Aging payment rails is not a new problem for the U.S. banking infrastructure, but Silicon Valley Bank’s collapse put it in the spotlight, especially for payment companies that had their payment rails with the bank.
A payment rail is a network for how payments move from the payer to the payee. We’ve seen newer rails emerge in recent years, for example, the blockchain, and within the consumer realm with peer-to-peer payments via apps like PayPal, Venmo and Zelle. Most of the payments occur in real time.
Airbase was one of those fintech companies that had its payment rails with SVB. CEO Thejo Kote told + that the company had to scramble to help customers make sure their payroll and vendor payments were able to resume and also remain secure.
Current payment rails, particularly in the U.S., are decades old, created long before digital payments became a way of life. In recent years, financial technology companies have built rails on top of existing infrastructure, for example Stripe, Plaid and the like, but it takes years and millions of dollars to do it. Visa, too, recently partnered with PayPal, which also owns Venmo, and others to help people make digital payments regardless of which app you use.
But even with this technology, some fintech founders say decentralized finance rails built on the blockchain could be a better answer. Especially as building on the current aging payment rails is expected to increasingly be a problem. This Finextra article notes, “as time goes by and the payments industry moves increasingly to micro, international, immediate payments with volumes that will be orders of magnitude greater than today, these problems will get a lot more visible.”
“It’s definitely archaic at this point, and it is a pretty slow kind of method of moving money, but it is also the most prevalent and popular kind of payment network in the U.S. when you’re moving money from bank to bank. There is a bunch of innovation happening right now, so there is a real-time payment craze coming up,” Kote said, referencing the Federal Reserve’s new FedNow Service. It’s set to launch in July and promises faster payment rails for financial institutions.