Real-Time Gross Settlement (RTGS)
Candlefocus EditorWhen a customer initiates an RTGS transaction, their bank sends instructions to the central bank who then processes and facilitates the payment. Upon completion of the transaction, the central bank books the transfer on both customer banks’ books and posts the transaction. The RTGS system is a fully electronic funds transfer solution, offering advantages to other forms of payment. As all payments are settled instantly, customers are ensured payment confirmation at the point of instruction and minimal lag time between funds debiting and crediting. Additionally, the RTGS system is highly reliable and secure.
The RTGS process also helps reduce risks associated with high-value payment settlements among financial institutions. A potential counterparty risk when transferring funds is minimized by the real-time settlement, so funds are deposited and credits are processed the same day, eliminating further exposure from default that arises from long-term netting of debits and credits. Additionally, since all funds exchanged in the system are held in the books of the central bank, funds are accessible quickly and easily in the case of any errors.
Overall, RTGS is an effective and efficient method of interbank transfers, offering numerous advantages over traditional netting services. In order to maximize the potential of the RTGS process, legal and organizational conditions need to be put in place. This includes the development of a legal infrastructure and the implementation of risk-control measures that incentivize adaptation of RTGS systems by other financial institutions and encourage innovation in the banking sector. As the RTGS process has become more popular in recent years, many central banks are already preparing these legal and technical frameworks to meet the current and future demands of this system.