Despite a history of direct competition, two major payments networks have become partners in developing disaster-recovery plans and are working together on ways to serve as backups to each other in case one becomes unavailable.
Chips and the Federal Reserve Board's Fedwire are both real-time settlement systems with multilateral netting capabilities. Many banks use both networks, but the two face off directly, particularly for the transaction settlement business of the largest U.S. depository institutions.
That competition continues, but a tandem effort that dates back to the late 1990s, when companies were planning for Y2K conversions, has the Chips and Fedwire teaming up to thwart potential disruptions to the payments system. The effort intensified after 9/11, when it became clear than an industrywide approach to contingency planning made more sense than a company-by-company approach.
The collaboration came into sharper focus this week when a white paper from federal regulators on disaster-recovery plans indicated that networks such as Chips and Fedwire should be up and running within two hours of a forced interruption. Executives from the networks say they are seeking to create standard formats and automated procedures for banks to use when issuing payment transactions, and that this will make it easier for an institution to use either network as a fallback settlement service.
Chips - for Clearing House Interbank Payments System - is run by the New York Clearing House, a private company owned by major banks. The clearing house also runs Electronic Payments Network, which is the largest private automated clearing house network and competes with the ACH service run by the Fed.
"We do cooperate very well on matters of safety and soundness and on issues that will help everybody, but we also go head-to-head," said Al Wood, the senior vice president of technology and operations at the New York Clearing House. "There has always been, and will continue to be, a balance between cooperation and competition."
Chips and Fedwire were key contributors to a report released Tuesday that issued a set of guidelines for financial companies' disaster-recovery planning. The paper reflects the impact of the World Trade Center attacks, which shut down the stock trading system for nearly a week and exposed weaknesses in the critical payments systems.
The "Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System," issued jointly by the Fed, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission, calls for networks such as Chips and Fedwire, which handle core clearing and settlements, to resume operations within the same business day as any type of disruption. The more specific goal is two hours.
Breffni McGuire, a senior analyst at the TowerGroup research firm in Needham, Mass., said the two networks have a history as competitors - especially for the business of the banking firms that generate the highest payment volumes - but that each has also carved out a market segment to dominate. Chips clears a large portion of transactions that originate overseas, she said, while Fedwire is the preferred network among smaller banks that use the system for domestic payments.
Both networks contend for business from the largest institutions, though payments from outside the United States typically will come over Chips. "They really do compete at the high end of the market, where the most volume is," Ms. McGuire said.
Chips' Web site describes its service as "a strong alternative to Fedwire," but that's just business, Mr. Wood said. He emphasized that on issues of systemic integrity, the pair are happy to collaborate to ensure the resiliency of the national payments networks.
While most companies have established internal disaster-recovery plans, Chips' position is that the industry needs to take a more holistic view, Mr. Wood said. "What we need to do is move beyond" individual corporate strategies, he said. "What happens if the unthinkable happens? Shouldn't there be a way for banks to get clearing and settling functions from a variety of services?"
Since most banks already have relationships with both payments networks, he said, it won't be difficult for Chips and Fedwire to function as backup networks to each other. Both already use a standard set of data elements for transaction processing, although some banks lack the automation that would permit them to move their traffic easily from one network to the other. "We are talking to the Fed now about going to all of the banks and encouraging them to automate this process," Mr. Wood said.
Virginia Garcia, a senior analyst for financial services strategies at TowerGroup, said she likes the idea
"This is something that I would believe would be a positive step towards ensuring resilience. It doesn't benefit anybody if one of the networks goes down," she said. "If there had been more collaborative testing prior to 9/11, some of the deficiencies in the system would have been exposed and corrected" right after the attacks. "The weeklong process of bringing up the networks could have potentially been avoided."
There are precedents for cooperation between Chips and Fedwire. When the attacks on the Twin Towers shut down lower Manhattan and both networks were having trouble with their check clearing services, Fedwire shifted some operations to a Chips facility in mid-Manhattan and Chips used a Fedwire site in New Jersey to handle some transactions.
Chips and Fedwire also worked closely with the Fed to coordinate testing in the months before the Y2K conversion.
Mr. Wood said the two groups will again initiate that level of joint testing. Existing guidelines call for the network to run internal tests four times a year, and the two networks plan to hold two simultaneous tests this year. That will allow banks to evaluate the telecommunications links to each network and to make sure the systems all pass muster.
Linda Ricci, an assistant vice president at the New York Fed, said, "This type of testing more realistically approximates what might happen." It also helps the groups develop better contingency plans, she said.
Said Mr. Wood, "Our recommendation is that Fedwire and Chips work cooperatively to ensure that all institutions are connected to both utilities."
