The two domestic wire-transfer service providers, the Federal Reserve System and Clearing House Payments Co. LLC, are upgrading their systems to adhere to standardized communications formats, and they plan to add new features and services.
Executives from both the Fed and The Clearing House said Wednesday at the IFSA 2005 Global Payments Conference in New York that they plan to link their networks with the international payment system run by the bank-owned cooperative Swift. The executives also said they plan to let businesses send more detailed invoicing information in wire transfers.
Gary M. Bertone, a vice president in the wholesale product office of the Federal Reserve Bank of New York, said the Fed and banks will begin testing the Internet protocol messaging system's security in the third quarter and will start sending test messages over its network this year. The Fed is already testing the system internally.
The Fed has always run its own closed network; its system dates to 1918, when telegraph operators tapped out payment messages. "We didn't want to trust a fledgling network called AT&T," Mr. Bertone said during a panel discussion at the conference, which was sponsored by the International Financial Services Association of Parsippany, N.J. "It's part of our culture."
Most of the world's communications networks already use IP technology, the fundamental communication format for Internet traffic. By shifting their payment networks to IP, the Fed and The Clearing House will make their systems compatible with other financial services organizations that have already made a similar switch.
Henry C. Farrar, a senior vice president of The Clearing House, said during the panel discussion that it began testing IP messaging for its Clearing House Interbank Payment System last month and plans to go live in October. It currently uses the X.25 standard to send payment messages but plans to retire that standard in 2007.
The Clearing House already operates its own IP network, which it uses for low-value automated clearing house transactions and for check-image exchange.
In 2001, The Clearing House rewired Chips to provide real-time settlement for high-value transactions. Two years later it began letting banks check the status of transactions (but not to execute them) over the Internet, Mr. Farrar said.
As executives weighed whether to move Chips to IP, one of the questions was whether it should use its own IP network or the one operated by Swift, formally known as the Society for Worldwide Interbank Financial Telecommunication, which completed its own IP conversion project last year.
"We actually concluded we should do both," Mr. Farrar said. "It was technologically feasible, and a lot of the banks [that use Chips] wanted it."
The SwiftNet network serves 7,800 financial institutions in 200 countries.
Mr. Farrar said The Clearing House and Swift are working to make their networks interoperable; The Clearing House will begin testing the connections in October, and by April of next year he expects to send Chips messages across the SwiftNet network, though the payments would continue to settle through Chips.
"We want to give the banks what best suits their operating environment." A bank could use either Chips or Swift as its primary network, with the other as a backup, "or they can use them both as live networks," he said. "These are business decisions that banks have to make" according to price and other factors.
But while The Clearing House wants to offer banks their choice of systems, Mr. Bertone said the Fed envisions SwiftNet more as a backup for its FedWire system, which connects to 300 of the largest U.S. commercial banks.
"We continue to look at this from a security perspective," Mr. Bertone said. Using a closed network lets the Fed monitor every aspect of a payment. "We like to be able to see out there to help troubleshoot problems."
The Fed has been building a portfolio of services it can offer banks using the IP format, but it remains committed to using only its own network, he said.
Mr. Bertone would not rule out the possibility of using SwiftNet as a primary network, but he said the Fed was focusing on using SwiftNet mainly for disaster recovery.
Edward W. Adams, a regional director for Swift in New York, said the moves bring the United States more in line with other financial systems around the world. "This is a natural evolution that The Clearing House and the Federal Reserve Banks would allow their clients to leverage the SwiftNet infrastructure."
The Fed is also talking to Swift about future messaging standards, Mr. Bertone said, including standards for attaching remittance information to a wire transfer, to tell a corporate recipient the purpose of a payment.
Unstructured information can be included in wire transfers, and he said the Fed is working with the Association for Financial Professionals, a trade group for corporate treasury executives, to decide what data elements a remittance standard must include.
Mr. Farrar said The Clearing House plans to begin a study next month on attaching remittance information to its wire transfers. Such information can be sent over Chips, but no one is doing so, he said.
"We believe there's an opportunity," and the study should help "quantify" that opportunity, he said.
