Overview of real time gross settlement systems (RTGS)

What is RTGS?

Real-Time Gross Settlement (RTGS) is a type of payment system that enables the transfer of funds between banks in real-time, with immediate settlement and finality. In other words, once a transaction is processed through an RTGS system, it is considered settled and cannot be reversed.

Key Characteristics:

  1. Real-Time: Transactions are processed and settled immediately, without any delay.
  2. Gross Settlement: Each transaction is settled individually, rather than being batched with others (as in net settlement systems).
  3. Finality: Once a transaction is settled through an RTGS system, it cannot be reversed or cancelled.

How Does It Work?

  1. A payment instruction is sent from the originator’s bank to the beneficiary’s bank.
  2. The originator’s bank checks the account balance and ensures sufficient funds are available for the transfer.
  3. The transaction is then transmitted to a central RTGS system, which verifies the instructions and performs various checks (e.g., authentication, validation).
  4. If all checks pass, the RTGS system updates the accounts of both banks in real-time, effectively settling the transaction.

Benefits:

  1. Improved Payment Finality: With immediate settlement, there is no risk of reversals or cancellations.
  2. Increased Efficiency: Transactions are processed and settled quickly, reducing processing times and costs.
  3. Enhanced Security: RTGS systems typically employ robust security measures to prevent fraud and unauthorized transactions.

Examples:

  1. The Federal Reserve’s Fedwire system in the United States
  2. The Bank of England’s Real-Time Gross Settlement (RTGS) service in the UK
  3. The European Central Bank’s TARGET2 system, which connects RTGS systems across Europe

In summary, RTGS systems provide a fast and secure way to settle transactions between banks, offering improved payment finality, efficiency, and security for financial institutions and their customers.