The Federal Reserve announced Monday that it has begun offering a cross-border automated clearing house payments service to Canada, its first such international service open to all U.S. financial institutions.

The new service allows U.S. banks to send both debits and credits to Canadians through the Fed's existing ACH network. U.S. banks initiate payments in U.S. dollars, and Canadian banks are paid in either Canadian or U.S. dollars.

So far the payments can be sent only from the United States to Canada. However, the Fed says that in the future it also could handle payments from Canada to the United States if there is enough customer interest.

Previously U.S. bank payments to Canada were limited mostly to paper-based checks or wire transfers.

Vicki Anderson, assistant vice president of the Fed's retail payments office in Miami, said the regulator decided to tackle cross-border ACH payments at the prompting of its bank customers. Globalization, egged on by the passage of the North American Free Trade Agreement in 1993, has contributed to the need for a faster and cheaper way to make international payments, she said.

Researching the issue, the Fed found that private attempts to offer start a service "were slow to develop and not accessible to all financial institutions," Ms. Anderson said. "In spite of the passage of Nafta and the expansion of trade and payments between the U.S. and Canada, there still wasn't a good method for banks to send batched electronic payments."

Canada is the United States' largest trading partner. Trade with Canada was valued at $410 billion in 2000 and represented 21% of all U.S. foreign trade.

The Fed, which operates the largest national ACH network, also is considering offering a similar service to Mexico, the other Nafta signee, but no timeline is yet in place, Ms. Anderson said.

Eleven U.S. banking companies - mostly large or super-regional ones, including SunTrust Banks Inc. in Atlanta, Mellon Financial Corp. in Pittsburgh, and Northern Trust Corp. in Chicago - had participated in a two-year pilot program with the Fed to develop international ACH payments.

Toronto-Dominion Bank and the Fed handle exchange, clearing, and settlement issues for the new service. Payments from U.S. banks are routed through the Fed's Minneapolis office, and Toronto-Dominion sends the payments to their Canadian recipients.

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