What are Payment Rails

Payment rails refer to the technology and underlying infrastructure used to facilitate payments between two entities.

Examples

The most common payment rail used by financial institutions is Society for Worldwide International Financial Telecommunication (SWIFT). SWIFT is a messaging network used by more than 11,000 banks globally to facilitate payments. Payment details are encapsulated in the SWIFT format and then executed on the SWIFT network. SWIFT makes use of correspondent banks to link payments together. This means that a payment may go through a couple of hops via correspondent banks before it reaches its final destination.

An upcoming alternative to SWIFT is Ripple. Ripple has a payment network called RippleNet which uses blockchain and distributed technology to along banks to settle payment among themselves. This reduces the need for payments to go through correspondent banks and largely reduces the risk of inadequate know-your-customer (KYC) and anti-money laundering (AML) failures of the foreign correspondent bank.

When we pay with credit cards, payment rails are also used at the backend. Some examples include Visa, Mastercard, AMEX, and UnionPay. These are commonly used to settle payment to merchants and collect payment from end consumers.

In addition, there are also local payments rails such as Unified Payments Interface (UPI) in India, Fast and Secure Transfers (FAST) in Singapore, and HKD Clearing House Automated Transfer System (CHATS) in Hong Kong.

The Future of Payments

Increasingly, there are many local payment rails and this leads to legacy issues and a fragmentation of the market. In Singapore alone, the national payment systems are MAS Electronic Payment System (MEPS), FAST, General Interbank Recurring Order (GIRO), Network for Electronic Transfers (NETS). There are also numerous systems by corporates such as EZ-Link.

With the many payment rails available, it is difficult for third parties to navigate the landscape and ensure interoperability. This is not forgetting the different security standards and conventions used by the different gateways.

There is a need for a common payment user interface for third parties to link to. Enter India’s UPI. It is a payment interface that ensures interoperability and backward compatibility between two entities. Moreover, it allows for users to be authenticated and payments to be made via existing rails. This is a responsible step towards financial inclusion and opens up the potential for third party apps to deliver more innovative solutions for customers.