The Federal Reserve, entering the final phase of upgrading its computer connections to Internet protocol, plans to announce today that it will overhaul direct connections for the biggest banks, with the most transactions.
The new access connection, called FedLine Direct, uses dedicated data lines for unattended machine-to-machine access to the Fed's payment services.
The Feb began pilot testing in the fall and now has a six banks connecting and running test transactions, said William Barouski, the FedLine product manager at the Federal Reserve Bank of Chicago and a senior vice president. The Fed expects to have the TCP-IP (for Transmission Control Protocol - Internet Protocol) connection in production later this year.
Ultimately, it plans to convert all 300 institutions that use its existing computer interface, which is based on SNA (formally System Network Architecture), which International Business Machines Corp. introduced in 1974 as a standard for mainframe networks.
"We made the [SNA] technology go much further than it was intended," Mr. Barouski said Friday.
The Fed expects most of its direct-connect customers to convert to FedLine Direct in 2007 and 2008. Eventually it will sunset the SNA-based computer interface, though when has not been decided, Mr. Barouski said.
By phasing in a new system and then phasing out an old one the Fed is replicating the strategy it used for moving smaller institutions to Internet access from software based on Microsoft Corp.'s old MS-DOS.
In that migration, the Fed began by offering information reporting and limited access to payment services in June 2001 through an Internet-only program called FedLine Web. In November 2004 it came back with a more robust online variation called FedLine Advantage, which offered tighter security and access to automated clearing house services, wire transfers, and the ability to issue some securities, such as government bonds, which the initial Web connection did not provide.
Only after those connections were available did the Fed set plans to sunset the DOS-based FedLine, which is scheduled to go out of service in September. Of the 7,000 users of that connection, 4,000 have converted and 1,000 are now doing so, Mr. Barouski said. The others are in preliminary planning, he said.
Similarly, FedLine Direct will provide access to FedACH, Fedwire funds transfers, and Fedwire securities services at first, and check and accounting services later, Mr. Barouski said. Each bank will "customize it internally to fit" its own environment, he said.
Three or four years ago bankers were reluctant to abandon a proven system, but as TCP-IP has become predominant for online connections, the resistance melted away, Mr. Barouski said.
"All our interviews confirmed our direction," he said. "We've had a number saying, 'We can't wait to get off SNA.' "
One such trading partner is The Clearing House Payments Co. LLC of New York, which exchanges 250 million automated clearing house transactions a month with the Fed. (The bank-owned Clearing House and the Fed operate the nation's only two ACH networks.)
"We're very excited about it. We think it's very important that they scrap their old proprietary file transfer," said George F. Thomas, an executive vice president at The Clearing House.
The old connection is slower than modern data links, and its data-compression routines consume more processor time, he said.
The Clearing House converted its ACH and wire transfer systems to Internet protocols several years ago, Mr. Thomas said. "The only part that is not IP is this SNA link with the Fed. We want it to go away as quickly as possible."
The Clearing House and the Fed already use an Internet-based system to exchange check images, Mr. Thomas said. For these exchanges the Fed uses the Clearing House's SVPCO Image Payments Network.
Larry Tabb, the founder and chief executive of the Westborough, Mass., market research firm Tabb Group, said it makes sense for network operators such as the Fed to move to TCP-IP.
"The developers who are coming through school who are learning applications development are all learning TCP-IP," Mr. Tabb said. "The old protocols are going away."
Such conversions can prove complex, however. Swift, the Society for Worldwide Interbank Financial Telecommunication, switched its worldwide messaging system to Internet protocols in 2004, completing a process that began in 2000. Swift serves 7,800 financial institutions in 200 countries.
Mr. Barouski said the Fed coordinates international wire transfers and other transactions over Swift. "We talk a great deal with Swift as a provider, but we came to our own conclusion," he said.
