What it means
When a company in Singapore pays a supplier in Brazil in US dollars, the money usually passes through banks that hold dollar accounts in the United States. CHIPS is one of the main routes for those payments.
It is owned and operated by The Clearing House, a company that is itself owned by large banks. The distinctive feature is netting.
Rather than settling every payment one at a time for its full value, the system matches payments flowing in both directions between participants and settles the leftover amounts. Because most payments are offset by others, a modest amount of cash can support a very large volume of payments.
Participants fund their position in advance by placing money in the system, and the rules require payments to be released against available funds or offsetting payments. This means the system does not depend on extending credit between banks during the day.
By the close of the day the remaining positions are settled, so each participant ends the day square. For a business, CHIPS matters because it influences cost, speed and reliability of dollar payments.
The sending bank chooses the route, and intermediary banks may take fees along the way. Knowing that the payment passes through a large-value system helps a treasurer understand why detailed payment instructions, such as correct bank identifiers and reference numbers, are essential.
CHIPS sits alongside other systems, including the central bank's own large-value transfer service. They compete in some areas and complement each other in others, and banks choose between them on cost, liquidity and timing.
A finance team does not need to pick a system, but it benefits from knowing that its bank has more than one option. Compliance is part of the picture too.
Large-value dollar payments are screened against sanctions lists and anti-money-laundering rules by the banks along the chain, and a payment with vague or inconsistent details can be held for questions. Giving full names, addresses and the purpose of payment up front saves several days of back-and-forth.
In practice
Real-world examples.
Example
An exporter in Vietnam invoices a customer in Mexico in US dollars. The customer's bank sends the payment through a US dollar route involving CHIPS, and the exporter receives the funds after the correspondent banks have processed the transfer.
Example
A multinational treasury centre pays 300 suppliers in dozens of countries each month in dollars. The treasurer asks the bank to confirm the payment route and fees, because savings per payment add up over thousands of transfers.
Example
A bank's operations manager watches the intraday balance during a busy afternoon. Because incoming payments offset outgoing ones, the bank needs less funding than the gross total, and it avoids borrowing overnight.
Formula
Calculation
Liquidity saving = 1 - (funding actually needed / gross value of payments)
Suppose participating banks send each other payments with a combined gross value of $400,000,000 during a day (an illustrative figure). After offsetting the flows in both directions, the net amount the banks need to fund is $40,000,000. The liquidity saving = 1 - 40,000,000 / 400,000,000 = 1 - 0.10 = 0.90, or 90%. The banks needed only one tenth of the gross value in cash to complete every payment.Case study
Seen in the real world.
Lakeshore Trading is an illustrative, fictional importer that pays suppliers in US dollars across Asia and South America. The finance director noticed that some payments took three days, and others arrived the same day.
After asking its bank to explain the routes, she learned that payments sent with complete and correct bank details were processed automatically through the large-value system, while those with missing details were manually repaired and delayed. She built a validation step into the payment file so that every bank identifier was checked before release.
In the illustrative result, the share of payments arriving the same day rose from 55% to 90%, and supplier complaints about late funds stopped. The change cost only a few hours of work on the payment template.
Watch out
Common mistakes.
- Thinking CHIPS is a bank you can open an account with, when it is a payment system used by banks.
- Assuming every dollar payment goes through CHIPS, when banks can choose other routes depending on cost, timing and counterparties.
- Ignoring payment details, since incorrect bank identifiers or missing references cause delays and manual repair fees.
Questions
People also ask.
How is CHIPS different from CHAPS?
CHIPS handles US dollar payments and uses netting, while CHAPS handles sterling payments and settles each payment individually in real time.
Can a business send a payment through CHIPS directly?
Usually not, because only participating banks have access, so a business sends the instruction to its bank, which chooses the route.
Is a CHIPS payment final?
Payments are treated as final once released and settled under the system rules, so errors normally have to be corrected through a separate return or request.
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