All businesses, no matter their scope or specialty, handle payments. The ability to do so is essential to the smooth running of any organisation, however, as basic as this concept may sound, the underlying infrastructure of payments can be difficult to grasp.

To the consumer, not much thought is given to the exact payment systems that facilitate their transactions, but to businesses, it is critical to their ability to operate. Indeed, the importance of a frictionless payment process cannot be understated – particularly for startups and SMEs that could find themselves significantly impacted by choosing the wrong payment rail, both from a convenience perspective and also financially.

So, what are payment rails, and how can businesses choose the right option to suit their needs?

What are payment rails?

The bottom-line is that payment rails are methods of transferring money between point A and point B. Crucially, all banks and financial institutions are connected by different rails, and these transactions can occur between one individual or one organisation to another, both domestically and internationally.

When a payment is initiated at the point of sale, data is essentially passed between entities. Specifically, this information includes customer account information, merchant identification numbers (MIDs) and instructions for financial institutions, to name but a few. Throughout the process, this data is supported by payment rails, which provide the backbone for payments, ensuring an accurate and timely movement of funds to their target account.

Naturally, all firms will differ in their specific requirements, and as such, there is a plethora of options to choose from when selecting a payment rail. Key areas for consideration should include an organisation’s geographic focus (where it is located, and with which countries it does business), while its available cash reserves should also be factored into any decisions, as smaller firms may need to prioritise faster and more nimble payment rails. 

Here, the specific settlement time of a payment rail is vital – this refers to the total elapsed time between a payment or transfer, and the successful arrival of funds into a designated account.

Choosing the right rail for your business

With the above in mind, it is important to acknowledge that all payment rails are not created equally. While some rails will process transactions instantaneously in domestic settings, they may not be the most appropriate choice for businesses processing a high number of international payments or larger transactions. Indeed, some payment rails will take multiple days to process, which may be an issue for smaller firms.

Therefore, to decide on the best rails for your organisation, businesses must first think about which organisations and consumers they are exchanging funds with and how widely a certain rail is accepted. Likewise, the technology required by each rail is an equally important factor, as well as any security and fraud concerns a business might have, and the additional fees associated with using specific rails.

The SWIFT network is perhaps amongst one of the best-known legacy payment rails on an international scale, allowing firms to make payments to any business in the world, given that they are part of the network. The network allows users to pay in a variety of currencies which is a clear advantage to firms operating internationally, although settlement times are likely to be longer, with transactions typically taking between 3-5 business days to clear and potentially higher costs involved.

For UK-based organisations, Faster Payments has set the benchmark for domestic payments, as businesses can settle transfers within seconds. That said, this rail is UK-focused and limited to payments under £250,000, so will not be suitable for all firms. 

Keeping foreign exchange (FX) and international payments in mind

For businesses considering international expansion, selecting the right payment rail is imperative. Indeed, the task of assessing new markets and demographics in different countries, while considering the security implications and potential costs that could be incurred along the way, can be difficult to grapple with, without the right technology and infrastructure to hand. 

For those making cross-border payments, high costs, limited transparency and security apprehensions are likely to pose significant obstacles. With SWIFT messaging fees, transaction and regulatory costs, and spreads on foreign exchange all to consider, the price of doing business internationally can quickly add up. Moreover, many intermediaries are typically involved in the process, meaning that each correspondent bank will need to be reimbursed.

APIs and AML: removing friction from the payments journey

With this in mind, businesses would do well to choose their rails wisely. Choosing a partner that offers simple API integration for example, can resolve many of these common pain points, allowing organisations to gain access to multiple markets at once and operate at numerous branches in real-time with instant FX conversion. 

Speaking from experience, at Vodeno, our clients may receive interbank rates and direct access to multiple EUROzone payment rails thanks to our partnership with Aion Bank who has a Belgian banking licence,  a branch licence in Germany, and two more branch licences in Poland and Sweden. Unlike other providers, our single API solution reduces costs for our clients and facilitates a faster and more frictionless payment journey, enabling organisations to collect money in local markets, local currencies and local rails.

Another important factor to consider when selecting a payments provider is its ability to deliver rigorous and agile Anti-Money Laundering (AML) capabilities and automatically select the most appropriate payment rail for any given transaction. Because these procedures typically require a high degree of forethought and labour when carried out manually on the business side, providers that can automate the process as part of the end-to-end process offer huge advantages to firms. By taking care of these tasks on their behalf, organisations can enjoy a much smoother payment journey and much shorter settlement times, safe in the knowledge that they need not worry about transactions causing cash flow issues.

The key for many organisations will be agility and keeping pace with the changing payment rails ecosystem as real-time payments expand geographically, providing more businesses with the opportunity to improve their cash-flow and help their working capital.

Tom Bentley is the Chief Commercial Officer of VODENO. Tom is an expert in the banking and financial services sector with more than 12 years of experience. Tom joined VODENO from Thought Machine where he was responsible for growing its business across Europe. Prior to Thought Machine, he held executive roles at banking software company, Temenos, across Asia and Australia, working with some of the most disruptive fintechs in the world.