Real-Time Gross Settlement (RTGS): Definition & Benefits

Real-Time Gross Settlement

Investopedia / Theresa Chiechi

What Is Real-Time Gross Settlement (RTGS)?

The term real-time gross settlement (RTGS) refers to a funds transfer system that allows for the instantaneous transfer of money and/or securities. RTGS is the continuous process of settling payments on an individual order basis without netting debits with credits across the books of a central bank. Once completed, real-time gross settlement payments are final and irrevocable. In most countries, the systems are managed and run by their central banks.

Key Takeaways

  • Real-time gross settlement is the continuous process of settling interbank payments on an individual order basis across the books of a central bank.
  • This system's process is opposed to netting debits with credits at the end of the day.
  • Real-time gross settlement is generally employed for large-value interbank funds transfers.
  • RTGS systems are increasingly used by central banks worldwide and can help minimize the risks related to high-value payment settlements among financial institutions.

How Real-Time Gross Settlement (RTGS) Works

When you hear the term real-time, it means the settlement happens as soon as it is received. So, in simpler terms, the transaction settles in the receiving bank immediately after it is transferred from the sending bank. Gross settlement means transactions are handled and settled individually, so multiple transactions aren't bunched or grouped together. This is the basis of a real-time gross settlement system.

An RTGS system is generally used for large-value interbank funds transfers operated and organized by a country’s central bank. These transfers often require immediate and complete clearing. As mentioned above, once transactions are settled, they cannot be reversed.

In 1970, the U.S. Fedwire system launched. It was the first system resembling a real-time gross settlement system. It was an evolution of the telegraph-based system used to transfer funds electronically between U.S. Federal Reserve banks.

The British system, called the Clearing House Automated Payment System (CHAPS), is currently run by the Bank of England. France and other Eurozone nations use a system called Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET2). Other developed and developing countries have also introduced their own RTGS-type systems.

Real-time gross settlement lessens settlement risk—also referred to as delivery risk—overall, as interbank settlement usually occurs in real-time throughout the day—instead of simply all together at the end of the day. This eliminates the risk of a lag in completing the transaction. RTGS can often incur a higher charge than processes that bundle and net payments.

RTGS vs. Bankers' Automated Clearing Services (BACS)

A real-time gross settlement system is different from net settlement systems, such as the United Kingdom’s Bacs Payment Schemes Limited, which was previously known as the Bankers' Automated Clearing Services (BACS). Transactions that take place between institutions with BACS are accumulated during the day. At the close of business, a central bank adjusts the active institutional accounts by the net amounts of the funds exchanged.

RTGS does not require an actual physical exchange of funds. A central bank will often adjust the accounts of the sending and receiving bank in electronic form. For example, sender Bank A's balance will be reduced by $1 million, while recipient institution Bank B’s balance will be increased by $1 million.

Benefits of Real-Time Gross Settlement (RTGS)

RTGS systems, increasingly used by central banks worldwide, can help minimize the risk to high-value payment settlements among financial institutions. Although companies and financial institutions that deal with sensitive financial data typically have high levels of security in place to protect information and funds, the range and nature of online threats are constantly evolving.

RTGS-type systems help protect financial data by making it vulnerable to hackers for a briefer time window.

Real-time gross settlement can allow a smaller window of time for critical information to be vulnerable, thus helping mitigate threats. Two common examples of cybersecurity threats to financial data are social engineering or phishing—tricking people into revealing their information—and data theft, whereby a hacker obtains and sells data to others.

Article Sources
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  1. The Federal Reserve Financial Services. "Fedwire Funds Services."

  2. Federal Reserve Bank of New York. "Creating an Integrated Payment System: The Evolution of Fedwire," Pages 2-3.

  3. Bank of International Settlements. "Payment Systems in the United Kingdom," Page 407.

  4. European Central Bank. "What is TARGET2?"

  5. Bank of International Settlements. "Payment Systems in the United Kingdom," Page 410-413.

  6. Bank of International Settlements. "Payment Systems in the United Kingdom," Page 412-413.

  7. U.S. Small Business Administration. "Stay Safe from Cybersecurity Threats."