What are payment rails, and which are best for your business?

Payment rails are the infrastructure that allows money to transfer between a payer and a payee.

Just as the name suggests, you can think of a payment rail like the tracks for a railroad system. Without them, a train could not travel from Point A to Point B. The rail allows money to move from one account to another.

With a payment rail, banks or other financial institutions are connected, allowing money to travel between them regardless of country, payment method or currency.

When a payment has been initiated, a flow of information begins, including the customer account information and instructions for the financial institution. This flow of data is enabled by payment rails, of which there are many different types.

What are the different types of payment rails?

The types of payment rails include

• Account-to-account
• SEPA
• SWIFT
• Debit and credit card networks
• Cryptocurrency
• CHAPS
• Faster Payments

Since every payment rail works differently than the next, it’s important for businesses to understand how each rail functions. These will be detailed below.

Account-to-account

Also known as A2A, account-to-account payments allow the direct movement of funds from one account to another. Businesses have found the benefits of participating in A2A payment rails are many, including fast settlements. This form of payment rail works all over Europe, with kevin. offering broad coverage. All of this is offered at a fair price, where you don’t have to worry about paying card fees.

The rise of open banking enabled consumers to pay from their bank account directly to a third-party bank account. A2A transactions previously travelled on legacy banking rails. Open banking APIs have enabled consumers to use their bank account to make payments to third parties such as through apps, meaning greater convenience and quicker payments.

How it works

An A2A payment requires a payer sending money from their account to a recipient’s bank account. This type of payment can also be triggered by APIs, which would give a consumer making a purchase a prompt to transfer money.

SEPA

SEPA is short for the Single Euro Payments Area. It is a payment rail that enables the easy transfer of Euros from one bank account to another. SEPA payment rails are for direct debit, instant card transfers and credit transfers within SEPA zone countries. The transaction fees involved in a SEPA transfer are the same as they would be for a domestic payment.

How it works

There are three types of SEPA transfers:

1. SEPA credit transfer: funds can transfer within banks quickly, usually within a business day.
2. SEPA instant credit transfer: this involves nearly instant fund transfers made any time of day, not dependent on business hours.
3. SEPA direct debit transfer: used mostly for recurring payments, the sender must first sign a contract that permits the funds to be regularly transferred.

SWIFT

The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is a messaging network that carries payment instructions between banks around the world. As a payment rail, SWIFT is a popular way to send or accept money internationally, either electronically or with card payments. Banks charge a percentage fee to complete the transfer.

How it works

Institutions using SWIFT payment rails use codes that are specific to each organisation to understand the amounts to send and where to send them. Using specific SWIFT codes assigned to each financial organisation, instructions for transactions between these organisations can be carried out.

Credit and debit card networks

The major credit card companies include Mastercard, Visa, Discover and American Express. They each run on their own independent networks to complete transactions. Each network charges a fee to merchants to process payments using their infrastructure.

The bank that issues the card is referred to as the sponsor bank or issuing bank. The other party involved in transactions is the acquiring bank, which processes the debit or credit card payment for the merchant.

How it works

When a credit or debit card is swiped, the merchant’s card reader informs the card network of the payment. The network works with the merchant and your bank to make sure the transaction amount is transferred to the merchant bank account.

A card payment is not a real-time payment; instead, it can take days or weeks to reach the merchant bank account. Because of this and other reasons like costs, many merchants are increasingly turning to account-to-account payments.

Cryptocurrency

Cryptocurrency is a digital payment rail exchanged on the blockchain network. A blockchain is, in simple terms, a digital ledger of cryptocurrency transactions.

The blockchain ledger is shared across the network of computer systems on the blockchain. Some cryptocurrency blockchains are open and accessible to anyone. When a transaction takes place, it is recorded and distributed to the blockchain network. The ledger cannot be edited, which guarantees its security.

The transactions are verified as valid in a process known as mining. Each cryptocurrency blockchain has its own rules for mining.

How it works

Cryptocurrency transactions work as follows:

1. A transaction takes place on the blockchain, and a record of it is transmitted to all computers on the participating network.
2. The transaction’s validity is confirmed. Then, a block representing the transaction is created.
3. Each block in the chain has a specific storage capacity. When filled, it is closed, then linked to the previous block that’s been filled, forming a chain.
4. The transaction is then transmitted as completed.

CHAPS

Clearing House Automated Payment System, or CHAPS, is a bank-to-bank payment rail. This system is used within the UK. It involves the settlement of foreign exchange and money market transactions by financial institutions, businesses and individuals. Payments are typically made on the day.

How it works

To make a CHAPS payment, a bank requires the sender payment details and the details of the receiving party. The bank sets up the transfer, though it can also be done online. Payment instructions must be given by a specific time in the working day to complete the transaction same-day. There are no monetary limits. Since the settlement can be done quickly, it is often most effective for larger transfers like putting down a deposit on a house or other big investment.

Faster Payments

Also used in the UK, Faster Payments are considered the gold standard for making bank-to-bank transfers. It is an electronic transfer service introduced to reduce payment times for these types of payments.

Payments can be settled in anywhere from a few seconds to about two hours. The rapid nature of Faster Payments is, however, limited to payments that are under the amount of £1M, though some banks may choose to limit the transfer amounts allowed to other numbers. Faster Payments can be completed via telephone banking, at a physical bank location, on the bank website or with a mobile banking app, making them convenient to carry out.

How it works

To complete a Faster Payment, a bank receives instructions from the sender, then verifies the sender’s identity. The sender must also give a supplier sort code and account number, and a reference for payment is often also given. The bank verifies that the sender has the funds present for the payment. The receiving bank gets payment instructions and checks that the account is valid. It’ll then inform the Faster Payments Service that the payment has been accepted, and in turn the service will inform the sending bank that the transaction is complete.

Why are payment rails important?

Payment rails are important due to being an essential part of completing a transaction that involves transferring or receiving funds. Each different rail can offer its own specific benefits. Settlement time is a clear differentiator between rails, while fees are another.

Though customers may not think much about payment rails when making a transaction, businesses understand that quick processing times and the expenses involved are important considerations.

Which payment rails to choose for your business

There are several considerations to examine when choosing a payment rail for business:

• The speed of settlement
• The technology each rail requires
• Whether cross-border transactions will occur in your business
• Fraud concerns involved in each type of rail
• The fees that apply to the rail

Though there are many factors that must be weighed out depending on the business needs, A2A payments offer advantages few other rails do: quick settlements, high conversion rates and low transaction costs.

How kevin. can help

With the many benefits of open banking, it’s no surprise that businesses are becoming more interested in using it. kevin. is a payment infrastructure that allows you to take advantage of open banking - at a fair price. A2A payments are predicted to make up 20% of e-commerce by 2023, and kevin. can help ensure your business doesn’t get left behind.