# Understanding Real-Time Gross Settlement (RTGS) and Its Impact on Banking

![Real-Time Gross Settlement](https://www.investopedia.com/thmb/-P3QXFhxTZWYO3ffbPbK4jC9BIU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/rtgs-Final-6457bcd3d3e549f9a1b0097c57390417.jpg)

*— Investopedia / Theresa Chiechi*

## What Is Real-Time Gross Settlement (RTGS)?

Real-Time Gross Settlement (RTGS) provides an efficient method for banks to execute high-value transactions instantly and individually, enhancing overall security by minimizing settlement risk. Unlike net settlement systems, RTGS transactions are final and irrevocable once processed, making it a vital component of modern banking.

### Key Takeaways

*   Real-time gross settlement (RTGS) allows for instant transfer of funds without netting debits and credits, ensuring transactions are final and irrevocable.
*   RTGS systems are primarily used for large-value interbank transfers and help minimize settlement risk by processing transactions in real-time.
*   The RTGS process is managed by central banks and does not require a physical exchange of funds, reducing vulnerabilities to cybersecurity threats.
*   RTGS differs from net settlement systems, like BACS, by settling each transaction individually and immediately rather than at the end of the day.

## Understanding the Mechanics of Real-Time Gross Settlement (RTGS)

When you hear the term real-time, it means the settlement happens as soon as it is received. So, in simpler terms, the transaction settles in the receiving [bank](https://www.investopedia.com/terms/b/bank.asp) immediately after it is transferred from the sending bank. Gross settlement means transactions are handled and settled individually, so multiple [transactions](https://www.investopedia.com/terms/t/transaction.asp) aren't bunched or grouped together. This is the basis of a real-time gross settlement system.

An RTGS system is generally used for large-value interbank funds transfers operated and organized by a country’s [central bank](https://www.investopedia.com/terms/c/centralbank.asp). These transfers often require immediate and complete clearing. As mentioned above, once transactions are settled, they cannot be reversed.

In 1970, the U.S. Fedwire system was launched. It was the first system resembling a real-time gross settlement system. It was an evolution of the telegraph-based system used to transfer funds electronically between U.S. Federal Reserve banks.

The British system, called the Clearing House Automated Payment System (CHAPS), is currently run by the [Bank of England](https://www.investopedia.com/terms/b/boe.asp). France and other [Eurozone](https://www.investopedia.com/terms/e/eurozone.asp) nations use a system called Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET2). Other developed and developing countries have also introduced their own RTGS-type systems.

Real-time gross settlement lessens [settlement risk](https://www.investopedia.com/terms/s/settlementrisk.asp)—also referred to as [delivery risk](https://www.investopedia.com/terms/d/delivery-risk.asp)—overall, as interbank settlement usually occurs in real-time throughout the day—instead of simply all together at the end of the day. This approach eliminates the risk of transaction delays. RTGS can often incur a higher charge than processes that bundle and net payments.

## Comparing RTGS and BACS Systems

A real-time gross settlement system is different from [net settlement](https://www.investopedia.com/terms/n/net-settlement.asp) systems, such as the United Kingdom’s Bacs Payment Schemes Limited, which was previously known as the Bankers' Automated Clearing Services (BACS). Transactions that take place between institutions with BACS are accumulated during the day. At the close of business, a central bank adjusts the active institutional accounts by the net amounts of the funds exchanged.

RTGS does not require an actual physical exchange of funds. A central bank will often adjust the accounts of the sending and receiving bank in electronic form. For example, sender Bank A's balance will be reduced by $1 million, while recipient institution Bank B’s balance will be increased by $1 million.

## Advantages of Real-Time Gross Settlement (RTGS)

RTGS systems, increasingly used by central banks worldwide, can help minimize the risk to high-value payment settlements among [financial institutions](https://www.investopedia.com/terms/f/financialinstitution.asp). Companies and financial institutions maintain high security for sensitive data, yet online threats keep evolving.

> **Important**
>
> RTGS-type systems help protect financial data by making it vulnerable to hackers for a briefer time window.

Real-time gross settlement can allow a smaller window of time for critical information to be vulnerable, thus helping mitigate threats. Two common examples of cybersecurity threats to financial data are social engineering or [phishing](https://www.investopedia.com/terms/p/phishing.asp)—tricking people into revealing their information—and data theft, whereby a hacker obtains and sells data to others.

## What Is the Real-Time Gross Settlement Fee?

The fee for real-time gross settlement will vary depending on the institution/country in which the settlement occurs as well as the size of the transfer. There are times when the fees can be waived by the institution.

## What Is an Example of a Real Time Gross Settlement System?

An example of a real-time gross settlement system would be when a customer has their bank send a transfer of funds to another bank via the RTGS and the transfer happens instantaneously. If this transfer was done via automated clearing house (ACH), the transfer may take a few days to clear.

## What Is the Difference Between Net Settlement and Real-Time Gross Settlement?

 The difference between net settlement and real-time gross settlement (RTGS) is that net settlement involves aggregate data that is processed and settled at the end of the day whereas RTGS involves data with individual transactions in real-time (processed and settled instantly).

## The Bottom Line

Real-time gross settlement (RTGS) systems enable the immediate and irrevocable [transfer of funds](https://www.investopedia.com/what-is-fednow-7963716) across central bank books, which mitigates risks associated with high-value interbank transactions. Used primarily for large-value transfers, RTGS systems minimize settlement risk by eliminating transaction processing delays, thereby ensuring seamless and secure financial operations.

> **Article Sources**
>
> 1.  Federal Reserve Bank of New York. "[Creating an Integrated Payment System: The Evolution of Fedwire](https://www.newyorkfed.org/medialibrary/media/research/epr/97v03n2/9707gilb.pdf)," Pages 2-3.
>     
> 2.  Bank of International Settlements. "[Payment Systems in the United Kingdom](https://www.bis.org/cpmi/paysys/unitedkingdomcomp.pdf?msclkid=5ad66d83aa1b11ecb9eb3fecee7aa2ed)," Page 407.
>     
> 3.  European Central Bank. "[What is TARGET2?](https://www.ecb.europa.eu/paym/target/target2/html/index.en.html?msclkid=90081545aa1c11ecbaaf4eb98b7aa75e)"
>     
> 4.  Bank of International Settlements. "[Payment Systems in the United Kingdom](https://www.bis.org/cpmi/paysys/unitedkingdomcomp.pdf?msclkid=5ad66d83aa1b11ecb9eb3fecee7aa2ed)," Pages 410-413.
>     
> 5.  Bank of International Settlements. "[Payment Systems in the United Kingdom](https://www.bis.org/cpmi/paysys/unitedkingdomcomp.pdf?msclkid=5ad66d83aa1b11ecb9eb3fecee7aa2ed)," Pages 412-413.
>     
> 6.  U.S. Small Business Administration. "[Stay Safe from Cybersecurity Threats](https://www.sba.gov/business-guide/manage-your-business/stay-safe-cybersecurity-threats)."