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.
In the simplest possible terms, a payment rail is any form of digital infrastructure that transfers money from one individual or business to another. The fintech community refers to payment rails as being on “the far side” of a payment transaction–i.e., the rail is the “hidden” portion of the transaction. As opposed to “the near side” of the transaction, which is made up of you and whatever party you’re transferring funds to or receiving funds from.
In this post, we’ll be covering the basics of 3 of the most popular payment rails.
Automated Clearing House (ACH)
The ACH Network processes an astounding $41 trillion annually, making it one of the most popular payment rails worldwide. This transaction category includes automatic bill payments, brokerage account deposits, and direct payroll deposits.
A bank must act as the Originating Depository Financial Institution (ODFI) for all ACH transactions. 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 3 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 clearing house in the ACH Network. Once these details reach the clearinghouse, the bank will be notified and the proper accounts will be debited or credited.
ACH transactions tend to take an average of two to three days, and cost between $0.14 and $0.95 per transaction depending on your location, the financial institutions employed, whether you’re making international payments, and other factors.
Mastercard is another one of the major payment rails (though unlike ACH, Mastercard is what’s known as a card rail). Mastercard–along with Visa, American Express and Discover–is one of the major credit card companies in the United States. Below is a quick breakdown of how Mastercard operates as a payment platform.
When you pay for something with your Mastercard, the transaction has six basic steps. First, you swipe your card. Then, the credit card machine captures your account info and digitally sends it to the merchant’s bank (known as the acquirer). Fourth, the merchant acquirer submits an authorization request to the customer’s bank. Authorization for the purchase is either granted or denied, and finally the issuing bank routes the payment to the merchant’s bank, where it is deposited into their account.
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 does offer certain real-time functions, such as real-time options for digital bill payments.)
PayPal is responsible for a huge portion of global payments made today, both in casual and small business payments. Founded in 1998, PayPal is an established global network, though they also own Venmo, a new mobile payment rail in the United States.
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. As noted in the previous section on ACH payments, this is not a real-time payment method, and it can take anywhere from 3 to 5 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 has the ability to 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.
Conclusion: Global Payments Are An Expanding Competitive Arena
If there aren’t enough different payment networks and card rails to satisfy your curiosity, new additions are created almost weekly it seems. Between blockchain and countless
fintech innovations, the coming years are sure to see a flood of new payment networks hitting the markets.
To learn more about how Tipalti can help you navigate the complicated world of AP and send or receive funds quickly and securely across 196 countries in 120 different currencies, click here.
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