What Is Real-Time Gross Settlement (RTGS)?

What Is Real-Time Gross Settlement (RTGS)?

Real-Time Gross Settlement (RTGS) gives banks a way to handle high-value transactions right away and one by one, which boosts security by cutting down on settlement risk. Unlike systems that net out payments, RTGS makes each transaction final and impossible to reverse once it's done, so it's a key part of how banking works today.

Key Takeaways

You should know that RTGS lets funds move instantly without balancing debits and credits, and those moves are final once processed. These systems focus on big interbank transfers and cut settlement risk by dealing with everything in real-time. Central banks run them, and there's no need for physical money swaps, which helps against cyber threats. RTGS stands apart from net systems like BACS because it settles each deal right away instead of batching them at day's end.

Understanding the Mechanics of Real-Time Gross Settlement (RTGS)

When I say real-time, I mean the settlement kicks in the moment the transfer arrives. Put simply, the money lands in the receiving bank's account right after it leaves the sender's. Gross settlement handles each transaction on its own, without grouping them up. That's the core of an RTGS system.

RTGS is typically for large interbank transfers, run by a country's central bank, and they need to clear fully and immediately. As I noted, you can't undo them once settled.

Back in 1970, the US launched Fedwire, the first setup like RTGS, building on old telegraph methods for electronic transfers between Federal Reserve banks.

In the UK, it's CHAPS, managed by the Bank of England. France and other Eurozone spots use TARGET2. Plenty of other countries, developed or not, have their own versions.

RTGS cuts down on settlement risk, or delivery risk, because deals happen throughout the day in real-time, not all at once later. This wipes out delay risks. Keep in mind, RTGS can cost more than bundled payment methods.

Comparing RTGS and BACS Systems

RTGS isn't like net settlement setups, such as the UK's Bacs Payment Schemes, once called Bankers' Automated Clearing Services. With BACS, transactions pile up during the day, and at close, the central bank nets out the accounts.

RTGS skips any physical fund swaps. The central bank just tweaks the electronic balances—for instance, dropping Bank A's by $1 million and boosting Bank B's by the same. That's how it works.

Advantages of Real-Time Gross Settlement (RTGS)

Central banks around the world are using RTGS more to lower risks in big payment settlements between institutions. Even with strong security for sensitive data, online threats keep changing.

RTGS systems protect financial info by shortening the time it's exposed to hackers. This quick processing helps fend off threats like social engineering, phishing, or data theft where hackers grab and sell info.

What Is the Real-Time Gross Settlement Fee?

The fee for RTGS depends on the country or institution and the transfer size. Sometimes, banks waive it.

What Is an Example of a Real-Time Gross Settlement System?

Take a customer telling their bank to send money to another via RTGS—it happens instantly. If it was ACH, you'd wait days for clearance.

What Is the Difference Between Net Settlement and Real-Time Gross Settlement?

Net settlement batches data and settles at day's end, while RTGS handles each transaction right then and there.

The Bottom Line

RTGS systems let funds move immediately and irrevocably across central bank records, cutting risks in high-value interbank deals. They're mainly for big transfers and ensure smooth, secure operations by ditching processing delays.