bre44380_ch30_787-812.indd 798 10/06/15 10:57 AM
798 Part Nine Financial Planning and Working Capital Management
The ACH system also allows money to flow in the reverse direction. Thus while a direct
payment transaction provides an automatic debit, a direct deposit constitutes an automatic
credit. Direct deposits are used to make bulk payments such as wages or dividends. Again the
company provides its bank with a file of instructions. The bank then debits the company’s
account and transfers the cash via the ACH to the bank accounts of the firm’s employees or
shareholders.
The volume of direct payments and deposits has increased rapidly. You can see from
Table 30.3 that the total value of these transactions is over double that of checks.^13
Large-value payments between companies are usually made electronically through^ Fedwire
or CHIPS. Fedwire is operated by the Federal Reserve system, and connects nearly 9,000
financial institutions to the Fed and thereby to each other.^14 CHIPS is a bank-owned system. It
mainly handles eurodollar payments and foreign exchange transactions, and is used for over
95% of cross-border payments in dollars. Table 30.3 shows that the number of payments by
Fedwire and CHIPS is relatively small, but the sums involved are huge.Speeding Up Check Collections
Although checks are rarely used for large-value payments, they continue to be widely used
for smaller nonrecurring transactions. Check handling is a cumbersome and labor-intensive
task. However, changes to legislation in the United States at the beginning of the century have
helped to reduce costs and speed up collections. The Check Clearing for the 21st Century
Act, usually known as Check 21, allows banks to send digital images of checks to one another
rather than sending the checks themselves. Thus there is no longer a need for cargo planes to
crisscross the country taking bundles of checks from one bank to another. The cost of process-
ing checks is also being reduced by a technological innovation known as check conversion.
In this case, when you write a check, the details of your bank account and the amount of the
payment are automatically captured at the point of sale, your check is handed back to you, and
your bank account is immediately debited.
Firms that receive a large volume of checks have devised a number of ways to ensure that
the cash becomes available as quickly as possible. For example, a retail chain may arrange for
each branch to deposit receipts in a collection account at a local bank. Surplus funds are then
periodically transferred electronically to a concentration account at one of the company’s
principal banks. There are two reasons that concentration banking allows the company to
gain quicker use of its funds. First, because the store is nearer to the bank, transfer times are(^13) The Automated Clearing House also handles check conversion transactions and nonrecurring transactions made by telephone or
over the Internet.
(^14) Fedwire is a real-time, gross settlement system, which means that each transaction over Fedwire is settled individually and immedi-
ately. With a net settlement system transactions are put into a pot and periodically netted off before being settled. CHIPS is an example
of a net system that settles at frequent intervals.
Volume (millions) Value ($ trillions)
Checks 13,000 $ 17
ACH direct payments and deposits 17,000 39
Fedwire Funds Service 134 713
CHIPS 103 380
❱ TABLE 30.3^ Use of Payment Systems in the United States, 2013.
Source: Bank for International Settlements, “Statistics on Payment, Clearing and Settlement Systems in the CPSS
Countries— Figures for 2013,” December 2014.