Swift, SEPA, CHAPS, ACH, Faster Payments - just some of the examples of payment rails. But what do they actually do? And why are they important?
In today’s episode of Finance Jargon 101, we explore: ‘payment rails’. It’s a term you’ll see on many payment and financial services websites, including our own. And for good reason - payment rails are hugely important for making both domestic and international payments.
However, it can be hard to keep up with the sheer number of them, especially as almost all of them use acronyms. So we’ve created this short guide to what payment rails are, how they work and what you need to know.
Payment rails are the infrastructure that carry money between a payer and a payee. Just like rails for a train, payment rails connect banks and financial institutions with one-another and allow money to travel between them.
However, while you’ll probably use the same rails to travel between two places on a train, there are many options when it comes to payment rails. Any non-cash payment you make runs on a payment rail, so let’s look at an example of exactly what happens in closer detail.
Imagine you’re a UK business that has just received a bank transfer from a customer in the EU. Both your business and the payee’s bank are in the Single European Payment Area, so the payment is sent from their bank account to yours via the SEPA payment rail. Later you pay one of your suppliers in the US. This payment is sent via SWIFT to the supplier's account, as both of your banks are part of the SWIFT network. In the evening you send a friend some money you owe them directly from your personal bank account. Because you are both UK bank customers, the money appears in their account almost instantly via the Faster Payments payment rail.
Different payment rails are used for different types of payment, have different geographic focuses or process payments at different speeds. These are some of the world’s largest payment rails that our customers rely on at OpenPayd - all aboard!
Faster Payments: The gold standard for UK bank-to-bank transfers, Faster Payments usually settles within a few seconds, though it can take up to two hours. For making rapid payments within the UK, it is unrivalled, although it is limited to payments under £250,000.
CHAPS: CHAPS is another UK system which has several use cases. It is used by financial institutions and very large businesses to settle money market and foreign exchange transactions, and used by other businesses and individuals for high-value transactions such as housing deposits or tax payments. While it isn’t as fast as Faster Payments, payments are usually same day, depending on when they are submitted.
SEPA/SEPA Instant Credit Transfer (SCT Inst): SEPA payments allow businesses and individuals to send money between Euro bank accounts, providing that the country has signed up to the Single European Payments Area (hence the name). This includes all EU members plus eight additional territories. Thanks to SEPA Instant Credit Transfer, payments are now a maximum of 10 seconds.
SWIFT: SWIFT is the Society of Worldwide Interbank Financial Telecommunication and is a way of making global payments to any bank in the world, as long as they are part of the SWIFT network. Unlike Faster Payments and SEPA, SWIFT allows you to pay in a number of currencies, though transactions are likely to take between 3-5 business days and there are potentially higher costs involved.
BACS: BACS is a payment rail usually used for Direct Debits - perfect for businesses that want reliability in receiving regular payments, such as subscription services. Payments will take around three days to clear however, so they’re not quite as quick as other options.
ACH: The Automated Clearing House payment rail processes transfers between US bank accounts. They are relatively fast, settling between 1-2 business days.
This certainly isn’t an exhaustive list - there are additional payment rails specifically for credit card networks and for peer-to-peer payments. US app Venmo is a popular example, while many countries have their own P2P payments apps.
The newest payment rail is of course blockchain technology, the underlying infrastructure that cryptocurrencies operate on. Payments can be sent around the world very quickly, but blockchains are not currently used for fiat currency (though that may change in the future). Blockchain-based payments are also peer-to-peer, rather than between two financial institutions.
For any payment that isn’t cash-based, the payment will automatically be travelling via a payment rail. Access to these rails is provided by the same institution that provides the banking and payment services - either a Bank or an Electronic Money Institution. Things work slightly differently when processing card payments, as it will be the card acquirer that handles access to the card rails for the payment. But the end result is the same - businesses will get access to these payment rails as a standard part of their payments infrastructure.
Where things can get trickier is for large businesses with complex payment needs. These are companies that might need access to multiple international payment rails, or have realised they need access to real-time payments. This is ultimately a question of scale - a small local business probably won’t need to worry if its payments are real-time or not. A remittance platform with a million users all making payments into their accounts will definitely want those payments processed instantly.
Most non-real-time payment rails around the world will take around 2 days for a payment to settle. Some, like SWIFT, can be even longer than this.
On the other hand, a few like Faster Payments and SEPA Inst can process and settle payments almost instantly. To give themselves a buffer, these schemes usually suggest a payment should complete either within 2 hours or same-day respectively. But they will rarely take that long. To put this in context, at OpenPayd our average (median) time for a SEPA Inst payment is just 5 seconds.
There are a few other things to know about real-time payment rails. While they’re convenient, they will usually only be used for small-value transactions. SEPA Inst caps transaction sizes at €100,000, for example. Larger payments will therefore usually travel on a different payment rail.
This is why we see the world moving to a rails-agnostic model, where payments travel along the rail that is most appropriate for the size and nature of the payment - either real-time, or not.
Clearly different payment rails each offer their own distinct benefits - with settlement time being a key differentiator. As customers, most of us won’t know which payment rail our payments are sent over. But there are plenty of specific business problems that require fast payment processing, which all hinges on the payment rail used. Knowing which rails are best suited for different types of payment can help you achieve that.
At OpenPayd, this is the starting point for many of our conversations with clients, who typically have specific payment challenges they are looking to solve. We give businesses access to multiple payment rails, including those listed above, and work with them to make sure their payments are processed in the quickest, most efficient way.
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