Imagine you’re a bank in the United States, and you are looking at two large transfers. 

  • One is a multimillion payment your client initiated where speed is of the essence.
  • The other is one large transaction that settles all your daily payments with a wide range of financial institutions.

You’d wire the first one through Fedwire and the second one through CHIPS. In this article, we’ll cover everything you need to know to make informed decisions on the fly when dealing with large wire transfers inside the USA. 

Fedwire and CHIPS (Clearing House Interbank Payments System) are both cornerstone parts of the local payment rail system of the USA. 

Fedwire is the electronic funds transfer system created by the Federal Reserve to settle the country’s digital transactions. CHIPS is an exclusive tool used by a select group of major financial institutions to net interbank settlements to cut the cost of transfers made on Fedwire or SWIFT. 

While most small—to mid-size consumer and business transactions are handled through ACH transfers, CHIPS and Fedwire efficiently handle high-value transfers.

These Clearing and Settlement Systems are created specifically to move large sums of money between banks, mainly inside the United States. 

What is Fedwire?

Fedwire is the main way of handling real-time gross settlement of high-value transactions in the US. 

Just as railroads and highways were needed to enable economic growth, the financial sector needed an efficient way of handling an ever-growing number of transactions. Enter Fedwire, the dedicated system for high-value transfers managed by The Federal Reserve Banks. 

Electronic payments have existed since the early 1900s, and in 1918, the US Federal Reserve launched Fedwire (Fedwire Funds Service)—revolutionary tech that replaced physically moving money, doing paper-based deals, or using the telegraph for interbank communications.

The Federal Reserve Wire System in 1953 (source)

Many decades since, Fedwire now connects well over 9,000 financial institutions in the US and continues to innovate rather consistently.

Today, it’s the fastest way to move a large amount of money to institutions that are members of the US Federal Reserve System.

What is CHIPS?

In 1970, a consortium of banks in the US created CHIPS (Clearing House Interbank Payments System). Since then, according to Fedwire, the volume of CHIPS transactions has averaged roughly two-thirds of the volume of all Fedwire transactions. According to The Clearing House, CHIPS handles $1.8 trillion daily transactions between the consortium’s 50 direct participants.

CHIPS acts as a messaging tool for member banks to figure out amongst themselves who owes whom and how much. And then, at the end of the day they settle the tab with the Federal Reserve, paying way less than if they made millions of instant transactions through Fedwire or ACH during that time.

CHIPS was created to provide select US banks, branches of foreign banks, and corporations with a cost-saving tool for using Fedwire. A privately-held alternative that allows its members to move trillions between their accounts without sending the money back and forth unnecessarily. This makes for much more efficient liquidity management and best of all – it costs less.

From the start, the focus of CHIPS was to allow for cheaper clearing and settlement of transactions through netting. This means calculating the final balance and sending payments at specific times throughout the day instead of forwarding each one instantly. 

How the CHIPS’ net settlements work

CHIPS uses a proprietary netting process to enable lower transaction costs. It consolidates all the transactions between the participants and offsets the payment obligations to reduce the overall number of transactions. CHIPS then transfers netted settlement instructions to Fedwire, which costs less in fees because it does not make unnecessary transfers.

How to choose between CHIPS and Fedwire for high-value transfers

  • Settlement process/speed: With CHIPS, netted transfers happen once a day, whereas Fedwire transfers are real-time. 
  • Cost—When dealing with CHIPS, your fees are lower, which, of course, comes with time limitations. 
  • Transaction size—The average transaction size for CHIPS is $3 million, and the higher the number, the better the terms. Fedwire is commonly used for high-value transactions of all sizes. 
  • Membership—You need to be a member of both CHIPS and Fedwire to make transfers on either system, but it is much simpler to opt in for Fedwire.   

Financial organizations that aren’t on the CHIPS network use one of these methods instead:

  • Settle their payments instantly for a little more money with Fedwire
  • Use a correspondent bank inside the CHIPS networks
  • For the majority of smaller transactions, they use the ACH network

Fedwire vs CHIPS – roles in the financial ecosystem

Fedwire is the primary way for financial institutions to settle high-value transactions with the United States and its Federal Reserve. 

CHIPS is located one level above this foundation and acts as the power hub that connects the biggest and most influential organizations in one deal-making space. They use it to reduce the number of large transactions by doing all the calculations before money changes hands.

CHIPS also collaborates closely with international agents, which allows the member banks to conduct business easily through the Swift network. It offers a range of other financial instruments but is known best for high-value transactions to Fedwire optimized through netting. 

How to use Fedwire and CHIPS

You need to be a member of Fedwire or CHIPS to make a transfer on either system. Both Fedwire and CHIPS are open for new members, and it’s relatively easy for a financial institution to opt into Fedwire on the Federal Reserve’s website. 

CHIPS is an extremely exclusive community whose requirements include the organization’s net worth, maintaining adequate liquidity, and adhering to strict operational and risk management standards. However, as a financial institution, you can easily establish correspondent bank relations with one of the 50 members. 

Final thoughts

That should be enough to get you started on Fedwire and CHIPS payments and using those systems for high-value payments in the USA, but if you have any questions, don’t hesitate to contact us.

At Payment Labs, we specialize in creating dedicated cross-border payment systems that fit your needs. We have expertise in esports prize payments, sports payments, NIL payouts, and agency solutions that simplify fast and compliant global payments with low, flat-rate fees. Our solution automates payments so you can focus your time on growing your business instead of managing payments.