined regions and economies. Service companies that operate across borders lean on these often, such as the SEPA in some European countries.

This is because local payment rails can offer cost savings by a large margin compared with traditional payment systems. Transactions conducted through these rails also align with regional regulatory standards.

2. Marketplaces

Online retailers, marketplaces, and businesses need payment rails to handle multi-currency transactions. These rails scale with increasing transaction load as well, and integrate with existing tools and management platforms to consolidate data.

3. Exporters

Exporters, especially those that operate internationally, benefit the most from the right payment rail in hand. Multi-currency support, low conversion rates, and quick fund settlements are highly desirable in these competitive trades.

4. Payroll platforms

Payroll providers deal with large transaction volumes. Payment rails can speed up the payroll process and simplify scaling.

5. Fintechs

Fintech companies and banks are leaders in adopting payment rail solutions. Leading companies have integrated digital wallets and cross-border transactions into their services and operations. An increase in this adoption has led to positive effects on treasury systems management and the affordability and efficiency of fintech services, too.

Payment rails are the infrastructure that transfers funds. Payment processors handle the transaction routing and overall flow. Payment gateways provide merchant interfaces for the transactions. There is overlap in their features and examples. 

Let’s look at a short table summarizing their key differences.

Global payments rely on multiple rails including SWIFT, SEPA, ACH, RTP, UPI, card networks, and blockchain. Each differs in cost, speed, and other factors. Businesses must choose the right combination that fits their needs well.

1. SWIFT (Global)

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a messaging network that secures the communication between banks. Although it does not move funds by itself, SWIFT is responsible for transferring information about the fund transfer – like the payment instructions, transaction details, and more.

2. SEPA (Europe)

SEPA (Single Euro Payments Area) is a payment system managed by the European Union, covering both debit and credit payments in the Euro currency. Its functionality is restricted to SEPA-approved countries.

3. ACH (US)

ACH (Automated Clearing House) payment rails operate in the U.S. They are responsible for electronic, bank-to-bank transfers. For example, direct deposits fall under the umbrella of ACH payments. 

ACH payments are commonly used in transactions like payroll deposits and bill payments.

4. RTP (US)

RTP (Real-Time Payments) networks, much like ACH transfers, facilitate money transfers between banks in the U.S. RTPs are more desirable due to their accessibility. Fund transfers are nearly instant, and the service is available around the clock. RTPs are often used for interbank settlement.

5. UPI (India)

UPI (Unified Payments Interface) is an Indian real-time payment system. Funds are transferred digitally using QR codes. It is an example of a highly accessible and convenient payment rail.

6. Cards

Perhaps the most popular example of payment rails, card networks effectuate transactions using credit cards, debit cards, and more. Household names in card networks include VisaNet, Mastercard, American Express, and more.

7. Blockchain-based rails

Blockchain technology uses “blocks” across many computers to store transaction data. Some of this blockchain (Lightning network, Ripple, Stellar) tech can function as rails, creating a secure, global settlement option.

Apart from these popular payment rails, FedNow (US) and cryptocurrencies are also emerging platforms.

With multiple rail types available on the market, businesses can choose to mix and match payment options according to their needs. This is known as a multi-rail strategy, where payment applications use multiple rails based on their needs.

Traditional payment rails like ACH, despite their legacy, often involve delays, high fees, limited visibility, and costly currency conversion. These challenges are slowly being addressed by newer payment rail options in the market.

Let’s look through these challenges, one at a time.

1. Delays

Traditional rails like ACH and other bank-to-bank transfers can take a long time to process transactions and settle final amounts. These delays are often higher for international fund transfers. The delay can not only slow down your business’s operations, but also limit the amount of working capital you have at any given moment. Because newer rail options settle much faster, they have gained popularity in the last decade.

2. High fees

Costs can shoot up when using traditional payment rails. Corresponding banks charge their own fees, price points are not always transparent, and cross-border transactions come with multiple, unpredictable markups.

If your business is still using traditional rails, these fees can be a large drain on your money.

3. Limited visibility

Because traditional rails are not as digitized as the newer ones, they can offer limited visibility into transactions. As a business, staying on top of your financial status is crucial, which is why payment rails without features like real-time tracking can cause significant harm.

4. Currency conversion

For businesses that trade internationally, currency conversions can be costly and complex. High conversion fees, coupled with a lack of transparency about exchange rates, can make cross-border payments a tedious process. Payment platforms like Xflow offer low exchange rates with the fastest settlement times, making them a worthy consideration against more traditional payment rails.

Businesses should pick payment rails that suit their use cases, maintain redundancy using multi-rail strategies, and comply with standards like ISO, RBI guidelines, KYC, and AML. This ensures efficiency in operations and regulatory alignment.

1. Use-case fit

When picking payment rails, choose the right one for each scenario. For example, if geographical borders are a concern, SEPA can be used for fund transfer in the Euro currency, and ACH for transfers in the U.S.

2. Redundancy

Businesses can incorporate a multi-rail strategy into their operations. This redundancy makes sure that individual issues in payment rails don’t affect the company overall. Similarly, customers can have more choices for making payments.

3. Compliance alignment

A rail’s alignment with major regulatory standards helps your businesses stay compliant. This is particularly a concern for newer rail types, such as blockchain-based cryptocurrencies. Look for compliance with frameworks like ISO 20022, RBI guidelines, and  KYC and AML frameworks.

Integration is a foundational stone for efficient operations for a business. Xflow provides APIs for platforms to connect payment rails to ERP, treasury, and payout systems.

API banking is an emerging trend in digital finance, which is improving the ease of integrating all your financial tools. For example, Plaid is a data network connecting applications to user accounts. Similarly, Modern Treasury uses an API-based approach for payment operations.

Consider integrating your payment rails with accounting and technical tools already in place in your business operations. Through this integration, you’ll consolidate all your financial data and keep it consistent across different systems. This improves the quality of your reconciliation, ledger system management, and reporting cycles in the long run.

Xflow offers powerful APIs backed by enterprise-grade security and intuitive user interfaces. By acting as a facilitator between the payment rail and your finance tools, Xflow can help your business streamline its operations.

Payment rails must meet compliance standards like KYC, AML, sanctions screening, and PCI-DSS. These safeguards protect your business against fraud and keep your customers’ data safe.

1. KYC

Know Your Customer checks are mandatory when onboarding new customers. A comprehensive KYC check at this stage makes sure that you are transacting only with legitimate users.

2. AML

Anti-Money Laundering policies actively monitor accounts for suspicious activity. AML policies and payment rails go hand-in-hand, as they can flag transactions that could be dodgy.

3. Sanctions screening

Payment rails should also screen customers and counterparties against global sanctions lists to ensure compliance. These can protect your business from regulatory violations and potential penalties.

4. PCI-DSS

Any rail handling card data must comply with PCI-DSS. This framework provides the standards for handling sensitive payment and card information. 

Additionally, payment providers and rails that align with ISO 20022 are able to offer more transparency in the payments they manage.

Payment rails have undergone rapid evolution in today’s digital era. CBDCs, AI-based routing, and instant settlement infrastructures will shape future payment rails. These innovations are expected to deliver on the promises of fast, cost-effective fund transfers. Let’s take a brief look at each of these trends.

1. CBDCs (central bank digital currencies)

The introduction of cryptocurrencies and the shift in payments to the online world have motivated central banks to create their own digital currencies. Since the Bahamas released its first central currency in 2020, CBDCs have been appearing more frequently. They are expected to shorten transaction delays at lower costs.

2. AI-based routing

AI is inescapable for all domains and industries. For payment rails, AI integration in fund routing can create several featural changes. Improving fraud detection processes, removing operational roadblocks, and aligning with compliance requirements are among a few.

3. Instant settlement infrastructure

Real-time payments have already become an industry standard for payment rails. In the future, this infrastructure is expected to be accessible at all times, from all locations, with immediate settlement – both domestically and internationally.

For businesses that are scaling internationally, efficiency is the need of the hour. If managing your payment rails and cross-border payments is getting complex, consider using Xflow.

With Xflow, you can simplify your cross-border transactions. Xflow is an elegant, intuitive platform that meets the international payment needs of exporters, start-ups, fintechs and freelancers alike. It offers quick fund transfers at transparent price points with no hidden costs.  Xflow offers the lowest FX costs and backs all your transactions with ISO 27001 and SOC 2 grade security.

Over 7,000 organizations worldwide use Xflow for their cross-border payments. Try it out and discover why today. Sign up now.