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The speed and efficiency of financial transactions have never been more critical to business success. Payment delays can affect merchants’ transactions and business relationships, as well as raise potential security concerns. As such, various payment methods exist that handle transactions in different ways.
The simple fact is that some business payments are more urgent than others. Whether involving large sums or requiring immediate settlement, merchants need the highest priority service to clear some payments instantly. In this case, real-time gross settlement (RTGS) systems are an excellent choice.
Unlike some traditional payment methods – where transactions could take days and are sent in batches – RTGS operates differently. It allows for instant transfer of funds, ensuring that money moves swiftly and securely from one account to another. Settling payments individually not only accelerates transactions but also adds a layer of security.
This immediate settlement is particularly beneficial for merchants sending or receiving large, time-sensitive online payments. But no matter the reason, merchants can use the RTGS system to improve their liquidity management strategy.
What is real-time gross settlement (RTGS)?
RTGS is a funds transfer system where transactions are settled individually. This contrasts with deferred net settlement systems, where payments are batched together for settlement at the end of a business day – potentially leading to delays.
The full form of RTGS — real-time gross settlement — means precisely what it says. It’s the instantaneous (real-time) processing of funds transfers as soon as they are received. There is no waiting for any batching or processing window.
Worldwide, several financial systems use RTGS for large-value payments.
- The Bank of England, for example, operates CHAPS (Clearing House Automated Payment System), a renowned RTGS system that settles billions of pounds of high-value transfers each day.
- Target2 offers RTGS settlements within the European banking ecosystem, where a central bank receives and handles payments.
- The Fedwire Funds Service is typically used for immediate payments in the United States.
- The Reserve Bank Information and Transfer System (RITS) is used to process RTGS payments in Australia.
Similarly, many other countries have adopted RTGS systems to enhance the efficiency and security of their financial services. These systems allow merchants to receive client money immediately, without waiting for end-of-day batch payments, creating much faster and smoother transactions.
How long does an RTGS transfer take?
The most important aspect of RTGS is its real-time settlement. Transactions are typically processed within a few hours or even minutes from the time the instruction is given. This rapid processing time is different to traditional payment methods, where transfers can take up to several days. This is especially true for overseas payments, where merchants may need RTGS to make quick payments instead of using other more time-consuming methods.
This real-time feature is especially valuable for high-value or large-amount transfers. Merchants sending or receiving substantial sums can use RTGS for instant transfers, ensuring peace of mind that their payment takes priority. By sending immediate transfers, RTGS systems shorten the waiting time for both parties involved in the transaction. This is vital in scenarios where time is of the essence, such as large corporate payments or interbank settlements.
Of course, not all payments need to be settled instantly. But by enabling instant settlement of high-value payments, RTGS gives merchants priority for crucial transactions while adding an extra layer of security and reliability. Overall, using RTGS for such time-critical payments can help businesses and financial institutions streamline their risk management and payment processes.
How does RTGS work?
At its core, RTGS is a process that settles important transactions individually. Unlike traditional methods that process payments in batches at specific times, RTGS operates on a transaction-by-transaction basis. This means as soon as a payment instruction is received, it’s immediately processed and settled.
- The RTGS process starts when a merchant initiates a transfer. This could be a while conducting a large trade, interbank transfers or a significant one-off payment.
- The merchant’s instruction is then immediately sent to the receiving bank via the RTGS system. This will usually include details like the amount to be transferred, the account to be debited and the acquiring bank and account information.
- Upon receiving, the system verifies the availability of funds and processes the transfer. The funds are then credited to the merchant account and taken from the sending bank account in real-time, ensuring immediate availability. This confirmation is almost instantaneous, assuring both parties that the funds have been successfully transferred. Each transaction processed through RTGS is final and irrevocable.
It’s important to remember that timing is crucial in RTGS. Most RTGS systems process on the same day during operating hours. If sent at the correct time, transactions are usually completed within a few hours or minutes. This rapid turnaround is a key advantage of RTGS, especially for high-value transactions where any delay can be costly.
What is the RTGS limit per day?
RTGS is unique because it typically has a minimum transaction value, ensuring that it’s only used for significant sums. There’s generally no maximum limit, making it ideal for large-scale transfers. The minimum amount varies between systems but is set to ensure that RTGS is used for its intended purpose – high-value, time-sensitive transactions.
What are the benefits of RTGS?
Real-time gross settlement systems bring many advantages. Below are some of the key benefits:
Improved cash flow
Merchants receiving funds immediately through RTGS can simply better manage their cash flow. This has a ripple effect on overall operations. Sending and receiving funds instantly allows for better management of working capital. Companies can then optimise their financial resources, paying for services or goods exactly when needed.
Reduced friction
In international trade, the immediacy of RTGS payments is invaluable. It facilitates smoother cross-border payments, helping to reduce the uncertainty and delays often associated with worldwide payments. This helps in building trust between trade partners, as funds are transferred and confirmed in real time. In urgent scenarios, like emergency payments or time-sensitive investments, the ability of RTGS to move funds instantly is another significant advantage.
Enhanced security
The risk of cyber threats is significantly minimised due to the smaller time window for each transaction. In traditional batch processing, funds can be in limbo for a longer period, increasing vulnerability. RTGS, with its instant processing, reduces this risk, offering a safer channel for transferring large sums and offering merchants peace of mind that their large transactions are in safe hands.
Extensive availability
Most RTGS systems operate 24/7, 365 days a year. This round-the-clock availability means that merchants can execute high-value transactions without the constraints of traditional banking hours. This feature is particularly beneficial in a global economy, where the ability to transfer funds swiftly across different time zones is crucial.
Transparent fees
The cost of using RTGS is regulated with a cap on fees. This charge, which varies depending on the institution or country, ensures that the cost of using RTGS is not prohibitive, making it accessible to a wide range of users. The transparency in RTGS fees also adds to its appeal, as users can anticipate the cost associated with their transactions.
The differences between RTGS, BACS and NEFT
BACS
BACS is a payment system used for processing a high volume of transactions, particularly in the UK. It’s typically used for low-value transactions such as payroll, direct debit payments or bill payments. For example, 80 per cent of UK workers’ salaries are paid by BACS.
The key characteristic of BACS is its processing time. Transactions are not immediate. Instead, they operate on a batch basis and can take three working days to clear. This makes BACS a good fit for merchants sending routine, non-urgent or regular payments where the low cost of processing is more important than speed.
NEFT
NEFT is a payment system primarily used by the Reserve Bank of India. It facilitates fund transfers between banks and is designed for low to medium-value transactions.
NEFT processes transactions in hourly batches. It is typically faster than BACS but slower than RTGS. The transfer speed can range from a few minutes to a few hours, depending on the timing of the batch in which the transaction is processed. Merchants commonly use NEFT for small-scale business transactions which do not require immediate settlement.
RTGS
As we’ve seen, RTGS stands out for its immediate processing of high-value transactions. Each transaction is settled individually and in real time, instead of in scheduled batches. This makes it significantly faster than BACS and often quicker than NEFT.
Merchants around the world use the RTGS system for large-scale transfers, where immediate settlement, security and peace of mind is crucial. For smaller or non-urgent payments, a different method may be a better fit.
RTGS vs BACS vs NEFT
The key differences between these systems can be summarised as follows:
- BACS: Batch processing, days to settle. Best for lower-value transactions. Up to three days processing. Primarily used by merchants in the UK.
- NEFT: Batch processing, hourly settlement. Suitable for low-medium value transactions. Minutes to hours to settle. Primarily used by Indian businesses.
- RTGS: Real-time, individual settlement. High-value transactions. Fast (up to immediate) processing. Global merchant usage for high-value, high-priority payments.
In general, RTGS is preferred for high-value, urgent transactions requiring immediate settlement. BACS is suitable for regular, low-value payments where cost-efficiency is key and speed is less critical. NEFT strikes a balance, used for smaller transactions with faster settlement than BACS but not real-time like RTGS.
Conclusion
Real-time gross settlement systems have revolutionised the way high-value transactions are handled. By understanding what RTGS is and how it operates, merchants can send high-priority payments through an immediate, secure and irrevocable settlement service.
There are many use cases for RTGS. This is perhaps best seen when comparing it to similar services. For instance, the key differences between RTGS, BACS, and NEFT highlight RTGS’s unique position in facilitating large-scale, time-sensitive transfers globally. If you need to send or receive a large payment urgently, RTGS could be an excellent choice.
At Trust Payments, we understand the business-critical importance of an efficient, fast and secure payment service provider. Sending and receiving immediate, reliable, and secured transactions helps ensure seamless payment operations when you need them most. Our payment gateway service is designed to integrate seamlessly with RTGS systems, ensuring that your high-value transactions are processed with speed and security. Contact us to learn more.
FAQ
A real-time gross settlement (RTGS) payment is a system where the transfer of money or securities occurs from one bank to another on a real-time basis. This means that transactions are not subjected to any waiting period.
RTGS clearing time is often instant — transactions are processed as soon as they are initiated. They are then settled individually, without being bundled with any others, unlike other payment systems. RTGS is typically used by merchants sending high-value transactions, where immediate transfer and settlement are critical. It’s a standard in global financial systems for its speed, security and efficiency.
The primary difference between NEFT (National Electronic Funds Transfer) and RTGS (Real-Time Gross Settlement) is the transaction speed and the value of funds being transferred.
- NEFT is used by merchants transferring smaller amounts and processing transactions in batches, which means there can be a delay of up to a few hours.
- RTGS is designed for merchants sending larger transactions and operates in real-time, ensuring immediate settlement. Its minimum transfer amounts and relatively larger fees make it less suitable for everyday purchases, such as retail payments.
Accordingly, RTGS is more suitable for high-value business transactions requiring urgent clearance. NEFT is preferred for merchants making routine, lower-value transfers. However, both NEFT and RTGS time scales are fast compared to other traditional payment methods.
The full form of RTGS is “Real-Time Gross Settlement.” This term describes the system well — ‘Real-Time’ indicates that the processing of transactions happens instantly, without any delay. ‘Gross Settlement’ means the transactions are settled on a one-to-one basis without clustering them with other transactions.
The RTGS system is a pivotal part of modern financial markets and infrastructure. It allows merchants to make the quick and safe transfer of large sums of money. RTGS is renowned for its efficiency and reliability in handling high-value transactions, providing merchants with immediate funds clearance and peace of mind.
