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    November 9, 2023

    Payment rails: Everything you need to know about cross-border payment rails

    Cross-border payments today are fundamental pillars of international trade, investment, and personal financial interactions. FXC Intel forecasts that cross-border payment markets will grow by 43% by 2030. The seamless movement of money across borders relies on sophisticated mechanisms known as payment rails, which are integral to cross-border transactions.

    What are payment rails? 

    Payment rails are the underlying systems and networks that transfer money from one account to another. They can be categorized into domestic payment rails, which facilitate transactions within a country, and cross-border payment rails, which handle transactions across different countries. These payment systems play a critical role in global commerce by serving as the infrastructure that enables the movement of funds across borders.

    They enhance the digital transfer of money from one user to another regardless of currency, country, payment method, etc. For example, you can send money to your suppliers abroad from Africa in your local currency while they receive a payout in their preferred currency. This is made possible by cross-border payment rails as they make both simple and complex transactions possible. They're the backbone of global transactions, and without them, financial transactions won't be possible.

    How do cross-border payment rails work?

    Cross-border payment rails facilitate digital money transfers between countries and continents. They connect financial institutions and banks, enabling the transfer of funds between them. However, they differ from domestic systems due to the complexities of currency conversion, compliance with international regulations, and interoperability across diverse financial institutions.

    Payment transactions typically involve five key stages enabled by cross-border payment rails:

    1. Initiation: The payer starts the transaction by providing essential details, such as bank account information of both the payer and the receiver.

    2. Processing: The payment details travel across the rails, moving from the payer's bank to the designated payee's bank account.

    3. Authorization: The payee's bank receives and examines the information to verify the payer's identity, allowing for the authorization of the transaction.

    4. Settlement: The payer's bank proceeds to transfer the specified amount from the customer's bank account to the payee's account.

    5. Reconciliation: This stage marks the completion of the transaction, as the amount is credited to the payee's account and debited from the payer's account, finalizing the process.

    What are the different payment rails?

    1. SWIFT: The Society for Worldwide Interbank Financial Telecommunication (SWIFT)  is a popular payment rail worldwide. It is a global financial messaging network and cooperative organization facilitating secure and standardized communication and transactions between financial institutions worldwide. It communicates transaction orders between these institutions using SWIFT codes. SWIFT powers payment functions and does bulk credit transfers, cash management, and corporate-to-bank payment initiations. We wrote a detailed analysis of how SWIFT works in this article.

    2. PayPal: PayPal is a global payment rail streamlining transactions between parties via online transfers. It accounts for a substantial share of today's global payment transactions. PayPal enables users to create an account linked to their email, connecting it to their card or bank account. Once verification and funds validation are completed, users can initiate online or app-based transfers to and from other PayPal accounts. PayPal applies transaction payment processing fees that vary from 1.9% to 3.5% of the transaction amount.

      Today, PayPal is the most popular online payment processor globally, covering 75% of the market. It operates in more than 200 countries and has 210 million active accounts.

    3. Automated Clearing House (ACH): The ACH network is one of the popular payment rails worldwide for online payments. It facilitates funds transfer between US bank accounts utilized by businesses, consumers, and governmental entities. It is the predominant payment rail in the United States, facilitating a range of transaction categories like direct deposits, bill payments, and transfers.

      ACH transactions cost between $0.20 and $1.50 per transaction, depending on your location, the financial institutions used, and whether you’re making domestic or cross-border payments. Once a transfer request is initiated, the bank sends these details to the central clearing house in the ACH Network and the accounts will be debited or credited. Typically, this process spans 2 to 3 business days.

    4. Card network rails: Visa, Mastercard, and American Express, acting as credit and debit card issuers, utilise their exclusive payment networks as payment rails. When merchants connect their bank account with an entity like Visa, they can receive customer payments using Visa cards. Visa's payment network facilitates the connection between the merchant's bank account and the bank that issued the customer's card, allowing for seamless transaction processing.

    5. Cryptocurrencies and Blockchain: The blockchain network serves as a digital record of transactions and functions as the infrastructure for cryptocurrency transfers. Whenever a cryptocurrency transfer occurs, the transaction gets recorded across all computers involved in the blockchain network. This transaction undergoes validation, leading to the creation of a block that signifies it. Each block possesses a defined storage capacity. Upon reaching its limit, the block is sealed and connected to the preceding block, forming a chain of interconnected blocks.

    6. Single European Payment Area (SEPA): is a payment initiative across 36 European countries, including some non-eurozone and non-European Union nations, aimed at streamlining euro-based bank transfers. Entities within Europe, including countries, businesses, and governmental organizations, utilize the SEPA network for direct debit and credit transfer transactions, establishing SEPA as one of the most prevalent global payment methods. SEPA aims to render cross-border electronic payments as cost-effective and straightforward as domestic transfers.

    Factors to consider when choosing a cross-border payment rail

    Every payment network is tailored to specific circumstances. Some systems prioritize compliance with international regulations, while others emphasize delivering swift transactions. Businesses, governments, and consumers must consider several essential factors when selecting the most suitable payment rail for their transfers.

    1. Geographic limitations: Some payment rails cater to certain countries or regions, while others facilitate international transfers to almost any country. The location of the payer and payee is crucial when choosing a cross-border payment rail; for instance, the Single Euro Payments Area (SEPA) exclusively functions within European banks, while the Faster Payments Service (FPS) operates solely within the U.K. Those aiming to conduct payments beyond these designated zones must resort to other cross-border payment rails such as SWIFT.

    2. Average settlement time: Settlement time denotes the duration required to authenticate a transaction within a payment rail. While certain payment rails, like RTP, ensure immediate finality, most entail a processing period spanning several days. For instance, a typical ACH transfer requires 1–2 business days to complete. In contrast, cross-border payment rails such as SWIFT commonly exhibit longer settlement periods, with average processing times extending to five business days. So, consider choosing a payment rail that aligns with how quickly you need your funds to be sent and received.

    3. Security: Identify the risk of fraud exposure linked with each payment rail. While all payment rails incorporate specific security measures, it's crucial to assess whether these safeguards are adequate for the nature, scale, and frequency of the transactions you intend to send.

    4. Requirements: Various payment systems entail distinct prerequisites. Financial institutions often delineate these requisites. Inquiring about particulars, such as whether the payment platform accommodates cross-border transactions and the specific regions it serves, can offer valuable insights.