Clearing houses have always been a valuable tool for business owners. These financial intermediaries allow you to settle accounts and complete purchases quickly, conveniently, and safely.
The CHIPS system is one of the primary clearing houses used for large financial transactions in the United States. Here's how CHIPS payments work and how you can integrate this system into your business.
What does CHIPS mean in banking?
The term "CHIPS" is an acronym for "Clearing House Interbank Payments System."
CHIPS is owned by roughly 50 financial institutions, all of which use its unique system. The Clearing House network privately operates CHIPS, and CHIPS participants can use this service to make domestic and international payments.
The clearing house interbank payments system was founded in 1970. Originally it was an abbreviated form of the New York Clearing House Interbank Payment System, which in turn was under the control of the New York Clearing House Association (NYCHA).
The goal was simple: to have a system to facilitate the liquidation of large transactions, typically involving multinational parties and foreign currency.
Today, CHIPS is one of the world's largest private payment clearing systems, with an estimated $1.8 trillion in daily transactions. The three largest payment services in the United States include CHIPS, automated clearing house (ACH) transfers, and Fedwire.
How does the Clearing House Interbank Payments System work?
How does the CHIPS payment system work? It's easiest to think of the process as requiring two basic steps: clearing and settlement.
Clearing refers to confirming the information of both parties involved in the transfer, while settlement is the transfer of funds.
Again, a CHIPS money transfer technically takes place between two financial institutions rather than the individuals involved in the transaction. The CHIPS network "clears" the transfer by confirming the banking information for both the payer and the payee.
CHIPS payment orders can be credit or debit, though in most cases, CHIPS money transfers are credit transfers from the payer to the payee.
Keep in mind that the settlement process is final. Once the final settlement is complete, the payer's financial institution no longer has any obligation toward the payee's financial institution.
What is a netting engine?
The CHIPS system is classified as a "netting engine." This means that you can use the system to conduct multiple transactions between the same parties. So, for example, imagine that the following transactions take place:
- Party A sends $100,000 to Party B
- Party B sends $150,000 to Party A
Mathematically, this means that Party A stands to earn $50,000 ($150,000 - $100,000).
The CHIPS system performs this calculation automatically. Rather than conduct two transactions, CHIPS nets the value, ensuring that Party A receives the funds in a single payment.
What is a CHIPS money transfer?
Businesses can use the clearing house interbank payments system to make domestic and international payments. A clearing house is simply a financial intermediary that makes a transaction happen. So a CHIPS money transfer relies on this payment network to facilitate the transfer of money.
Money is sent from one financial institution to another, which means that both the payer and the payee must rely on their banks or other financial entities to make and receive these transfers.
Admittedly, CHIPS money transfers take a bit longer than other money transfer methods. But CHIPS users make CHIPS their primary network because it's more cost-effective than other payment systems.
And with a higher average transaction value, the CHIPS system is typically used for making large money transfers, where transaction speed is less important than overall efficiency.
CHIPS transfers are ideal for large, business-to-business transactions. You might use a CHIPS transfer to pay for materials, inventory, or major services. CHIPS transfers facilitate these transactions without needing a paper check or the risk of credit or debit cards.
What are CHIPS operating hours?
The CHIPS network operates between 9 a.m. and 6 p.m. eastern time. This is actually a recent change. Before March 2021, CHIPS closed business at 5:00 PM, but the network added the additional hour to accommodate business transactions involving the west coast.
During these hours, the CHIPS network will net and resolve payments. This means that CHIPS settles many transactions within the same business day. After regular hours, CHIPS releases and nets unresolved payments, though now it sends payment orders to the Fedwire system for settling payments.
What are the rules governing CHIPS payments?
CHIPS transfers are governed by article 4A of the Uniform Commercial Code, and the rules governing its services can be complex. More specifically, large-value transfers are regulated by stringent legal criteria compared to smaller retail transactions.
Advantages of the CHIPS payment system
There are many reasons why CHIPS has emerged as the main clearing house in the United States. Here are a few of the core benefits of CHIPS payments.
1. Convenient way to send large payments
Making large payments can be challenging. CHIPS payments allow business entities to conduct large transactions efficiently, which can come in handy when ordering new inventory or partnering for long-term projects.
2. Comparatively low costs
CHIPS transfers carry lower transaction costs compared to other payment options. This makes them a solid choice for companies trying to conduct business without adding to their overhead costs.
3. Capability to make international payments
With so much business happening globally, it's good to have an option for making international payments. CHIPS payments can be helpful when working with other international banks or business entities.
4. Secure payment option
The CHIPS system is self-contained and relies on payments between banks rather than individuals. The clearing process can verify the authenticity of each party in the transaction, shielding business owners from added risk when making large transfers.
5. Reduced operational risk
Because all settlements are final, the CHIPS system drastically reduces operational risk. This means that the chance of having payments reversed is significantly lower when using the CHIPS payment network, and you can be confident that the payer will not reverse the direction of the transfer after the fact.
Disadvantages of the CHIPS payment system
Despite these advantages, there are still a few drawbacks to the CHIPS system. Here are some of the disadvantages of making CHIPS payments.
1. Time delays
The CHIPS network only operates within a set number of business hours. CHIPS can indeed settle transactions within the same day, but there may be better options for making time-sensitive payments. This is especially true if you must conduct transactions outside the network's regular operating hours.
2. Fewer participating banks
Roughly 50 different banks rely on the CHIPS network — a relatively small circle. Comparatively, the Fedwire system boasts 50,000 banks. This means you may have less flexibility and fewer options when transferring funds using the CHIPS payment network.
3. Not everyone uses the CHIPS network
Before today, how familiar were you with the CHIPS network? If this article has introduced new information, it stands to reason that others are also unfamiliar with the CHIPS payment system. This means using CHIPS when transferring funds may be more challenging than other transfer options.
4. Not as efficient for everyday transactions
To be clear, CHIPS transfers are not designed for everyday transactions. Instead, CHIPS money transfers are designed for large, relatively rare transfers, especially when the time delay is not an issue.
Differences between CHIPS and other transaction types
You may already be familiar with other types of transactions, including Fedwire, ACH, and Swift. But how does CHIPS stack up against each of these other payment systems?
What is the difference between CHIPS and Fedwire?
CHIPS differs from the Fedwire service in several crucial ways. Here are the main differences between Fedwire vs. CHIPS.
1. CHIPS is privately owned
Fedwire is the funds service used by the Federal Reserve Bank, which is subject to a regulatory body. CHIPS, on the other hand, is not bound by the Federal Reserve but is privately owned and operated. This means CHIPS is free to make adaptations more quickly than an entity regulated by the U.S. government.
2. Fedwire has more participants
Admittedly, this is where the Fedwire service really shines. CHIPS participants are only around 50, while the Fedwire service reached nearly 10,000 members by 2010. That could change if CHIPS becomes more popular, but Fedwire has a broader body of participants now.
3. CHIPS is a netting engine
CHIPS is a netting engine that pools multiple transactions and distributes funds based on the mathematical difference (see above for an example). But because of this feature, transactions don't occur in real time. The Fedwire system, therefore, operates a bit faster since transactions process almost immediately.
4. CHIPS is more affordable
Despite the advantages of Fedwire, CHIPS comes out ahead when it comes to sheer cost. CHIPS users are generally more accepting of the time-based limitations since they're using the service for large transactions that aren't as dependent on immediate transfers.
What is the difference between CHIPS and ACH?
Many business owners may already be familiar with automated clearing house (ACH) transfers, which allow you to send money between banks quickly. ACH differs from CHIPS in several crucial respects. Here's how to distinguish between ACH payments and CHIPS transfers.
1. ACH payments are batched
ACH payments are batched rather than taking place one at a time. This makes ACH payments better for low-value, high-volume transactions, such as recurring payments for subscription services.
2. ACH payments take several days to process
ACH payments can take several days to process. This makes them even less convenient than CHIPS payments when measured by time alone. ACH payments are therefore best for bill payments or recurring services that don't require immediate money transfer.
3. ACH payments offer lower fees
In fairness, ACH payments provide the lowest fees, which is why they're great for small or recurring transactions. This makes them a good option for small businesses that need to order small batches of inventory or pay for recurring charges such as software subscriptions.
4. ACH payments have limits
Depending on the banks involved, ACH payments can limit the maximum amount of each transaction or the maximum amount you can transfer in a given day or month. So while ACH payments may be perfectly fine for day-to-day needs, CHIPS remains the preferred method of making large transfers.
What is the difference between SWIFT and CHIPS?
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. Like CHIPS, SWIFT is a privately owned network with a membership roster primarily consisting of banks. But SWIFT is not a true clearing house. Instead, SWIFT is a messaging system used to convey financial instructions.
In other words, SWIFT can't be used to actually transfer money between two parties, unlike CHIPS or Fedwire.
When to use CHIPS vs. Fedwire
Trying to decide on the best strategy for transferring money internationally? Here's a quick recap of the best times to use CHIPS:
- When conducting large transactions
- When conducting business internationally
- When the timing of the transaction doesn't matter
- When you want to cut the costs of the transaction
However, as noted, CHIPS isn't as immediate as the Fedwire system. If you need to transfer immediately, you might still benefit from using Fedwire.
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