The digital payments ecosystem is expanding as new payment rails emerge, such as FedNow and cryptocurrency. That fast pace of change can make it difficult to keep track of the latest payment innovations. This glossary lists and defines the language, technology, and stakeholders supporting each digital payment rail so you can stay up-to-date on the newest payment terms and their meanings.
Defining the major payment rails
ACH: ACH (Automated Clearing House) is a centralized system for moving money between financial institutions in the United States. The rail is managed by Nacha. About 93% of US workers receive their paychecks via ACH payments, also known as direct deposits. ACH transfers are most often used for smaller and more frequent transactions, while wire transfers are generally used for high-value transactions.
Card rails: Both debit and credit card transactions utilize card payment rails including Mastercard, American Express, Discover, and Visa to process and approve payments. Card payments are authorized immediately, but still take one to two days to settle.
Payment rails: Payment rails are the infrastructure that moves money from one party to another. All payment methods, from credit cards to Automated Clearing House (ACH) transfers, have rails.
Wire: Supports direct transfers between institutions that can be sent in local currency. The issuing bank or provider, like Western Union, guarantees the funds, and wires are generally irrevocable, so wire transfers are considered reliable. Wire transfers are typically used for larger transactions, like property sales.
Emerging payment rails
Cryptocurrency rails: A series of blockchain-based payment rails that can offer global accessibility, decentralized payments without third party control, and alternative investment opportunities.
FedNow: A real-time payment rail developed by the Federal Reserve and launched in July of 2023. FedNow settles consumer and business transactions through financial institutions' Federal Reserve accounts and operates 24/7/365, meaning it processes transactions on bank holidays, weekends, and after business hours.
RTP: A real-time payment rail offered by The Clearing House (TCH) since 2017. RTP operates 24/7/365, meaning it processes transactions on bank holidays, weekends, and after business hours.
Select rails used outside the US
Clearing House Automated Payment System (CHAPS): A rail used to make same-day payments within the UK.
The Single Euro Payments Area (SEPA): A payment rail managed, in part, by the European Central Bank where payments can be sent or received in euros.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT): A message network that sends payment instructions to financial institutions around the world. It’s popular for sending payments internationally.
To learn more, review the terms below which are organized by payment rail.
ACH key terms
ACH credit: An ACH credit payment occurs whenever someone instructs the ACH network to “push” money from their account to someone else’s. Examples include payroll, social security payments, or a peer-to-peer transfer solution such as Venmo. ACH credits typically take one day to process.
ACH debit: Any ACH transaction structured as an ACH debit "pulls" money from one account and moves it to another—such as from a consumer's personal account to that of a business or government agency. Examples include utility and mortgage payments taken directly from a customer’s account. ACH debits typically take 1-3 days to process.
ACH payments: ACH payments, short for Automated Clearing House payments, are made directly from one bank account to another, processed on the ACH network, and managed by Nacha. ACH payments can take from several hours to several days to settle and can, in many cases, be reversed, unlike other payment rails. They’re also bi-directional meaning that receivers can also send funds and senders can also receive funds.
ACH reverse: A reverse transaction that occurs when the payment originator requests their payment be returned, often due to a payment error.
ACH return: An ACH return occurs when an ACH payment cannot be completed for any reason, or when the payment initially settles but is later rejected. Essentially, it's the ACH payment equivalent of a bounced check. Common causes of ACH returns include insufficient funds, incorrect account information, fraud, errors, or if the account owner asks their bank to place a stop payment on the transfer.
Instant ACH: When a fintech or other financial services provider grants faster, or near-instant credit for funds to a customer, before the payment has actually settled. Plaid Signal supports instant ACH by identifying low-risk transactions and unlocking access to funds without increasing the risk of returns.
Non-Sufficient Funds (NSF): When a bank account has insufficient funds to cover a payment and the bank declines the payment. Banks often charge an NSF fee to the account holder that averages $34, according to the CFPB. Plaid Balance can protect against overdraft and NSF fees by providing visibility into available funds before a transfer is initiated.
Same Day ACH: Unlike standard ACH payments sent to a bank a day or two before their settlement date, Same Day ACH credits and debits settle on the same day they are initiated.
A Modern Guide to ACH
How to add ACH to your platform and reduce losses and risks
ACH infrastructure key terms
ACH operators: The entities that sort and deliver ACH transfer instructions between various banks involved in a transaction. There are two national ACH operators: the Federal Reserve Banks (through FedACH) and the Electronic Payments Network (owned by The Clearing House).
ACH Originator: The party that initiates or starts the ACH payment by entering it into the payment system. ACH Originators must obtain authorization from the receiver before transacting against their account.
ACH receiver: The account holder on the receiving end of an ACH transaction. ACH receivers authorize an Originator to debit or credit their account.
FedACH: An ACH operator and the automated clearing house (ACH) service of the Federal Reserve Banks. As one of two ACH operators in the United States, this system processes ACH transactions between financial institutions. It also processes a large number of government-issued electronic transfers, including Social Security payments.
Nacha: The governing body that oversees the ACH network and sets the operating rules and guidance for member banks and ACH participants. Plaid is a Nacha Preferred Partner and has been recognized for its leadership and innovation in advancing and promoting the safety of the ACH Network.
Originating Depository Financial Institutions (ODFIs): The banks initiating ACH requests. Each ODFI has a relationship with an ACH Originator. An ODFI is responsible for protecting ACH security and ensuring ACH returns are below an agreed-upon rate. The ODFI and RDFI are responsible for completing an ACH payment request.
The Clearing House (TCH): TCH is a payments company and a banking association owned by some of the world's largest commercial banks. It’s the only private sector ACH clearing house (through EPN), wire operator (through CHIPS), and real-time payments provider (through RTP).
The Electronic Payments Network (EPN): An ACH operator run by The Clearing House and the only private-sector operator in the ACH network. EPN is an automated clearing house (ACH) system that processes electronic payments between financial institutions.
The Federal Reserve: The US central banking system that supports ACH payments (through FedACH), wire transfers (through FedWire), and real-time payments (through FedNow).
Receiving Depository Financial Institutions (RDFIs): The banks receiving ACH requests. The RDFI must post the ACH transaction to the account listed in the payment instructions. They also report any return codes back to the ODFI. The RDFI and ODFI are responsible for completing an ACH payment request.
→ Plaid Transfer is a single API that can connect, authorize, and move ACH payments between 12,000+ financial institutions
Cards key terms
Acquiring bank: An acquiring bank, also known as a merchant bank, is where the merchant holds an account linked to their card transactions. As a licensed member of a credit card network, an acquiring bank is authorized to process credit and debit card transactions on behalf of a business. They route these payments through the card networks to the issuing bank.
Credit card: Credit cards allow users to purchase things by borrowing a small amount of money from a bank. The costs of using a credit card can include interest and fees, while benefits can include rewards for making purchases and the ability to build credit. Credit cards have a typical shelf life of three to five years because they can be lost, stolen, or expired. Bank accounts, on the other hand, are used for an average of 17 years. For this reason, many businesses prefer for their customers to pay by bank.
Debit card: Debit cards allow consumers to make online or in-person payments by taking money directly from their checking account. Debit cards can be used to access cash from ATMs, to fund digital wallets, and to transfer money to peer-to-peer apps like Venmo.
Issuing Bank: The bank that issues a card to the consumer or business.
Merchant: The store or other business involved in a card transaction.
Prepaid card: A prepaid card isn’t linked to a financial account; instead, it must be pre-funded with money before it can be used by a consumer. Prepaid cards can be especially useful for consumers who don’t qualify for a credit card due to a low credit score.
Push to debit card: A method of payment that sends funds to a consumer’s bank account through their debit card.
Virtual credit card: A virtual card-based payment instrument used for online purchases. Typically, a virtual card generates a random credit card number each time it’s used for a purchase as a security measure.
Wire transfer key terms
Fedwire: Fedwire, one of two major wire transfer clearing houses, processes domestic wires for banks that are part of the Federal Reserve system. Fedwire only operates on weekdays and excludes certain holidays.
The Clearing House Interbank Payment System (CHIPS): CHIPS, one of two major wire transfer clearing houses, is also one of the world's largest private payment clearing systems. CHIPS only operates on weekdays and excludes certain holidays. These transactions typically settle by the next business day.
Wire transfer: Domestic wire transfers are direct transfers between institutions that can be sent in local currency. During a wire transfer, a transfer institution, such as a bank, sends the receiving bank instructions through a secure settlement system, like the Federal Reserve Fedwire or the Clearing House Interbank Payment System (CHIPS), and guarantees the funds. Wires are generally irrevocable and often settle on the same day.
Real-time payments key terms
DDA Tokenization: Demand deposit account tokenization uses a secure token exchange as a way to mask sensitive account data for RTP and other payment types. The real DDA number is replaced by tokens with randomized account numbers and a dedicated routing transit number chosen by a Token Participant.
Document Exchange: An RTP capability that provides secure, standardized access to PDF or XML documents related to RTP payments or requests for payments.
FedNow: Launched in July of 2023, FedNow is a new real-time payment rail developed by the Federal Reserve. FedNow settles consumer and business transactions through financial institutions' Federal Reserve accounts. FedNow operates 24/7/365, meaning it processes transactions on bank holidays, weekends, and after business hours. It’s one of only two real-time payment options for US consumers and businesses.
Open loop payments: Payments made over shared networks like RTP, FedNow, and Zelle, that can work across the financial system.
Real-time payments: An instant payment system that supports consumers, businesses, and government entities in sending funds instantly 24/7/365, meaning it processes transactions on bank holidays, weekends, and after business hours. Real-time payments are provided by The Clearing House and FedNow and Plaid supports both solutions.
RTP: First launched in 2017, RTP is a real-time payment rail from The Clearing House. The RTP network includes over 350 banks and credit unions and reaches 65% of US demand deposit accounts (DDAs). RTP operates 24/7/265, meaning it processes transactions on bank holidays, weekends, and after business hours. It’s one of only two real-time payment options for US consumers and businesses.
Secure Token Exchange (STE): An optional capability on the RTP network that uses tokens in lieu of checking and deposit account and routing numbers when exchanging payments.
Token Participant: Financial institutions that participate in TCH’s DDA Token Service.
→ Learn how to access RTP and FedNow services with Plaid.
Cryptocurrency key terms
Blockchain: A secure, anonymous, and immutable ledger, or transaction record (financial or not). Unlike records held by banks or government agencies, for example, a blockchain is a public record stored in a digital “chain” containing blocks of data that record all past transactions. Payments made with blockchain cannot be reversed.
Cryptocurrency: Cryptocurrency, such as Bitcoin or Ether (Ethereum), is a digital currency on the blockchain network created using encryption algorithms. Cryptocurrency is verified and maintained by a decentralized system rather than a centralized entity like a government or a bank. Leading exchanges and digital asset investment platforms, including Gemini, Robinhood, and SoFi, are supported on the Plaid Network.
Digital currency: Any form of payment that exists in an electronic form rather than physically. Digital currency is primarily managed, stored, and exchanged digitally, typically via the Internet.
Hardware wallet: A hardware wallet is a physical device used to store cryptocurrencies and private keys offline. Typically, hard wallets are more secure because they’re only connected to the Internet during a cryptocurrency transaction and often require a PIN or biometric authentication to access.
Software wallet: A software wallet stores cryptocurrencies and private keys in a desktop, mobile, or online format. Consumers can easily access and transact with cryptocurrencies stored in a software wallet, however, they can be vulnerable to cyber attacks.
Payment processing key terms
Some payment terms are used across multiple payment rails. Here we define some of the key terms related to payment processing and different types of payment transactions.
Authentication: The process of verifying that a user is who they claim to be and has the ability to access a requested account. A user can be authenticated by entering online banking credentials (username/password) and verifying microdeposits, but that process can take several days. Plaid Instant Auth gets customers up and running quickly and securely by verifying their bank accounts in seconds.
Authorization: The process of establishing which permissions the user has granted to a third party. For example, a user might authorize a financial services app to access their bank transaction history or might authorize a business to debit their bank account to pay a bill. Plaid Link integrates OAuth, a secure industry-standard framework for authorization, providing a better user experience and increasing conversion.
Digital payment receipt: An electronic proof of payment sent to a user’s phone or email. These are also referred to as an electronic or e-receipt.
Digital wallet: A method to digitally store payment methods including cash, digital currencies, plus credit and debit cards. Digital wallets can also store other digital assets such as store gift cards, event tickets, and loyalty cards.
Instant payouts: A way to pay individuals and businesses as soon as a job is completed or funds are due. Instant payouts methods include real-time payments, push to debit card, virtual credit cards, and remote printing of a paper check. Plaid Instant Payouts supports real-time payments using both RTP and FedNow.
Money transmitters: Entities that engage in the business of accepting and transmitting funds. Money transmitters are strictly regulated at the federal and state levels to prevent money laundering and other financial crimes.
Multi-rail payment solutions: These solutions allow financial services providers to select different payment rails, depending on their needs. For example, a provider may want to pay suppliers using ACH but deliver payroll more quickly, using real-time payments. Transfer is a multi-rail solution that supports ACH, RTP, and FedNow payment rails
Payment acceptance rate: The percentage of accepted transactions compared to all attempted transactions. A high payment acceptance rate can indicate a low friction payment experience.
Payment gateway: A service that authorizes online or in-person card payments, online wallets, and other payment methods. Many payment gateways, such as Stripe and PayPal, are also payment processors.
Payment initiation: Open banking payment initiation occurs when a consumer allows third parties to connect and authorize payments from that consumer’s bank account.
Payment processor: A vendor that transports payment data from an online or physical point of sale to the appropriate payment network (e.g. American Express) and sends an approval decision back to the business.
QR code payment: When consumers pay by scanning a code with their smartphone that leads them to a page where they can enter their payment information.
Other key terms for digital payments
Account-to-Account (A2A): The transfer of funds between two accounts typically owned by the same consumer, either at the same financial institution, or at two different institutions. A2A payments include transferring money from a bank account to a brokerage account or payment platform like Venmo, CashApp, or Zelle.
Bi-directional payments: Payment methods that allow receivers to also send funds and senders to also receive funds.
Biometric payments: Payments that authenticate or confirm the identity of the user, with physical characteristics such as a facial image, voice recording, or fingerprint image. Plaid Identity Verification supports the use of biometric identity verification. For example, consumers can record short video selfies to confirm that they are present, live, and that their face matches the picture on their ID document.
Business-to-Business (B2B): Transactions between businesses, such as payments to suppliers, vendors, or service providers.
Business-to-Consumer (B2C): These are payments made by a business to a person, such as payroll, customer refunds, or insurance disbursements.
Business-to-Government (B2G): Payments from a business to a government entity, such as tax payments or business licenses.
Buy now pay later (BNPL): BNPL providers, like Klarna and Afterpay, allow consumers to make a purchase and pay for it over time. BNPL providers typically don’t charge interest unless a payment is missed or late.
Closed loop payments: Payments that require both the sender and the receiver to have an account with a specific provider to transact. Store credit cards and gift cards are examples of closed loop payment methods.
Consumer-to-Business (C2B): Payments made by an individual to a business, such as payments for gas, utility bills, or restaurant meals.
Consumer-to-Government (C2G): These are payments made by an individual to a government entity. Examples would include tax payments or business licenses.
Embedded payments: These are payment features integrated within an app or platform that can often seem invisible to a consumer. Some embedded payments can be used virtually anywhere, such as Apple Pay or Google Pay, while others can only be used within a single in-app experience, like the Starbucks app.
Government-to-Consumer (G2C): These are payments made by the government to consumers, such as tax refunds, Social Security benefits, or stimulus payments.
NFC payments: NFC payments are contactless digital payments that allow consumers to “tap to pay” at a point-of-sale (POS) terminal or card reader. These payments use short-wave radio near-field communication technology to send messages between a mobile phone or tablet and an NFC-enabled payment terminal.
Payment churn: Payment churn occurs when customers stop paying for a subscription service. Churn can be voluntary when a consumer decides to cancel their video streaming service or digital newspaper subscription. It can also be involuntary when there’s a payment failure, such as an expired credit card or insufficient funds.
Peer-to-peer payments (P2P): Payments made between family or friends, typically for things like reimbursements or other small payments. Apps like Venmo, CashApp, and Zelle often manage P2P payments.
Platform payments: Payments integrated into a platform or marketplace, often managed by an intermediary that connects buyers and sellers, such as eBay. Plaid Platform Payments (beta) APIs provide a scalable method to onboard new end customers, or Originators, onto your platform.
What are payment rails and how are they evolving?
FedNow is the Federal Reserve’s 24/7, instant payment rail. Learn how it works and how it differs from other payment options.
Learn how ACH and wire transfers differ in terms of speed, settlement, cost, size, and more. Plus, find out how they’re both changing in the future.