On-Line Electronic Payments

Fedwire: Communications System that allows banks to transfer Fed deposits and government securities. The central bank of the United States is the ‘Federal Reserve Banks (the Fed)’.This is a communication network that links the computers of banks to the computers of the Fed. Banks use Fedwire to transfer to one another Fed dollars in the form of deposits at the Fed. Payment by Fedwire is final. It is completely equivalent to payment in physical Fed dollars. Because of its speed and security, virtually all large payments in definitive money are made by Fedwire.

Using Fedwire is more expensive than using a check. Fedwire is not used for small payments. Most small banks, because they make few large payments, do not find it worthwhile to be connected to Fedwire. If they require this service, they can always get it from a correspondent bank.

CHIPS: If Fedwire is the electronic equivalent of payment in cash, then the electronic equivalent of payment by check is CHIPS (the Clearing House Interbank Payment System). This system, operated by the New York Clearing House, links banks with branches in New York City to a central computer.

Most payments over CHIPS are related to the foreign exchange and Euro dollar markets.

While payment over Fedwire (like payment in cash) is final, payment over CHIPS (like payment by check) is merely a promise to pay. As with check, there is a danger that the promise will “bounce”: a bank may be unable to settle at the end of the day. If this happens, all the banks to which it owes money will remain unpaid.

SWIFT: Society for Worldwide Interbank Financial Telecommunications – a private message transfer system.

In Japan, the Bank of Japan Financial Network System (BOJ-Net) performs the same function as Fedwire. The Zengin system, operated by the Bankers’ Association of Tokyo and Nihon Telephone and Telegraph (NTT), is organized much like CHIPS but plays a broader role. Its main function is to clear giro payments among banks electronically.

In the United Kingdom, CHAPS (Clearing House Automated Payment System) performs essentially the same function as CHIPS in the United States, clearing large payments among major banks.


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