Guide to real-time gross settlement (RTGS)

Payments are a hotly contested topic in the world of banking, and while the pace of change is accelerating, many people are still mystified by some of the nuances associated with the different forms of payments.

So, while you may not be familiar with the term “real-time gross settlement,” you should be. Want to find out more? Check out our guide to real-time payment systems, right here. First off, let’s explore the definition of real-time gross settlement.

What is real-time gross settlement?

Real-time gross settlement (RTGS) is a funds transfer system that allows you to transfer money or securities instantaneously. In most cases, RTGS is used for high-value interbank transactions that need to be cleared as soon as possible. Upon completion, RTGS bank transfers are final and irrevocable, and in most of the world, RTGS systems are run by central banks.

So, what are some examples of real-time payment systems? In the UK, CHAPS is the national real-time gross settlement system, usually used for high-value, bank-to-bank money transfers. In the EU, TARGET2 is an RTGS system used to settle payments for countries in the Eurosystem (i.e. the European Central Bank, as well as the national central banks of all 19 EU member states).

How does RTGS work?

So, how does RTGS or real-time money transfer work? Firstly, it’s important to understand the meaning of several terms. Settlement in “real-time” essentially means that the transaction isn’t subject to a waiting period, whereas “gross settlement” means that the payment will be settled on a one-to-one basis, rather than bundled alongside other transactions. Essentially, this means that the settlement takes place as soon as it’s received, or as soon as it’s transferred from the sending bank.

What’s the difference between RTGS and Bacs?

Net settlement systems, such as Bacs (Bankers’ Automated Clearing Services), is a slightly different type of funds transfer system to real-time gross settlement. Essentially, Bacs transactions are accumulated throughout the course of the day. Then, at the close of business, the relevant central bank adjusts all active accounts by the net amount of funds that have been exchanged. By contrast, real-time money transfers don’t require a physical exchange of funds, as the participating central bank will electronically adjust the accounts of the sending and receiving banks by the relevant amounts.

What are the benefits of RTGS bank transfers?

The main advantage associated with real-time money transfers is the fact that they minimise the risk associated with high-value payment settlements between banks and financial institutions. Although financial institutions offer exceptionally high levels of security, cyber threats are constantly evolving, and as such, it pays to have the most secure funds transfer system as possible in place.

Put simply, real-time payment systems allow for a much smaller window of time within which sensitive financial information is vulnerable. This can be a serious mitigating factor against cyber threats, helping to keep transactions safe and secure from the dangers posed by hackers or cyber criminals. With so much less time to work with, it’s far more difficult to exploit vulnerabilities, making RTGS bank transfers one of the most secure payment forms in the world.

It’s also important to note that efficient national payment systems are believed to reduce the cost of exchanging goods and services, making them vital for the health of the capital and money markets. Weak payment systems can lead to instability and a loss of confidence in the payment system itself, which can have a negative effect on the development of national economies.

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