What Is Fedwire? Definition, How It Works, Laws, and History

What Is Fedwire?

Fedwire refers to a real-time gross settlement system of central bank money used by Federal Reserve (Fed) banks to electronically settle final U.S. dollar payments among member institutions. The system processes trillions of dollars daily and includes an overdraft system that covers participants with existing and approved accounts.

Along with Fedwire, the Fed operates two other payment systems: The Fedwire Securities Service and the National Settlement Service.

Understanding Fedwire

The Fedwire system is an electronic funds transfer system used by banks, businesses, and government agencies for large, same-day transactions. Banks that use the system include depository financial institutions (FI) in the U.S., as well as the American branches of certain foreign banks or government groups, provided they maintain an account with a Fed Bank.

The Fed holds accounts for both senders and receivers and settles transactions individually and immediately. Once settled, all transactions are final and irrevocable, and the receiving bank is notified of the credit.

Although Fedwire is not managed for profit, the law mandates that the system charge fees in order to recoup costs; thus, both participants in a given transaction pay a small fee. Participating institutions can initiate fund transfers online or on the phone. They can send money from their accounts for themselves or on behalf of their clients to settle commercial payments or positions with other institutions, remit tax payments, and buy and sell federal funds.

The Fedwire system is owned and operated by the 12 Fed Banks. It is a networked system for payment processing between the member banks themselves, as well as other participating institutions. Fedwire operates Monday through Friday between 9 p.m. Eastern Time (ET) on the prior calendar day to 7 p.m. ET. The Fed may extend its hours, and the system is closed on all federal holidays.

The History of Fedwire

The Fedwire system, along with the other two wholesale payment systems operated by the Fed, goes back more than 100 years. It is considered to be very robust and reliable.

The Fed began to transfer funds between parties as early as 1915. In 1918, the central bank established its own proprietary system, which processed the transfers.

Until 1981, the Fedwire system was only available to member banks and services were free of charge. The Fed began charging fees after the Depository Institutions Deregulation and Monetary Control Act of 1980 (the Monetary Control Act) was signed into law.