Understanding Real Time Gross Settlement (RTGS)

Understanding Real Time Gross Settlement (RTGS)

 

Real-Time Gross Settlement (RTGS) is a continuous cycle of settling installments on an individual premise without balancing charges with credits on national bank books (for instance, batch transactions). Once completed, real-time gross settlements are final and irrevocable.

 

IFSC code is used by RTGS for electronic fund transfer. IFSC code is an 11-digit code that looks like ipos0000001.

 

Key points

  • Real-Time Gross Settlement (RTGS) is an ongoing process of calculating interbank payments individually across all central bank books, rather than offsetting debits with loans at the end of the day.
  • Real-time gross settlement is commonly used for large interbank funds transfers.
  • RTGS systems are increasingly used by central banks around the world and can help minimize risk for high-value settlements between financial institutions.
  • Real-time gross settlement is a system commonly used for large-value interbank transfers. They often require immediate and complete clearing and are usually organized by the country’s central bank.

 

Real-time gross settlement reduces overall settlement risk because interbank settlement usually occurs in real-time throughout the day, rather than just all at the end of the day. This removes the risk of a lag in completing a transaction. (Estimated risk is often referred to as delivery risk.) RTGS can often charge higher fees than processes that link net payments.

 

The real-time gross settlement system differs from net settlement systems such as Bacs Payment Schemes Limited in the UK (formerly Bankers’ Automated Clearing Services, or BACS). With BACS, for example, transactions between institutions accumulate throughout the day; at the end of the business day, the central bank will adjust active institutional accounts for the net amounts of funds exchanged.

 

RTGS doesn’t need an actual trade of assets. Most often, the central bank electronically adjusts the accounts of the sending and receiving banks. For example, the balance of Bank A (sender) will be decreased by $ 1 million, and the balance of Bank B (recipient) will be increased by $ 1 million.

 

Increasingly used by central banks around the world, RTGS systems can help minimize the risk of settling high-value payments between financial institutions. While companies and financial institutions dealing with sensitive financial data usually have a high level of security to protect information and funds, the spectrum and nature of online threats are constantly changing.

 

RTGS-type systems help protect financial data, making it vulnerable to hackers in a shorter period of time.

 

Real-time gross settlement can provide a shorter time frame 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 disclosing their information) and data theft, whereby a hacker obtains and sells data to others.

 

The first system to resemble the RTGS system was the US Fedwire system, which was launched in 1970. This system was an evolution of the previous telegraph system, which was used to electronically transfer funds between banks in the US Federal Reserve System. In 1984 Great Britain and France introduced RTGS type systems.

 

A British system called CHAPS (for the Clearing House Automated Payment System) is currently operated by the Bank of England. France and other eurozone countries share a system called TARGET2 (for a trans-European automated system for express transfer of gross settlements in real-time). Other developed and developing countries have also introduced their own systems such as RTGS.