Payment rails 101: What they are and how they work

Key takeaways:

Payment rails are a critical piece of the puzzle when you’re looking to integrate account withdrawals and fund transfers for your customers. But what are they?
Payment rails enable the movement of funds between individuals, businesses, and financial institutions. Common examples include ACH, FedNow, RTP, Visa Direct, and MasterCard Send.
A few use cases for payment rails include enabling account funding for neobanks, earned wage access for workers, automatic loan disbursement for qualified borrowers, and ensuring payouts are quick and seamless in a rewards program.
Plug and play payment solutions like Astra can help you deploy payment rails in your platform without building complex integrations yourself.

What are payment rails and why should you care about them? If you’ve been exploring ways to enable fund transfers for your clients, you’ve probably stumbled across this term.

Payment rails are a critical piece of the payments puzzle. By understanding what they are and how they work, you can figure out how you can tailor your platform to deliver the experiences your customers want.

In this article, we’ll cover everything you need to know about payment rails, including:

What are payment rails?
The different types of payment rails
Examples of companies that have used payment rails to grow
How to integrate payment rails with Astra’s full-stack payments API

What are payment rails?

Payment rails refers to the underlying technology or channel that enables the movement of funds between parties in a financial transaction.

For example, let’s say that your users have received funds on their dashboard that they wish to withdraw to a bank account. This withdrawal will take place via a payment rail. Some examples of payment rails are ACH, FedNow, and RTP.

A multi-rail payment strategy refers to you offering multiple payment rails on your platform. By doing this, you can:

Offer multiple payment options based on priorities like speed, cost, and security.
Build resiliency against disruptions in a single payment rail.
Support a wider range of payment methods like cards, wallets, and bank accounts.

4 types of payment rails in the US

Each payment rail has different characteristics in terms of speed, cost, technology required, cross-border capabilities, and fraud considerations.

Here are the most popular ones:

ACH
FedNow
RTP
Card company networks

Let’s look at these in more detail:

ACH

ACH or Automated Clearing House, is an electronic funds-transfer system that facilitates payments in the United States (US). It is run by an organization called the National Automated Clearinghouse Association or NACHA.

ACH transactions allow the electronic transfer of money between banks without using paper checks, wire transfers, credit card networks, or cash.

Here’s an overview of how ACH works:

The Originator (an individual, business, or organization) initiates an ACH transaction with their bank, known as the Originating Depository Financial Institution (ODFI).
The ODFI aggregates ACH transactions into batches and transmits them to an ACH Operator (either the Federal Reserve or The Clearing House) at predetermined times throughout the day.
The ACH Operator sorts the batched transactions and makes them available to the Receiving Depository Financial Institution (RDFI).
The RDFI receives the transaction, posts the debit or credit to the appropriate account, and notifies the Receiver (the individual or organization receiving the transaction).
Funds are settled between financial institutions through the Federal Reserve.

Pros of ACH

Transfers happen within the next business day after initiation.
ACH can be used for recurring billing and is less time-consuming than paper checks.
ACH is cheaper compared to wire transfers or push payments. Institutions usually charge a flat fee (20 cents to $1.50) or between 0.5 to 1.5% of the transaction volume.

Cons of ACH

Many banks impose per-transaction, daily, weekly, or monthly limits on ACH transactions. While amounts vary, banks impost a $10,000 monthly and $1,000 daily limit on ACH transfers.
ACH is a US-only system, making it impractical for international merchants.
ACH is slower compared to some of the other payment rails highlighted below.

FedNow

FedNow is a new instant payment service launched by the Federal Reserve in July 2023. With FedNow, customers can send and receive payments within seconds, even on weekends.

Here’s how FedNow works:

The sender (an individual or business) initiates a payment with their financial institution.
The sender’s financial institution submits a payment message to the FedNow Service.
The FedNow Service validates the payment message format and compliance with applicable controls and sends it to the recipient’s financial institution to seek confirmation.
The recipient’s financial institution sends an “accept” response to the FedNow Service, confirming it will accept the payment.
The FedNow Service settles the payment by debiting and crediting the master accounts of the sender’s and recipient’s financial institutions.

Pros of FedNow

Transactions clear and settle in real-time every day of the year.
Opens up instant payment services to more financial institutions, including neobanks.
Transaction costs are generally lower than card transfers. A credit transfer costs $0.045 per transfer, with the institution incurring a $25 monthly subscription fee.

Cons of FedNow

FedNow transactions are irrevocable. This means a transfer initiated by mistake cannot be reversed.
You can use FedNow only to execute push transactions. Executing a pull transaction (such as a direct debit) is not possible right now.
Your ability to access FedNow depends on financial institutions adopting it. As a result, your ability to offer this rail to your customers depends on your financial institution.
FedNow is restricted to US payments only.

RTP

RTP (Real-Time Payments) is a new payment rail in the US that enables instant transfer of funds between bank accounts. It was launched in 2017 by The Clearing House (TCH).

Here’s an overview of how RTP transactions work:

The sender initiates a payment with their financial institution.
The sender’s bank creates an RTP Credit Transfer message containing the payment details and sends it to the RTP network for routing.
The RTP network validates the Credit Transfer message format and compliance with applicable controls.
If the message passes validation, the RTP network forwards it to the recipient’s bank.
The receiving bank confirms the message, accepts it, and makes the funds immediately available to the recipient.

Pros of RTP

RTP Transactions clear and settle in real-time.
Costs are generally lower than wire transfers, just $0.01-$2 per transfer unlike $25-$50 for wire.
RTP offers detailed payment messaging, giving you access to better fund traceability.

Cons of RTP

Like FedNow, offering RTP as a rail depends on your financial institution. Since adoption is not widespread, you may find it unavailable at most banks.
RTP only facilitates push transactions, with no means currently available for executing a pull transaction.
RTP transactions cannot be reversed.
RTP is a US-only payment system, making it impractical for foreign merchants.

Card company networks

Card companies like Visa, Mastercard, American Express, and Discover operate payment networks that your merchants can use to move funds. Visa Direct and Mastercard Send are two of the biggest payment networks in the world currently.

Here’s how card networks work:

A user initiates a payment request through an app or website integrated with the network.
The transaction details are authenticated using the card company’s secure network.
The network processes the transaction, utilizing the card network to transfer funds. It routes the transaction to the recipient’s card account through its global payment system.
Funds are transferred to the recipient’s account, often within 30 minutes.

Pros of card networks

Offer real-time or near-real-time money transfer capabilities.
Card network payments are largely guaranteed. This means funds virtually always reach the recipient as long as the network approves the transaction.
Leverages card companies’ vast global network, reaching billions in over 190 markets.
Card networks offer advanced security protocols and strict compliance controls. Transactions on them are reversible.

Cons of card networks

Card network transactions are more expensive than ACH, FedNow, or RTP transfers. Fees range from 1.5-3.5%.
Due to their popularity, card network transactions experience significant volumes of fraud. Chargebacks and friendly fraud prevention cost companies using this rail significant resources.
While card transactions are quick, your merchants might not always be able to transfer them into their bank accounts. Withdrawing large amounts to a card is also impractical, making it an unattractive proposition for large merchants.

Payment rails summarized

	ACH	FedNow	RTP	Card networks
Pros	Enables low-cost electronic transfers between bank accounts in the US.	Real-time bank transfers within the US, but doesn’t cost as much as card transactions.	Transactions happen in real-time between bank accounts, while still remaining affordable.	Secure, instant, two-way card transactions powered by the global card networks.
Cons	Transfers aren’t real time, plus your bank will impose limits on transaction volume.	FedNow transactions are irreversible and offering them to your merchants depends on your financial institution adopting them.	Works only in the US. Even then, not every financial institution enables RTP.	Fees are high and this option is impractical for large ithdrawal amounts.

Examples of payment rails in action

Here are few ways vertical SaaS companies have used payment rails to grow their businesses:

Automatic loan disbursement for fintech

OnDeck, a fintech platform offering loans to small businesses, needed to get funds into its users hands quickly. Using Visa Direct, OnDeck installed instant push payments to deliver funds to recipients’ debit cards.

The result was more growth for OnDeck and happier users thanks to instant fund availability.

Instant payouts for rewards programs

Fold is a neobank that offers a rewards-based debit card that lets customers earn fractions of a Bitcoin. To enable faster fund transfers and access, Fold leverages an instant funding solution that allows users to transfer funds from external debit cards to their Fold accounts.

After implementation, 92% of Fold transfers have achieved a T+1 settlement speed. In addition, Fold’s user base has grown, with transfer volume increasing by 200% over 60 days post-implementation.

Integrating payment rails into your vertical SaaS platform

What is the best way to integrate payment rails to your platform? You could work with a payment gateway, but gateways are not suited for platform growth.

A payment processor can help you integrate different rails onto your system quickly, but you might still have issues with preventing fraud, ensuring instant payouts to merchants, and offering transparent fund reconciliation reporting.

A plug-and-play payments platform like Astra is built to help vertical SaaS platforms grow. Here’s how:

Astra connects you to the payments landscape instantly. Learn how Astra and you fit into this ecosystem.
The payments world is complex. Astra protects and assists you with the unknown unknowns such as chargeback handling, fraud prevention, and compliance reporting.
Astra gets you up and running quickly. With fast implementation, you can roll out features to your merchants quickly, helping you differentiate your product in the marketplace.

Companies like Cloudtrucks and Splitwise rely on Astra to facilitate real-time money transfers at scale. Book a demo to see us in action.

Payment rails 101: FAQs

What does “rails” mean in banking?

Payment rails refers to the underlying technology or channel that enables the movement of funds between parties in a financial transaction.

What are the payment rails in the US?

The four main payment rails in the US are:

Automatic Clearing House (ACH)
FedNow
Real-time Payments (RTP)
Card company networks (like Visa, Mastercard, American Express, etc)

Each of these has their own unique advantages in terms of speed, security, and cost per transaction.

What is the difference between payment gateway and payment rails?

A payment gateway is a software platform that securely transmits payment data from the customer to the payment processor. Payment rails, on the other hand, refer to the underlying infrastructure and networks that facilitate the actual transfer of funds between parties like banks, merchants, and customers.

What are multi rail payments?

Multi-rail payments refer to a strategy where businesses integrate and offer multiple payment methods or “rails” to their customers, rather than relying on a single payment option. This builds resiliency into a payment platform, allowing customers to have multiple options for processing payments.