FedWire, the main wire transfer system used by the United States, crashed last week. Let’s talk about why that happened and what it means for payments.
What is Fedwire?
“The Fed”, made up of the Federal Reserve Board and the Federal Reserve Banks, plays three main roles:
- Creates payment regulations for banks and other financial institutions
- Operates multiple payment systems, including the largest check clearing house, an ACH switch, Fedwire, and provides cash to banks
- Manages the National Net Settlement System for multiple private clearing houses
Wire transfer systems are also known as “large-value systems”, because they are the primary money transfer mechanism for large transactions. The US has two wire transfer systems: FedWire and CHIPs.
FedWire is a service offered by the Federal Reserve Banks (known together with the Federal Reserve Board as “The Fed”). It is available to all nationally-chartered banks and most major state-chartered banks.
As wire transfers are responsible for the majority of dollar value processed, it is no surprise that FedWire processes massive amounts of money. In December of 2020, it is estimated that FedWire processed a daily average dollar volume of $3.4 trillion.
Wire transfers work in real time, which means that payments are sent and settled immediately. These payments are also fully guaranteed, because they cannot be reversed or charged back.
How do Wire Transfers Work?
- The sender instructs their bank to send a wire transfer to a receiver
- The bank debits the sender’s account and sends a message to Fedwire
- The relevant Federal Reserve Bank debits the bank’s account and credits the receiving bank’s account
- The receiving bank credits the receiver’s account
What Went Wrong?
On Wednesday, February 24, 2021, FedWire services were down between 12:40 and 3:15 p.m. EST. The Federal Reserve claimed that the crash was due to an “operational error”. No further details were provided.
This is not the first time FedWire services have gone down in the last few years. In 2019, FedWire’s interbank funds transfer service also went down for multiple hours. This previous outage was attributed to “an internal technical issue”.
Clearly, there are some issues with FedWire’s infrastructure maintenance. Many users took to berating FedWire on Twitter, claiming that the outages show the downsides of centralized money processing systems, compared to decentralized cryptocurrency rails, such as those for Bitcoin.