What Is Real-Time Gross Settlement (RTGS)?

Real-time gross settlement (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 (e.g., bundling transactions). Once completed, real-time gross settlement payments are final and irrevocable.

Key Takeaways

  • Real-time gross settlement (RTGS) is the continuous process of settling interbank payments on an individual order basis across the books of a central bank—as 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 risk to high-value payment settlements among financial institutions.

How Real-Time Gross Settlement (RTGS) Works

Real-time gross settlement is a system that is generally used for large-value interbank funds transfers. These often require immediate and complete clearing and are usually organized by a country’s central bank.

Real-time gross settlement lessens settlement 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. (Settlement risk is often called delivery risk.) 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 U.K.’s Bacs Payment Schemes Limited (previously the Bankers' Automated Clearing Services, or BACS). With BACS, for example, transactions among institutions are accumulated during the day; at the close of business, a central bank will adjust the active institutional accounts by the net amounts of the funds exchanged.

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

The first system resembling a RTGS system was the U.S. Fedwire system, which was launched in 1970. That system was an evolution of a previous telegraph-based system, which was used to transfer funds electronically between U.S. Federal Reserve banks. In 1984, the United Kingdom and France both implemented RTGS type systems.

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