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.

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, which bundle and net payments.

RTGS Versus Bankers' Automated Clearing Services (BACS)

A real-time gross settlement system is in contrast with 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.

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

Special Considerations

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

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 include social engineering or phishing (tricking people into revealing their information) and data theft, whereby a hacker obtains and sells data to competitors.

The first system resembling an RTGS system was the U.S. Fedwire system, which was launched in 1970. The system was an evolution of a previous system telegraph-based system that 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, was developed by the Bankers Clearing House. The French system was called SAGITTAIRE. Since then, other developed countries launched systems that varied widely in how they worked. Most were usually based upon previous processes and procedures used in each country.

Key Takeaways

  • Real-time gross settlement is the continuous process of settling payments on an individual order basis without netting debits with credits across the books of a central bank.
  • Real-time gross settlement is a system, generally employed for large-value interbank funds transfers.
  • RTGS systems, increasingly used by central banks worldwide, can help minimize the risk of high-value payment settlements among financial institutions.