How Money Moves Between Banks

How It Works

When you send a bank transfer to someone at a different bank, your bank debits your account and sends an instruction to a settlement system. The settlement system — whether Fedwire (for large, urgent transfers), ACH (for routine batch transfers), or CHIPS (for large-value interbank transactions) — processes the instruction and credits the recipient bank's account at the Federal Reserve or at a clearing agent.

Fedwire, operated by the Federal Reserve, settles transactions immediately and irrevocably in real time. Every US bank has a reserve account at the Federal Reserve, and Fedwire moves money between these reserve accounts. A Fedwire transfer is as close to instant, guaranteed settlement as the traditional system offers. But Fedwire is expensive and primarily used for large-value transactions.

ACH (Automated Clearing House) is the workhorse of everyday US payments — direct deposits, bill payments, and most small-value transfers. Unlike Fedwire, ACH is a batch system. Transactions are collected throughout the day and submitted to the clearinghouse in batches, which processes them and settles the net positions between banks overnight. This is why ACH transfers often take one to three business days to complete.

CHIPS (Clearing House Interbank Payments System) handles the bulk of high-value international dollar payments between the largest banks. It uses multilateral netting — offsetting payments between participants — to dramatically reduce the actual dollar amounts that need to move across reserve accounts. CHIPS settles trillions of dollars daily with relatively modest reserve movements.

Why It Matters

The way money moves between banks directly determines the speed and cost of financial transactions for consumers and businesses. The patchwork of Fedwire, ACH, and CHIPS — built over decades and incompatible with each other — produces the settlement delays and batch processing limitations that blockchain technology addresses directly.

The Federal Reserve's launch of FedNow in 2023 represents an attempt to bring real-time gross settlement to smaller payments, competing with and complementing blockchain-based alternatives. Understanding how interbank settlement works illuminates why blockchain represents not just an improvement but a fundamental rearchitecting of how financial transactions are finalized.

Real-World Example

You send $1,500 rent to your landlord who banks at a different institution. Your bank debits your account immediately. But it does not immediately transfer $1,500 to your landlord's bank. Instead, it accumulates this and hundreds of thousands of similar transactions throughout the day, then submits a net batch through ACH at the end of the business day. The clearing system netted all the transactions between the two banks — perhaps your bank owes $100,000 net to your landlord's bank after offsetting flows in both directions. That $100,000 moves via Fedwire, and your landlord's bank credits the individual accounts the next morning. Your landlord sees the funds 1 to 2 business days later.