Real-time Gross Settlement - Mechanism

Mechanism

This "electronic" payment system is normally maintained or controlled by the Central Bank of a country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $1000 and increasing the amount of Bank B's account by the same.

The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time.

Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as BACS. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. Extending the example above, say another person deposits a check drawn on Bank B in Bank A for $500. At the end of the day, Bank A will have to "electronically" pay Bank B only $500 ($1000 – $500).

The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems.

In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated.

RTGS does not require core banking to be implemented across participating banks, since transactions are direct, with no central processing or clearing operations. Any RTGS employs two sets of queues: one for testing outgoing funds availability on a chronological FIFO basis with the option of prioritizing specific inquiries, while the other queue is for processing debit/credit requests received from the central bank's Integrated Accounting System.