Most (if not all) businesses depend on the ability to transfer money from one party to another. For example, when a customer pays a business for a product or service, both the customer and the business must feel confident that the money involved in the transaction is taken from the customer’s account and ends up in the business’s account.
This may strike you as glaringly obvious, but it all depends on an infrastructure of systems or networks that work behind the scenes to facilitate the swift and accurate transfer of funds. These various systems and networks are called payment rails, and it’s no exaggeration to say that they form the basis for our digital global economy.
Without payment rails, the money doesn’t flow — not from one country to another, not from one currency to another, and not from one business to another.
In this guide, we’ll introduce the different types of payment rails in terms that highlight their importance to your business. After all, only a business that understands the basics of payment rails can hope to build a swift and sturdy global payments process.
Payment rails are systems or networks that facilitate accurate payment transactions. They’re called “rails” because they work sort of like the rails on a train track, allowing money to travel from one point to another in a smooth and predictable way.
There are different types of payment rails that may function within a specific geographic area or currency type. For example, some payment rails help customers make cashless euro payments within a country or an economic zone, like the European Economic Area (EEA). Others are designed to facilitate transactions across borders or via decentralized networks.
Let’s now look at two major types of payment rails: local payment rails and global payment rails.
Local payment rails make possible the transfer of money or financial value within a country (or a group of countries, like the EEA). These networks play a vital role in intra- and international commerce, lowering transaction costs and thus removing the barriers of entry for businesses.
Local payment rails, such as the U.S.-based Automated Clearing House (ACH) network and the Single Euro Payments Area (SEPA), represent some of the most efficient and cost-effective ways in the world to transfer payments.
But they aren’t perfect for every use case. They may be slower and come with more restrictions than other ways of transferring money, and their geographic limitations may be a hindrance to startups and other businesses with an international focus.
At Levro, we support local payment rails in 37 different countries. But if you’re looking to make payments across currencies, you should understand how global payment networks work, too.
If you need to transfer money from one country or currency to another, local payment rails may not help. In this case, you will need to turn to a global network or system designed to facilitate cross-border transactions.
The global payment rails you use will vary depending on your goals. If you want to send money in an international wire transfer from one bank account to another, chances are that you will use the SWIFT global messaging network. But if you’re doing business abroad and paying for something with a credit or debit card, you’ll be using a global card network.
Now that we’ve defined our terms, let’s explore the most common types of payment rails and what they’re used for.
Before we go any further, though, be aware that the term “payment rails” is somewhat of a catch-all used to describe a number of different systems, some of which are similar (or interrelated) and some of which differ based on factors like region, payment type, and so on.
These differences may show up in other terms you’ll see used to refer to the most popular types of payment rails. For example, the ACH network is often referred to as a clearing house, while SWIFT is more typically described as a payment network or financial messaging system.
On that note, let’s look at how some of these payment rails work.
Type of payment rail: Local (United States)
ACH stands for the Automated Clearing House network. This US-based network involves thousands of banks and other financial institutions, and is among the cheapest and most popular ways of transferring money domestically within the US.
Think of an ACH transfer as the modern, electronic version of writing a paper check. Like a check, an ACH transfer requires payees to provide an account number and bank routing number for each transfer.
An ACH transfer offers a good example of how local payment rails work — and the types of payments they’re good for. Because this network is widely adopted by banks in the US, it’s a reliable and cost-effective (read: often nearly free) way to send money domestically. But it may be slower than a wire transfer, and may have size limits that hinder your ability to do business.
ACH direct debit is often used within the US as a means of paying bills, and it may be appropriate for your business as a means for paying contractors and employees (assuming you’re both based in the US).
Type of payment rail: Local (European Union and European Economic Area)
SEPA stands for Single European Payments Area — a hint that this network applies to cashless euro payments within the EU and the EEA. A SEPA transfer is not unlike an ACH transfer, though one major difference is that this particular form of “local” payments covers an impressive 36 countries as of 2023.
SEPA is thus an extremely convenient and popular way to conduct cross-border transactions within Europe. It can be used for direct debits, credit transfers, and other payments between European-based bank accounts.
In order to send money via a SEPA transaction, you’ll typically need to know the international bank account number (IBAN) as well as the BIC (Bank Identifier Code) of the receiving bank or financial institution.
Type of payment rail: Global
SWIFT, or the Society for WorldWide Interbank Financial Telecommunication, is a financial messaging system designed to make international payments faster, easier, and more secure. It does this by providing a standardized format that more than 11,000 banks across the world now use to send and receive electronic payments.
This format depends on individual codes known interchangeably as SWIFT or BIC codes. These 8–11 character codes identify the financial institution and the country to which money should be transferred. Banks can use these codes to prepare SWIFT messages that route the appropriate amount of funds to the receiving bank.
If the two banks involved in a transaction don’t have a pre-existing SWIFT agreement or commercial relationship, an intermediary or third-party bank may step in and help process the payment. This is a fairly common step and may not slow down the processing of SWIFT payments too much.
If you’re sending an international wire, chances are good that you’ll use the SWIFT network to do so. Since SWIFT is a messaging network and not itself responsible for the transfer of funds, any fees involved with a wire transfer are typically charged by the banks involved and not by the SWIFT network itself.
Type of payment rail: Global
Chances are you use a personal or business credit card on a daily basis. But do you know how these cards actually work? They depend on credit card networks that either process transactions themselves or partner with card issuers to do so.
The major credit card networks in the US (and globally) include Visa, Mastercard, and American Express. Other credit card networks also exist and may operate on a more regional basis; these include Discover in the US, China UnionPay (CUP) in China, and JCB in Japan.
These card networks facilitate electronic transactions between cardholders and various merchants or other payees. They communicate with banks electronically to determine whether to approve or deny individual transactions; if approved, the transaction is successful. Settlement typically occurs later, and involves a transfer of funds from the card’s issuing bank to the merchant or payee’s bank.
Type of payment rail: Global
Though relatively new, the role of cryptocurrencies as a legitimate form of global payment rails is growing. Popular cryptocurrencies such as Bitcoin and Ethereum are being used in more and more digital payments, and businesses are beginning to grow more comfortable with participating in a decentralized financial system.
This “decentralized” aspect of cryptocurrency is a core part of its appeal. Many popular cryptocurrencies rely on blockchain technology that functions as a kind of digital ledger, allowing a decentralized network of nodes to review and approve individual transactions within said ledger. This is in contrast to a centralized authority (like a bank) reviewing and approving transactions, as is the case with the credit card networks we talked about above.
Cryptocurrency has a lot of promise as a global payments concept, but it also has some difficulties. Trust is an issue, as several major crypto players have been charged with fraud in recent years. Price volatility and an uncertain regulatory environment are also concerns.
With that said, it’s unlikely that crypto will go away anytime soon, and the speed, security, and global utility promised by many cryptocurrency projects is difficult to ignore.
This is not an exhaustive list of payment rails, and other networks exist as well. These include:
Some of these are geographically limited or used for more specific purposes. CHIPS, for example, is a US-based payments system used primarily for large-value banking transactions.
Levro’s tools and products are designed to support payments across borders and currencies, because that’s what our clients need to grow their business. Our easy-to-integrate API supports an end-to-end payments experience that automates all processes and workflows from one central platform. What’s more, it seamlessly integrates with your accounting software.