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What are Payment Rails & How do They Work? | Tipalti

When you transfer money to or from your bank account, you’re probably not giving too much thought to the precise payment systems behind your transfer. But these payment systems-or “payment rails” as they’re known in the financial services world-play an increasingly pivotal role in our daily business transactions and personal affairs.

Business transactions on payment rails include supplier payments and other operating expenses and investments, including fixed assets and payroll. Payment rails also handle payouts to freelancers in U.S. and international payments with local currencies and any social media influencers the business uses.

What are Payment Rails?

A payment rail is essentially the backbone to all digital transfers of money between one individual or organization to another, regardless of country, currency, or digital payment method.

Most Popular Payment Rails

The most popular payment rails include Automated Clearing House (ACH), Mastercard and other major credit card providers, PayPal, the RTP Network (for real-time payments) from The Clearing House, and blockchain.

Automated Clearing House (ACH)

The ACH Network, regulated by Nacha, processed an astounding $62 trillion annually in 2020, making it one of the most popular payment rails worldwide for online payments. This transaction category includes automatic bill payments, brokerage account deposits, and direct payroll deposits.

ACH transactions tend to take an average of two to three days, although Same Day ACH and Next Day ACH are available, meaning business day (if specified time windows are met). The Automated Clearing House network handles both debit and credit ACH transactions.

ACH fees cost between $0.20 and $1.50 per transaction depending on your location, the financial institutions employed, whether you’re making international or domestic ACH payments, and other factors.

Mastercard

Mastercard is a major payment rail that’s known as a card rail, as are its competitors. Mastercard, Visa, American Express, and Discover are major credit card companies in the United States.

A Mastercard payment can take anywhere from 1 to 3 days to process completely, meaning it is not a real-time payment rail. (Although it offers certain real-time functions, such as real-time digital bill payments.)

PayPal

PayPal is responsible for a huge portion of global payments made today, both in personal and small business payments. Founded in 1998, PayPal is an established global network, though it also owns Venmo, a mobile payment rail that operates only in the United States.

The Clearing House – RTP

The RTP Network for real-time payments serving retail and commercial customers was launched in November 2017. The RTP Network from The Clearing House is another payments rail. Major U.S. financial institutions own The Clearing House. Only U.S. depositary financial institutions that are federally insured are eligible to use the RTP Network, meaning 73% of U.S. demand deposit accounts in small and large financial institutions are eligible.

RTP Network pricing is low, between $0.01 and $2.00, depending on the type of transaction or service used.

How Do Payment Rails Work?

Some payment rails use API for payouts integration, and others use flat-file integration. PayPal uses PHP integration for payments.

ACH

A bank must act as the Originating Depository Financial Institution (ODFI) for all ACH transactions, which are bank transfers. The responsibility for verifying the reality of the bank account and the presence of sufficient funds to fulfill the transfer falls to the individual or company transferring the funds.

Every ACH transaction has three core steps (and it’s important to note that ACH is not a real-time payment method). First, the party requesting the transfer sends their bank a copy of the transaction details. After that, the bank sends these details to the central clearinghouse in the ACH Network. Once these details reach the clearinghouse, the bank will be notified, and the proper accounts will be debited or credited.

Mastercard

When you pay for something with your Mastercard, the transaction made through the payments platform has six basic steps:

  1. First, you swipe your card.
  2. The credit card machine captures your account information.
  3. The card machine digitally sends it to the merchant’s bank (known as the acquirer).
  4. The merchant acquirer submits an authorization request to the customer’s bank.
  5. Authorization for the purchase is either granted or denied.
  6. The issuing bank routes the payment to the merchant’s bank, where it is deposited into their account.

PayPal

When you make or receive a payment using PayPal, the app connects to the Automated Clearing House (ACH). PayPal acts as the originating depository financial institution (ODFI) for the ACH transaction. PayPal isn’t a real-time payment method. According to PayPal support, it can generally take anywhere from four to five days for the funds to settle.

However, PayPal does feature real-time payment options. All an individual would need to do is link a credit card to their PayPal account in addition to their bank account. PayPal can place a hold on the user’s card if the transaction is declined. This allows instant transfers to take place because PayPal can still acquire their money even if the transaction is initially declined.

Furthermore, for new PayPal accounts used for business transactions, PayPal can put an up to 21-day hold on the payment to sellers until issues are resolved.

RTP Network

The RTP Network makes real-time mobile and digital payments between member depository financial institutions.

Blockchain

Blockchain, the distributed network used for smart contracts and transactions, including those related to cryptocurrency, is considered a payment rail.

What is Multi-Rail Strategy?

A multi-rail payments strategy for business enables instantaneous digital global transfers between B2B buyers and sellers, as accomplished by Zelle on its payments platform. Mastercard launched a multi-rail strategy for U.S. companies that are buyers and sellers through Mastercard Track Business Payment Services (BPS) in November 2020.

What Are Real-Time Payment Rails?

Real-time payment rails enable instantaneous digital payments. Examples of real-time payment rails include the RTP Network from The Clearing House and Mastercard’s multi-rail strategy that uses RTP Network, ACH, and Mastercard’s acquired infrastructure from VocalLink and Nets.

Importance of Payment Rails

Payment rails on payment platforms have great importance for both business transactions and personal transactions.

The Fintech community refers to payment rails as “the far side” of a payment transaction. The rail is the “hidden” portion of the transaction instead of “the near side” of the transaction, consisting of you and the other party transferring or receiving funds.

New payment networks and strategies using payment rails, including real-time U.S. and multi-rail strategies for instant B2B global payments, continue to gain popularity. These payment rails use the latest digital and mobile technologies for customer convenience, reliability, and quick payment settlement. To learn more about how SaaS Tipalti AP automation software can help you navigate and streamline workflow for the complicated world of accounts payable and send or receive funds quickly and securely across 196 countries in 120 different currencies, click here.

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