For consumers, payments can be as easy as the dip of a credit card, a tap on a smartphone, or the touch of a “Pay Now” button. The ease of these transactions belies the complex architecture that makes modern payments so fast and effortless.
When a payment is initiated online or at the point of sale, an intricate flow of information and instructions is passed between entities. This information includes customer account information, merchant identification numbers (MIDs), and instructions for financial institutions, just to name a few. The flow of this data is supported by established networks, commonly referred to as payment rails, that ensure the correct flow of funds between businesses and consumers.
Payment rails were established to transmit this information quickly and accurately, resulting in the speedy payment transactions that consumers have come to expect. What are these payment rails, and how do they work? This blog looks closer at four payment rails commonly used for payment transactions in America – the ACH network, card networks, The Clearing House’s RTP® network, and the FedNow® Service.
ACH
ACH is an acronym for Automated Clearing House, and it has a long history of facilitating transactions between merchants, consumers, and financial institutions. It’s one of the most used payment rails in the U.S., having handled 597.6 million Same Day ACH payments valued at $1.78 trillion in 2023. This is an increase of 42.4% compared to the first three quarters of last year.
ACH can be used for both credits (direct deposit of payroll, for example) and debits (including mortgage, loan, and utility bill payments). It’s also being leveraged to power popular peer-to-peer (P2P) payment solutions like Zelle®, Venmo, and Square Cash. Users can either link their bank accounts directly or access them using an alias (email address and/or phone number). Using an existing payment rail like ACH has allowed these solutions to thrive because they can leverage an established, reliable payment rail without building it themselves.
Card Networks
Card networks are payment rails maintained by four major brands–American Express, Discover, Mastercard, and Visa. Much like ACH, they are established networks with infrastructure, rules, and regulations that allow payment transactions to run smoothly between parties (card issuers, consumers, merchants, acquiring banks, and the card networks themselves). Unlike ACH, these networks also supply branded plastic cards that consumers can use to make payments. The widespread issuance of these cards, plus global marketing campaigns, have made the card networks some of the most recognizable brands in the U.S.
The card networks are also evolving to support new payments technology. Push-to-card is one way that companies leverage card networks as payment rails to send money to consumers, flipping the traditional flow of consumer-to-merchant card payments. Both Lyft and Uber have introduced push-to-card solutions (Lyft Direct and Uber Instant Pay) that allow drivers to receive their earnings directly to a debit card for a small fee. More companies are expected to adopt push-to-card solutions as consumers shift away from paper checks and toward digital disbursements. Thanks to the ubiquity of their plastic payment cards, card networks are an attractive payment rail for businesses that want to offer fully digitized transactions to a broad range of consumers.
The Clearing House – RTP
One of the newest payment rails is The Clearing House’s RTP network. It launched in 2017 with the goal of bringing real-time payments to the U.S. Consumers can use the network to send, clear, and settle payments in a secure environment designed to make payments more efficient. RTP is unique from ACH and the card networks in many ways, the most obvious being its relative youth. Currently, no mandate requires U.S. banks to use RT, but according to this publication, real-time payment capabilities are accessible to financial institutions that hold 90% of U.S. demand deposit accounts (DDAs), and the network currently reaches 65% of U.S. DDAs.
Federal Reserve – FedNow® Service
FedNow is the Federal Reserve’s new instant payment rail which provides bank payments that settle in real time. The system’s pilot program began in January 2021 and officially launched in July 2023 with the participation of 41 banks and 15 service providers. This service has been introduced to support the growing demand for instant payment services in the U.S. Catering to U.S. depository institutions, this service offers near real-time, 24/7/365 interbank clearing and settlement. With FedNow, consumers and businesses can engage in end-to-end payment processing within a secure and efficient infrastructure. Distinct from traditional payment rails like ACH, FedNow offers continuous payment and settlement, reflecting the evolving expectations of the digital age. While there’s currently no mandated adoption for U.S. banks, the momentum gained from its launch and the Federal Reserve’s promotion of the system underline its potentially pivotal role in the future U.S. payments landscape.
The Bottom Line: Payment rails work behind the scenes to facilitate payments between businesses and consumers. Some are new, and others have existed for decades, but they’re all used in imaginative ways to support traditional payment flows while facilitating up-and-coming payment technology.
Click here to see how U.S. faster payment channels and their respective advantages compare.
*This is an update on an original post published July 2019
Alacriti’s centralized payment platform, Orbipay Payments Hub, provides innovation opportunities and the ability to make smart routing decisions at the financial institution to meet their individual needs. Financial institutions can take full ownership of their payments and control their evolution with ACH, Wire, TCH’s RTP® network, Visa Direct, and the FedNow® Service, all on one cloud-based platform. To speak with an Alacriti payments expert, please contact us at (908) 791-2916 or info@alacriti.com
