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Payment Systems
Large value transfers of funds are usually done over systems about which most citizens are unaware and few have direct contact.  These systems are used to move enormous dollar amounts daily by electronic means.


The Fedwire funds transfer system is a real-time gross settlement system in which about 8,500 depository institutions initiate transfers of funds that are immediate, final, and irrevocable when processed.  Depository institutions that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire to send payments to, or receive payments from, other account holders directly. 

Depository institutions use Fedwire to handle large-value, time-critical payments, such as payments for the settlement of interbank purchases and sales of federal funds; the purchase, sale, and financing of securities transactions; the disbursement or repayment of loans; and the settlement of real estate transactions 


The Clearing House Interbank Payment System (CHIPS) is the electronic equivalent of payment by check.  As of April 2008 this system linked 46 banks with branches in New York to a central computer, clearing and settling about 350,000 transactions per day with an average total value in excess of $2 trillion.  Most payments over CHIPS are related to the foreign exchange and Eurodollar markets.

As an example, suppose a British bank needs to pay a French bank $100 million in U.S. dollars.  The British bank executes the payment through its branch in New York if it has one, or through a New York bank with which it has a deposit.  The payment is made over CHIPS to the New York branch of the French bank if it has one, or to a New York bank at which it has a deposit. 

As with the check clearing process, payments are netted to minimize the amounts needed to settle.  The CHIPS computer keeps track of each bank's net position relative to all other banks on the system.  At 4:30 PM each day, the CHIPS computer sends each bank a summary of its payments for the day and its final net position.  Each bank with a net debt must transfer funds to a special account at the Fed.  At 6:00 PM, banks that are owed money receive payment out of the special account. 

As with a checking account, there is a danger that a bank may not have sufficient funds to settle at the end of the day.  If that happens, all banks to which it owes money would remain unpaid.  Strict rules are imposed on the participating banks to minimize this possibility.  If a bank does fail during the day, CHIPS has a loss sharing arrangement in which the other banks must cover the failed bank's debt in proportion to each bank's credit limit to the failed bank. 

Automated Clearing Houses (ACHs) 

Fedwire and CHIPS are on-line systems on which payments can be executed immediately.  ACHs are a slower but less expensive method of electronic payment. Payroll payments are usually handled that way.  The data is sent to an ACH, together with information from other banks.  Payment instructions are passed on, and payments to and from the various banks are netted.  Settlement of net positions is made over Fedwire. 

ACHs handle both credit transfers and debit transfers.  Credit transfers are similar in nature to giro payments, e.g. direct deposits to your bank account.  Debit transfers are similar in nature to checks, e.g. authorizing your insurance agency to take monthly payments from your bank deposit.  In the U.S. most ACHs are operated by the Fed, although there are private operations too.