CHIPS operates as what type of payment system?

CHIPS, which stands for Clearing House Interbank Payments System, functions primarily as a deferred net settlement payment system. This means that transactions processed through CHIPS are accumulated and settled in batches at specified intervals rather than in real-time.

In a deferred net settlement system, individual transactions are not settled immediately but rather netted out against each other before a final settlement occurs, typically at the end of the business day. This allows for efficiency in handling large volumes of transactions, reducing the need for immediate liquidity and allowing banks to manage their funds more effectively.

This operational model is distinct from real-time gross settlement systems, where each transaction is settled individually and immediately, and from automatic clearing houses, which typically deal with mass payment transactions like payroll or direct debits in a scheduled batch processing manner. Instant payment systems, on the other hand, allow for immediate fund transfers between parties at any time.

Thus, understanding that CHIPS functions as a deferred net settlement system helps clarify its role in the payments landscape, focusing on the efficiency of settling transactions over the course of the day instead of in real-time.