A Real Time Gross Settlement System (RTGS) is a funds transfer system in which the transfer of funds between one bank and another takes place in "real time" and on a "gross" – transaction by transaction – basis, without bundling or netting with any other transaction. Real time settlement means that a payment transaction is not subjected to any waiting period. If funds are sufficient, transactions are processed and settled as soon as they are entered into the RTGS. Once processed, payments are final and irrevocable. RTGS transactions may be customer to customer or bank to bank but are always sent by one bank (the paying bank) and received by another (the collecting bank).
Purposes of the RTGS
RTGS systems are typically used for high-value and/or urgent transactions that require and receive immediate clearing. In some countries the RTGS systems may be the only way to get same day cleared funds and so may be used when even small payments need to be settled urgently.
Most regular payments, i.e., low-value or non-urgent payments would not be accomplished through RTGS, but instead would use a national payment system such as ACH that allows participants to batch and net payments. RTGS payments typically incur higher transaction costs and usually operated by a country's central bank.
Benefits of the RTGS
The biggest benefit is that RTGS eliminates systemic settlement risk that can arise for end-of-day net settlement of large value transactions. In a net end-of-day system, if one bank fails to pay, then others can also fail, and a country’s banking system can crash. RTGS prevent this by settling transactions in Central Bank accounts (the RTGS settlement accounts) before the payment is passed to the collecting bank.
From the transaction point of view, RTGS is immediate and secure. RTGS is mainly used for high-value transactions, since RTGS payments are processed individually when entered. And since RTGS funds are transferred immediately upon processing, the funds are immediately available for further payments.