Today, The Clearing House’s CHIPS wire payment system is 40 years old: ancient for an electronic payment system. It is one of two wire payment systems in the United States; the second is FedWire operated by the Federal Reserve. Wires constitute a relatively small number of US payment transactions but they account for the vast majority of the total transaction value. M&A deals, securities trades, business-to-business payments, and inter-bank transactions are typically funded by wires. Finality and immediacy motivate payors to use wires over other payment mechanisms in these scenarios. CHIPS is responsible for 95% of all US international dollar clearing, a daily average of 350,000 payments equaling US$ 1.5 trillion.
Way back when, CHIPS was conceived as a means of making international clearing between banks faster and more efficient than exchanging paper checks, while reducing exposure risk. Before CHIPS and FedWire (established shortly thereafter), a long line of communications marvels (including morse code via telegraph, telex) facilitated payment instructions between banks.
CHIPS has 42% market share of all wire transactions. FedWire, accessible to all US banks, represents a larger share of domestic clearing. Forty-eight banks are members of CHIPS. These banks are responsible for the majority of International transactions. Not surprisingly, considering Asia’s increasing importance in global trade, 41% of CHIPS transactions are to, from, or within Asia-Pacific. As of December 2009, five Chinese banks are members of CHIPS, the largest concentration of participants outside of the US.
The Evolution of Wires: Remittance Data is Coming Soon
Payments between businesses remain stubbornly paper (three-quarters are still check) and one of the biggest challenges in migrating payments to electronic is consistent, efficient communication of the payment data along with the payment itself. This payment data, commonly referred to as remittance data, is how the buyer tells the supplier what the payment is for. The biggest change to wires in decades is due to take place later this year. Scheduled for November 2o10, CHIPS and FedWire will incorporate the ability to transmit remittance data with wire payments (more on remittance data for wires here).
Today, when a company receives a wire payment, the information explaining what the payment is for is typically delivered via fax or email, and occasionally via phone call. The supplier has to maintain a manual process to look up the explanation of each wire payment and manually apply the incoming payment against the appropriate open invoices. Remittance for wires will eventually streamline this process for wire payments in much the same way that efforts to append remittance data to ACH and buyer initiated card payments are tackling the same challenge.
Although CHIPS and FedWire are making the necessary infrastructure changes, it will take time before banks, corporates – and critically the technology solution providers that serve both – adopt the new wire remittance format. Not all banks are eager to make the investment to handle remittance data for wires, but those that do are often doing so as part of a holistic payment solution that can handle wires and ACH through one interface. The same data elements are necessary to create an ACH transaction with remittance data or a wire transaction with remittance. The goal is to allow the payer to define the requirements for the payment (finality, timing, transaction value) and allow the solution to select the best payment method based on the criteria specified. This remains an elusive goal, but steps by CHIPS and FedWire are laying the ground work.