What is the Clearing House Interbank Payments System?

The Clearing House Interbank Payments System, often referred to as CHIPS, is a transferal system that can be used to conduct financial transactions between different banks. The system is not to be confused with the Federal Reserve Wire Network, which is much larger and also is better suited for bank transfers that require a high degree of security and need to be processed quickly. However, the Clearing House Interbank Payments System remains a viable alternative for transfers that are more routine in nature and are somewhat less time sensitive.

Not all banks and financial institutions are involved with the Clearing House Interbank Payments System. Still, the network is understood to process in excess of one trillion US dollars of transactions on any given business day. Because of the type of financial transfers made with the system, large corporations are more likely to make use of the Clearing House Interbank Payments System than small or mid-sized businesses.

The system functions by using a process referred to as netting. Essentially, the Clearing House Interbank Payments System uses a private network to effect electronic transfers between member institutions. Because the network is limited to member use only, the speed that a transfer can take place and be posted at each member banking institution is almost immediate. This can be an important factor when the need to complete the transaction within a very short period of time is essential.

While most individuals will never conduct a transaction requiring the use of the Clearing House Interbank Payments System, major corporations often utilize this network as a means of conducting electronic transfers on a daily basis. This can be especially true when large sums of cash are involved and the need to receive and post the cash receipt is necessary in order to maintain the flow of business. As long as both the sending entity and the receiving entity are both members of the system, the funds transfer will take place in real time, and through a highly secure transfer process.