How a US payment flows end to end

Consider a company in Chicago that needs to pay a supplier in New York fifty thousand dollars today, pay its employees on Friday, and send two million dollars to a partner bank as part of a securities settlement. A good analyst would route these three payments through three different systems. The supplier payment of fifty thousand dollars could go through FedNow if both banks participate, because it is urgent and the value fits, or through Same Day ACH if FedNow is not available and the payment is submitted before the cut off. The payroll would go through ACH as a batch file, because there are many employees, the amounts are routine, and the cost must be low. The two million dollar securities settlement would go through Fedwire, because it is large, time critical and must be final in central bank money the moment it is sent. Follow the supplier payment through FedNow. The company instructs the payment at 10am, giving the supplier's routing number, account number and the amount of 50,000 dollars. The sending bank checks the balance, the customer limit and the fraud rules in real time, then sends a pacs.008 message to the FedNow Service. The receiving bank credits the supplier within seconds and returns a pacs.002 confirming acceptance. The supplier sees the money before 10:01, and the interbank settlement has already happened in central bank money. If the receiving bank did not participate in FedNow, the sending bank would fall back to Same Day ACH, and the supplier would be credited the same day but not in seconds, and the product must say so before the customer confirms. Follow the payroll through ACH. The company sends a file of 200 employee payments totalling 800,000 dollars to its bank on Wednesday, as the ODFI. The file has a header, batches with the PPD SEC code for consumer credits, entries with routing numbers and account numbers, and control totals that must match. The ODFI validates the file and sends it to the ACH operator, which sorts the entries and delivers them to the RDFIs. On Friday, the settlement date, the RDFIs credit the employees. The whole cycle takes two business days, the cost is a few cents per payment, and the employees are paid on time. If the file had been submitted after the ODFI cutoff on Wednesday, settlement would slip to Monday, and the payroll team would have a problem that no amount of urgency can fix after the fact. Follow the securities settlement through Fedwire. The treasury team instructs a 2 million dollar payment to the partner bank, giving the routing number, account number and the trade reference. The sending bank runs sanctions and fraud screening, then sends a pacs.009 financial institution credit transfer message to the Federal Reserve. The Fed checks the sending bank's balance, debits the sender and credits the receiver in the same instant, and the payment is final. The receiving bank credits the partner and returns a pacs.002 confirming settlement. The trade settles today, the counterparty risk is gone, and the treasury team can close the position. The fee is a few tens of dollars and the liquidity cost is the 2 million dollars held at the Fed until settlement, both trivial against the value of a settled trade. The flow inside each system follows a similar pattern even though the timing differs. The originator instructs its bank, the bank validates the instruction, checks the balance or the credit limit, screens the payment for fraud and sanctions, and then sends it to the operator. The operator validates the message, routes it to the receiving bank, and settles it according to the rules of that system. The receiving bank credits the beneficiary account and sends a confirmation back through the chain. The differences are in the settlement step. Fedwire and FedNow settle immediately in central bank money, CHIPS settles by netting through the day with final settlement at the Fed, and ACH settles in batches one or two days later. An analyst who can draw this pattern for any payment, and then fill in the settlement step for the chosen system, can explain any US payment to any audience. Cut off times are the practical detail that causes the most operational pain in US payments, because each system has its own cut offs and they are expressed in US Eastern Time. A Fedwire payment submitted after the closing cut off waits until the next business day. A Same Day ACH payment submitted after the last window waits until the next day. A CHIPS payment submitted after the cut off waits as well. A business analyst must publish the cut off times in the customer journey, in the operations manual and in the system configuration, and must design the behaviour when a payment misses a cut off. Does the system reject it, queue it for the next day, or offer an alternative rail. The answer must be decided in advance and written down, because the customer who misses a cut off is already unhappy, and a system that silently queues the payment until tomorrow makes it worse. A fourth payment shows the cross border leg. Suppose the same Chicago company also needs to pay a supplier in Germany 100,000 dollars. The payment leaves the US bank through CHIPS, because the US dollar leg to the correspondent bank settles efficiently by netting, and then travels through SWIFT as a cross border payment to the German bank. The CHIPS leg uses a pacs.008, the cross border leg uses a pacs.008 under CBPR+, and the data is consistent throughout because both systems now use ISO 20022. The analyst must trace this payment across the boundary: the CHIPS settlement is final in central bank money, the SWIFT leg is a messaging instruction, and the two must be reconciled against each other so the operations team can prove the money left CHIPS and arrived in Germany. The analyst's end to end checklist for any US payment has five items. First, the rail chosen and why, written down against the value, urgency, cost and volume of the payment. Second, the message flow, naming each ISO 20022 message or ACH file step in order. Third, the settlement step, stating when the money is final and in what form of money. Fourth, the cut off, stated in Eastern Time, with the behaviour when it is missed. Fifth, the exception paths, stating what happens on a reject, a return, a recall and a timeout, and who is told. A payment design that answers all five is a design an SME can defend in front of treasury, operations and audit.