A look at the role RTGS plays in payments

Key Takeaways

• RTGS has been revolutionary in the world of payments
• India has been ahead, and the US and UK are catching up
• RTGS could be used in cross-border payments, blockchain transactions

Real-Time Gross Settlement (RTGS) is often described as a game changer because it enables electronic payments between two banks to be processed and settled in real time rather than being batched.

The speed and efficiency explain why it is typically used for large-value interbank funds transfers operated and organized by a country’s central bank. These often require immediate and complete clearing but once settled, cannot be reversed.

RTGS differs from net settlement systems, such as the UK’s Bacs Payment Schemes Ltd, which was previously known as the Bankers’ Automated Clearing Services (BACS). Transactions that take place between institutions with BACS are accumulated during the day. Central banks then adjust the active institutional accounts at the close of business by the net amounts of the funds exchanged.

RTGS roots

RTGS’ origins can be traced back to the US Fedwire system (see case studies below) debut in 1970. It was an evolution of the telegraph-based infrastructure used in 1915 to transfer funds electronically between the country’s central banks. Today, it is owned and operated by the 12 Fed banks as a networked system for payment processing between the member banks and other participating institutions.

The British system, called the Clearing House Automated Payment System (CHAPS), is run by the Bank of England (BoE), while eurozone countries use a system called the Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET2). Other developed and developing countries have also introduced their own versions.

How it works 

The RTGS system operates on a transaction-by-transaction basis without any netting or offsetting. Each is settled individually and immediately, which means that the funds are transferred in real time and are available for use as soon as the transaction is completed.

It operates on a centralized platform that is managed by the central bank of the country and, as mentioned, is typically used for large-value interbank funds transfers between central banks as well as by corporations and governments. They often require immediate and complete clearing.

The main benefits

The main attributes of RTGS are speed, security, transparency, and cost. Unlike other payment systems, transactions are settled in real time, which means that the funds are available to the receiver almost instantly. In addition, there is no upper limit on the amount that can be transferred, which makes it beneficial for high-value transactions that need to be settled quickly.

The system also provides a secure way to transfer funds between banks. An encryption mechanism protects the data and prevents unauthorized access, ensuring that the funds are transferred safely without any risk of fraud or theft. Moreover, senders and receivers can track and monitor the status of the transaction, which means there is no confusion or delay in the settlement process.

Saving time also makes RTGS a cost-effective way to transfer funds between banks. While there may be a fee, it is often much lower than those associated with other payment systems.

Case studies

The Federal Reserve Bank of New York operates the Fedwire Funds Service, an RTGS system that is used by banks and other financial institutions to settle large-value transactions, such as interbank transfers and government securities transactions. The system has grown exponentially since its inception. According to the latest annual statistics from the Fedwire Funds Service, the total number of transfers last year was more than 193 million and the value of transfers originated was just over one quadrillion USD. That is compared with over 53 million transfers and a value of more than USD 152 billion in 1987.

Fedwire had been free of charge but that changed under the Depository Institutions Deregulation and Monetary Control Act of 1980, which imposes a small fee.

The Fed, like many other central banks, is looking to upgrade and enhance its RTGS infrastructure. Over the last two years, it has been consulting with industry participants on the revisions required to make it fit for purpose for the 21^st century. To that end, a move to ISO2002 is set for next March, where it will join an increasing number of the world’s payments, clearing and settlement systems that are adopting the global standard to improve payment processing efficiency and promote interoperability globally.

The agenda also includes proposals to expand the operating days of both the Fedwire Funds and the National Settlement services to be a 22/7, 365-day service. Although 2027 is the target start year, stakeholders requested that it be delayed until after the ISO 20022 migration is completed.

Bank of England 

CHAPS, which uses RTGS for sterling transactions in the UK, was originally established in London by the Bankers Clearing House in February 1984, before transferring to the CHAPS and Town Clearing Company Ltd. It was run by different operating companies until the BoE took control in 2017.

It represents around 0.5% of UK total payment volumes but 92% of total GBP payment values. In 2023, volumes grew by 0.5% to a record 51.1 million – on average 203,759 per day, which surpassed the previous volume record in 2022 of 50.9 million. The total value settled in CHAPS in the 12 months to December 2023 dropped by 7.3% to GBP 91.5 trillion or, on average, GBP 364.4 billion daily.

Two years ago, the BoE launched its road map for a new and improved RTGS infrastructure. The plan involves increasing resilience, offering greater access and wider interoperability, and improving user functionality.

As with the Fed, implementing ISO200 for CHAPS and extending RTGS settlement hours to near 24/7 are important planks. A new core settlement engine and synchronization interface are also part of the package. They would support connections to external ledgers and programmable platforms, as well as asset settlement in central bank money.

The BoE said its vision is for RTGS to act as an open platform for change and innovation, supporting its financial stability and monetary policy objectives. The end goal is to help drive the industry development of innovative features that would lead to cheaper, safer, and faster domestic and cross-border payments.

Reserve Bank of India

The RBI introduced the RTGS system on 26 March 2004 to settle interbank transactions but quickly extended the service to customer transactions. Today, it is considered the most critical payment system in India due to its security and ability to provide real-time online settlements for interbank transactions and customer-based interbank transactions of any amount.

In many ways, the country has been ahead of its developed peers in upgrading its systems. It has already adopted ISO2022 and did not let the pandemic hamper its plans to introduce 24/7, 365-day service in 2020.

The future

As financial services continue their digital journey, RTGS is expected to expand into new markets and offer new functionalities to meet users’ evolving needs.

Here are some of the developments to look out for:

• Integration with blockchain technology to provide additional security features and support new use cases. For example, blockchain-based smart contracts could automate the settlement of complex transactions, reducing the need for manual intervention.
• RTGS systems have primarily been used for domestic payments, but there is growing interest in using them for cross-border payments as well. By leveraging RTGS, they could become faster, cheaper, and more secure.
• RTGS systems could potentially integrate with other payment systems, such as card networks, to offer a more seamless payment experience. For example, a user could initiate a payment from their mobile phone using a card network, and the payment could be settled instantly using RTGS.

Regardless of jurisdiction, RTGS offers banks the potential for increased efficiency, reduced costs, and improved risk management.