Introduction
The financial system is undergoing a structural transformation that is changing how money is moved, processed, and settled globally. Historically, it was the traditional banks that stood between all money transfers, managing and controlling access to the system’s architecture and making themselves essential intermediaries to all digitized transactions. Now this whole approach seems to be getting turned on its head through the work of fintech firms and the development of new “payment rails.” It is becoming increasingly common for such firms in nations such as India, the USA, and elsewhere around the globe to have more access to the payment rail systems.
Understanding Payment Rails
Payment rails can be defined as the infrastructure through which money moves from one account to another. Without these, no electronic transaction would be possible, thus making it a crucial aspect of payments. Essentially, payment rails can be described as the “transport system” of money. Traditional payment rails include the Automated Clearing House (“ACH”) in the US, Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) in international payments, Single Euro Payments Area (“SEPA”) in the EU, as well as card networks such as Visa and Mastercard. While traditional rails are highly effective and trusted by many, they are typically inefficient and costly, particularly when dealing with cross-border payments.
On the contrary, modern payment rails allow for instant and affordable transactions. This includes payment rails such as India’s Unified Payment Interface (“UPI”), the United States’ FedNow system, the UK’s Faster Payments service, and Brazil’s Pix. Today, all these new payment rails operate 24 hours per day and have completely changed the game when it comes to domestic payments. Moreover, there are many other new payment rails that make use of blockchain technology, such as cryptocurrencies like Bitcoin and stablecoins like USD Coin (“USDC”) and Tether USD (“USDT”).
How Payment Rails Work
Although technology varies, payment rails generally operate in a structured and uniform process:
- Initiation of Transaction: The process begins when a payment is initiated by an individual or an organization. This could be through a mobile app, bank transfer, or any digital payment platform where the payer authorises the transaction.
- Transaction of Payment Instruction: The payment instruction is then transmitted using the chosen payment rail. In this case, the instruction travels using the underlying infrastructure of finance used to link payment systems and banks.
- Clearing of the Transaction: This stage involves validation of the transaction details by the involved banks. This entails confirming if the information regarding the account numbers is correct and if there is enough balance on the payer’s account for the completion of the transaction
- Settlement of Funds: In this stage, funds move from one bank account to another. This happens through the relevant payment system. The transaction is now settled.
- Reconciliation of Accounts: This is the last stage of a financial transaction. Here, records of the transaction are updated.
How Are Fintech Companies Getting Access to India’s Payment Systems?
One of the developing trends in the financial market environment in India is that fintech companies now have more access to the core payment systems like UPI and any other RBI-approved payment rails. Before this development, fintech companies would only rely on banks to conduct their business operations as they only operated as an application layer through which they provided payment applications to customers.
Currently, fintech companies are increasingly obtaining regulated access to payment infrastructure through structured frameworks, partnerships, and RBI-authorised arrangements, rather than through unrestricted direct participation in core systems. This shift enables smoother payment experiences, reduced operational friction, and increased competition within the financial sector.
However, expanded participation also places fintech entities under heightened regulatory scrutiny and may require adherence to compliance standards applicable to payment ecosystem participants.
Policy Discussions and the Future of Fintech Access to Payment Systems
These developments are not unique to India, but similar developments are taking place even in the US. Under this act, eligible fintechs will be allowed to use the Federal Reserve’s payment infrastructure, including Fedwire, FedNow, and ACH.
Policymakers and regulators have explored frameworks that may enable broader fintech participation in payment infrastructure while preserving financial stability and regulatory oversight. Discussions around access to systems such as FedNow and other payment networks reflect a broader effort to balance innovation with prudential safeguards. Such proposals generally contemplate rigorous supervision, licensing requirements, and compliance obligations aimed at protecting the integrity of the financial system. This reflects an emerging global trend that seeks to permit innovation while maintaining strong regulatory controls.
How Payment Systems Around the World Are Becoming More Connected
Apart from domestic payment systems, fintech enterprises are increasingly working toward more integrated international payment networks designed to facilitate seamless global transactions. Traditionally, cross-border payments relied heavily on SWIFT networks, which often involved multiple intermediaries and could increase costs and processing time.
Modern fintech companies are increasingly leveraging combinations of SWIFT, UPI, card networks, and blockchain-enabled systems to optimize payment routing. Integration into payment rails can facilitate real-time transaction routing based on considerations such as cost, speed, and efficiency. Certain blockchain-based payment systems may facilitate faster settlement in particular use cases, especially cross-border transactions, although settlement speed varies across different blockchain networks and transaction conditions.
Variations in Digital Payment Adoption
Despite rapid technological growth, adoption of digital payment systems continues to vary across different regions. Studies indicate that digital payment usage, including UPI adoption, can differ across Indian states due to factors such as demographics, consumer behaviour, digital literacy, transaction patterns, and local preferences.
These differences suggest that digital payment adoption is influenced by multiple behavioural and socio-economic factors rather than solely by income levels or economic development.
Payment Rail Integration Challenges
Several issues emerge when payment rails begin to adopt fintechs. Fragmentation in regulatory compliance is experienced because of differences in policies in various jurisdictions, particularly on issues like anti-money laundering policies and data privacy concerns. In addition, security threats continue to be a concern because many different players can access sensitive financial networks, and thus, strong security measures need to be put in place.
Another challenge involves the technical nature of integrating different rails, which involves advanced technologies such as Advanced Application Programming Interface (“API”).
Trends in Payment Systems
Emerging trends include increased interoperability, faster settlement mechanisms, and greater automation in payment routing. Organizations are increasingly adopting multi-rail strategies where transactions are routed dynamically according to speed, cost, and efficiency considerations.
Digital money and blockchain technologies may also provide opportunities for improved international settlement mechanisms. As payment systems continue becoming more interconnected, movement of funds across institutions and platforms is expected to become increasingly seamless. The distinction between traditional banking services and fintech-driven offerings may continue to narrow as financial ecosystems become more integrated.
AMLEGALS Remarks
There is a paradigm shift in the payment’s infrastructure of the world from a model based on banks to a more interconnected and tech-enabled one. Financial technology firms are no longer restricted to being service providers, rather, they are increasingly playing a role in the backbone of the financial system. Payment rails that were previously hidden elements of any financial ecosystem are now becoming key to conversations around competition, innovation, and regulatory measures.
For any queries or feedback, feel free to connect with dhwani.tandon@amlegals or hiteashi.desai@amlegals.com