What are payment rails? How they work and the types of payment rails

Key takeaways: 

• Payment rails are the underlying infrastructure that connects banks and financial institutions to enable the secure and efficient transfer of funds.

• Companies with local bank accounts can send and receive money within the same country more quickly. This can also help them do business around the world at a lower cost.

• Common payment rails include local ones, like Automated Clearing House (ACH) and Single Euro Payments Area (SEPA), as well as global ones, like Society for Worldwide Interbank Financial Telecommunication (SWIFT).

With more businesses ‌sourcing materials and services internationally, cross-border payments could reach US$290 trillion by 2030,¹ highlighting the increasing scale of global business transactions.

Financial infrastructures such as payment rails are essential for the smooth movement of funds between parties. Whether managing domestic payments or handling cross-border transfers, you'll need to use these payment rails to move money to your recipient.

In this guide, you’ll learn what a payment rail is, how it works, the types of payment rails available, and tips to help you choose the best one for your business needs.

What is a payment rail?

A payment rail is the underlying infrastructure that allows money to move between a payer and a payee, allowing financial transactions to travel between businesses, individuals, and financial institutions. It allows businesses to move money seamlessly both domestically and internationally.

Businesses, particularly those with global aspirations, rely on payment rails to facilitate smooth cross-border transactions to support international trade. These rails support a multitude of payment methods – from traditional bank transfers to credit card payments and digital wallets – making it easier for businesses to connect with customers worldwide.

Over the years, many businesses now opting for local payment rails instead of international ones. This shift was driven by the desire for faster, more cost-effective transfers. Local payment systems often have lower fees and faster processing times. This can help you manage the costs of cross-border transactions and improve your financial health.

How do payment rails work?

Payment rails are the underlying infrastructure that connects banks and financial institutions to enable the secure and efficient transfer of funds. When a payment is initiated, the payment rail acts as the intermediary, facilitating every stage of the transaction – including verification, processing, authorisation, clearing, and settlement.

Various payment rails cater to different needs. Bank transfers, for example, are a common payment rail that allows money to move from one bank account to another. Card networks, such as Visa and Mastercard, are another type of payment rail that enables transactions through credit and debit cards.

Each payment rail has its own set of protocols and standards that ensure transactions are processed accurately and securely. Understanding the meaning and capabilities of payment rails can help businesses choose the most appropriate financial solution for their needs.

Types of payment rails 

There are different types of payment rails depending on the different payment needs of businesses.

Local payment rails 

A local payment rail is designed to facilitate transactions within a specific country or region. These systems are typically optimised for domestic use and often process transactions much faster, and usually come with much lower fees. Examples of local rails include Australia's New Payments Platform, the Automated Clearing House (ACH) in the United States, Single Euro Payments Area (SEPA) in Europe and UPI (Unified Payments Interface) in India.

These days, fintechs have made it easy for global businesses to utilise local payment rails as though they're ‌local businesses by giving them local currency accounts that help facilitate what would otherwise be an international transfer.

Card rails 

Card rails are payment infrastructures used by major providers like Visa, Mastercard, and American Express (Amex). They facilitate payments and enable the transfer of funds through debit, credit, and prepaid cards. Card rails are known for their speed and efficiency. Card payments are typically authorised within seconds, making them a preferred choice for quick transactions.

International payment rail

An international payment rail is a financial system that enables transactions between countries. They are favoured as they have detailed tracking and reporting capabilities, which is important for traceability. The most globally recognised international payment rail is SWIFT (The Society for Worldwide Interbank Financial Telecommunication). It operates as a standardised messaging network, allowing banks worldwide to send and receive payment instructions seamlessly.

The SWIFT payment network can be expensive, with banks charging varying recipient or transfer fees based on the transaction type. The process sometimes involves intermediary banks, which can lead to additional costs and delays.

Real-time payments network (RTP)

Real-time payments (RTP) networks are rapidly gaining popularity for their ability to process instant transfers. Examples include the New Payments Platform in Australia, RTP in the US, Faster Payments in the UK, and India's Unified Payments Interface (UPI).

These systems enable near-instantaneous money transfers, allowing businesses and consumers to send and receive payments within seconds, regardless of the time or day.

How local payment rails can benefit your business

You can improve your financial operations and profit margins by tapping into local payment rails. For example, a non-European business with European vendors can use SEPA to facilitate quick and affordable transactions within the Eurozone. By using local payment rails, international companies can keep costs low and improve the speed of transfers while reducing foreign exchange risks.

Firstly, local payment rails enable near-instant transfers, reducing the delays associated with traditional international payments. This can significantly reduce the delays associated with international payments.

Additionally, many local payment rails eliminate many of the fees associated with international payment rails, allowing recipients to receive the full amount without deductions.

Our own solution, Airwallex Global Accounts offer local currency accounts in multiple locations managed within a single platform. These accounts provide local banking details for the countries you operate in, allowing you to send, receive, and hold foreign currencies via local payment rails.

For example, you could open USD and GBP currency accounts on one platform. Since you can collect and payout in local currencies, you can minimise cross-border payments and speed up transfers by leveraging domestic payment networks.

Which payment rail to use: SWIFT, SEPA, or local?

Payment rails are designed for specific use cases, and so choosing the right rail is important when making a transfer. Here are the important considerations to keep in mind when you choose between SWFT, SEPA, and local payment rails.

SWIFT payment rails 

• A financial messaging system covering 220+ countries and territories

• Typical settlement between 1–5 days

• Higher, opaque costs due to intermediary banks

• Best for the the expansive coverage area and where no local payment rails exist

SEPA

• Covers 41 countries in the Single European Payments Area (SEPA)

• Uses IBANS for transfers

• SEPA credit transfers are settled within 24 hours, direct debit transactions take between 3–6 business days, and instant transfers are within seconds

• Businesses outside the SEPA area can accept SEPA payments from European customers

• Best for transferring to accounts within the SEPA area

Local payment rails

Local payment rails are the domestic rails that are used to facilitate transfers within a country or territory. These include:

• Australia: The New Payments Platform offers near-instant payments through Osko and real-time payments via PayID; eftpos payments are processed the same or next business day; and BPAY takes between 1–3 business days.

• United States: The Automated Clearing House (ACH) takes 1–3 days to transfer payments; FedNow and Real-Time Payments (RTP) offer instant payments. 

• United Kingdom: Faster Payments offers near-instant payment processing; CHAPS (Clearing House Automated Payment System) offers same-day processing for high-value transactions; while Bacs (Bankers' Automated Clearing System) takes three days to process.

• Singapore: FAST (Fast and Secure Transfers) offers real-time payment processing; PayNow also offers real-time transfers; NETS (Network for Electronic Transfers) settles the same or next day; and MEPS (MAS Electronic Payment System) offers real-time payments.

How to choose the best payment rail 

Choosing the best payment rail will depend on your goals and budget. Here are some key factors to consider while you’re comparing options:

Currency, country and how much you’re transferring

Your intended recipient, where they’re located and how much they are sending will determine the best payment rail for you to use. Where you are located will also factor in. For example, someone located in Australia wanting to transfer funds to an account in Germany will want to use a different payment rail than someone located in New Zealand trying to transfer money to Mexico. Check if local payment rails are an option or if you have access to your recipient’s currency through a multi-currency account. If using SWIFT to transfer, many modern fintech platforms, including Airwallex, let you transfer money at the interbank rate which helps you save on the cost of a transfer.

Speed and cost

Fast payment processing can improve cash flow and reduce delays, especially for businesses managing supply chains across borders. Local payment rails, for instance, often process transactions within the same day, significantly faster than SWIFT, which can take 1–5 days. However, for certain cross-border transfers, a SWIFT transfer may be preferred or it can be your only option due to its wide global coverage.

Transparency in pricing

Hidden fees and high transfer costs can quickly erode your profit margins, especially for growing businesses managing international transactions. To stay ahead, opt for payment rails that provide clear, upfront pricing with no surprise fees. Transparent pricing makes it easier to budget effectively while avoiding unexpected charges.

Additionally, competitive transfer costs are essential. Fees from systems like SWIFT – including intermediary bank charges and foreign exchange margins – can add up fast. Payment rails that use local payment methods and offer competitive pricing can save you significant money on transactions, helping you reinvest in your business.

Operate globally with Airwallex’s Global Accounts

Many businesses are familiar with payment rails but face hurdles like opaque fees, unpredictable transfer times, and high costs. These issues can strain cash flow and increase operational complexity for a growing company that relies on sourcing materials and services internationally.

Airwallex simplifies payments with faster, low-cost transfers through local payment rails. With a multi-currency business account, receive funds from customers in their preferred currency and say goodbye to costly conversion and transaction fees often associated with traditional payment solutions.

Frequently asked questions about payment rails

Below are some frequently asked questions related to payment rails:

Are there fees associated with payment rails?

Payment rails usually involve fees for processing transactions, such as interchange fees, network fees, or service charges, depending on the system and parties involved.

What’s the difference between a payment network and a payment rail?

A payment network connects entities (e.g., banks, merchants, and consumers) to facilitate transactions while a payment rail refers to the infrastructure or system that physically transfers funds or payment data.

Can payment rails help lower payment processing fees? 

If you have a local currency account, you can receive funds domestically regardless of where your business is located. You can then use those proceeds to pay your suppliers or employees, eliminating unnecessary conversion fees. 

Sources:

1. https://www.foley.com/insights/publications/2024/08/cross-border-payments-market/

This information doesn’t take into account your objectives, financial situation, or needs. If you are a customer of Airwallex Pty Ltd (AFSL No. 487221) read the Product Disclosure Statement (PDS) for the Direct Services available here.