Guide to payment rails: How they work and different types

Key takeaways

• Payment rails are the underlying infrastructure that connects banks and financial institutions, enabling 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 Electronic Funds Transfer (EFT) and Interac in Canada, Automated Clearing House (ACH) in the United States, and Single Euro Payments Area (SEPA) in Europe, as well as global ones like the 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 must use these payment rails to move money to your recipient.

In this article, 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 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 and support international trade. These rails support many 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 have switched to local payment rails instead of international ones. This shift was driven by a desire for faster, more cost-effective transfers. Local payment systems often have lower fees and faster processing times, which 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 transaction stage, including verification, processing, authorization, 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 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 

In Canada, local payment rails include Electronic Funds Transfer (EFT) and Interac. In the United States, Automated Clearing House (ACH) is common, and Single Euro Payments Area (SEPA) is widely used in Europe. In India, the Unified Payments Interface (UPI) is the standard.

These systems are typically optimized for domestic use, often process transactions more quickly, and incur much lower fees.

These days, fintechs have made it easy for global businesses to use 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 authorized 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. It is favored because it has detailed tracking and reporting capabilities, which are important for traceability. SWIFT is the most globally recognized international payment rail (The Society for Worldwide Interbank Financial Telecommunication). It operates as a standardized 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, leading to additional costs and delays.

Real-time payments network (RTP)

Real-time payments networks process instant transfers. Examples include RTP in the US, FedNow, and India’s UPI. Canada is developing its real-time payments system, the Real-Time Rail (RTR), through Payments Canada. While promising, this infrastructure is not yet widely available and should be considered a future capability.

These systems allow near-instant money transfers, even after hours.

How local payment rails can benefit your business

By tapping into local payment rails, you can improve your financial operations and profit margins. 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.

First, local payment rails offer near-instant transfers, helping reduce the delays and fees typically associated with international payments.

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

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.

Canadian businesses can open CAD accounts and hold, send, and receive currencies like USD, GBP, and EUR – all through one platform. This makes it easier to operate globally while reducing the complexity and cost of cross-border payments.

How to choose the best payment rail 

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

Speed of transactions 

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 1–3 days.

Transparent fees and low costs  

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 with clear, upfront pricing and 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 multicurrency business 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.

Canadian businesses can benefit from local and international currency support via Airwallex, which can help them better manage cross-border cash flow, supplier payments, and customer collections.

Frequently asked questions (FAQs)

1. Are there fees associated with payment rails?

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

2. 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.

3. Can payment rails help lower payment processing fees? 

If you have a local currency account, you can receive funds domestically regardless of your business location. 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/