Posted by Alison Arthur on 30 Jul 2019
For consumers, payments can be as easy as the dip of a credit card 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 are 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 takes a closer look at three payment rails commonly used for payment transactions in America – the ACH network, card networks, and The Clearing House’s RTP® network.
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 US, having processed approximately 23 billion payments in 2018.
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 needing to build it themselves.
Click here for a deeper dive into ACH, including an infographic of the parties involved and how information flows between them.
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 US.
The card networks are also evolving to support new payments technology. Push-to-card is one way that companies are leveraging the 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 Express Pay 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 was launched by The Clearing House in 2017 with the goal of bringing real-time payments to the US. Consumers and businesses can use the network to send, clear, and settle payments in a secure environment that’s 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, there is no mandate that requires US banks to use RTP, but TCH’s senior management anticipates that RTP will reach near-ubiquity by 2020.
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 being used in imaginative ways to support traditional payment flows while facilitating up-and-coming payments technology.