In a strategy to attract domestic large-value payments between businesses, the Clearing House Interbank Payments System, Chips, has changed the way it processes payments, and hopes the change will help it compete with the Federal Reserve’s Fed Wire system.

Rather than approach each transaction individually, the private bank consortium will now match interbank transactions to locate available funds to complete payments, in essence creating mini-intraday exchanges. Through this matching process, payments can be settled in final funds within seconds. Chips began using the new system Jan. 22.

Already the dominant clearing house for international large-value payments, with about a 95% market share, Chips is hoping the newly implemented real-time netting system will allow it to capture a significant portion of domestic large-value business-to-business payments from the Federal Reserve and also to win paper payments that go electronic in the future.

That would be no small order, since the Fed has a near-monopoly on domestic payments, as Chips has internationally. Chips has only about a 5% share of domestic large-value business-to-business payments.

“It is always in the best interest of the marketplace to have private alternatives to the public alternatives,” said Chips president and chief executive officer Jeffrey P. Neubert. “Because we are smaller and our membership is so focused, and we share common interests and a common strategy, we are able to focus and move more quickly than the Federal Reserve, which is a very large organization, and quite a decentralized organization unlike our operation.”

To expedite transactions under the new system, which has been in development for about three years, Chips will keep track of all the incoming and outgoing payments for a particular bank. Rather than dealing with each transaction separately, as the Fed does, as soon as the bank is in a positive position — with more money coming in than going out —Chips will release payments going out from the bank. By continuously monitoring a bank’s position as transfers go back and forth, Chips can send a bank’s transfers out without sending a bank into an overdraft position.

“We’ve gone from being a static controller of payments to being an active manager of the payment flows,” said John Mohr, Chips’ chief operating officer. “Chips’ new ability to do real-time netting means that bottlenecks that slow the payment process will be eliminated.

“Even very large payments are netted out quickly, completely eliminating daylight overdraft situations. With real-time multilateral netting, the system continually offsets payments between two or more bank participants. This process clears payments faster and more efficiently.”

Dara Hunt, wholesale product manager for the Federal Reserve, said that competition between the Fed and 31-year-old Chips is nothing new, and that this new payment processing system, while innovative, will not make the Fed less competitive.

“I think we are highly competitive,” she said. “Fed Wire has a great track record of being highly responsive. We are in the game; we will compete. This competition is really good for the payments system. It keeps us lean and it keeps us on our toes.”

Ms. Hunt said it is “questionable” whether Chips can truly process payments faster than the Fed with the new system. “I think the services are different, but I don’t think we are disadvantaged,” she said. Chips processes payments for its 60 large bank members, while the Fed processes payments for about 10,000 customers.

Elliot McEntee, president and chief executive of Nacha, the electronic payments association, said the Federal Reserve has “certain advantages … that the private sector will never have.

“The Fed Reserve is transferring central bank money. It is very unlikely that the central bank will ever default. You can’t ask for a higher-quality transfer than what is coming from the central bank.”

He added, however: “What Chips is doing, at least theoretically, is as close as you can get to certainty without it being central bank money. It does definitely make Chips’ network more competitive with Fed Wire.”

Ms. Hunt said the Fed’s customers pay, on average, 18 cents per transaction — a penny more than Mr. Mohr said Chips’ large-volume customers pay.

Mr. Mohr said that traditionally “the Fed’s big advantage is they are … the comfortable solution.”

“Fed Wire is so dominant and so well known, particularly for small and midsize banks who tend to be primarily, if not exclusively, in the domestic payments arena,” Mr. Mohr said. However, “the enhancement to the Chips system gives us a more attractive offering in a domestic marketplace and gives us an opportunity to compete on a more equal footing with the Fed for domestic wire volume.”

But the Fed has also rolled out new initiatives for its customers recently such as volume-based pricing, customer advisory groups, and message format changes to stay up to date with international payment system formats, and is working on Internet-enabling payments, Ms. Hunt said.

Conversion did not crimp Chips’ operations the first day under the new system. The New York-based company processed more than 270,000 payments, clearing over $1.43 trillion — which compares favorably to the roughly 140,0000 payments, clearing $1.2 trillion, on an average day with the old system.

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