If you make payments as a business or an individual, you may have come across the term RTGS. Understanding what RTGS means and how it works can help for managing time-sensitive transactions effectively. In this article, we will explain what RTGS means, provide examples of how it is used, and explore alternative payment methods.
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What Does RTGS Mean?
RTGS stands for Real-Time Gross Settlement. It’s a system used for the continuous, real-time settlement of fund transfers individually on an order-by-order basis, without netting. This means that transactions are settled as soon as they are processed, making RTGS one of the fastest methods of transferring money between banks. RTGS systems are becoming more common globally and are increasingly the standard expectation for consumer and business-based domestic payments, as they provide a reliable means for time-critical payments.
What Does “Without Netting” Mean?
In the context of RTGS, “without netting” means that each transaction is processed and settled individually in real-time. Unlike systems that use netting, where multiple transactions are combined and only the net amount is settled at the end of a period (also known as batch payments), RTGS ensures that each payment is settled immediately and in full. Batch payments, on the other hand, wait for a net figure to build up, usually over a specific time frame, such as an hour. Consequently, batch systems are generally slower than RTGS because they require waiting for a payment cycle to complete.
Example of RTGS in the UK: The Faster Payments System
In the UK, an example of an RTGS would be the Faster Payments Service (FPS). Launched in 2008, FPS is designed to reduce the time taken to process electronic payments. It allows individuals and businesses to send payments quickly and securely, with most transactions being processed in minutes. This is a significant improvement over previous systems, where payments could take much longer to clear. Most people in the UK should be familiar with FPS, as it is typically the default payment rail used when making a domestic transfer to pay for goods and services or to send money to a friend.
Key Features of Faster Payments in the UK:
- Speed: Payments are processed in near real-time, typically within a few seconds.
- Availability: The system operates 24/7, including weekends and holidays.
- Accessibility: Available for most types of payments, including online, mobile, and telephone banking.
What is Batch Processing?
Batch processing is the opposite of RTGS. In batch processing, transactions are accumulated over a period and then processed together at specified intervals. This method is efficient for handling large numbers of transactions but lacks the immediacy of real-time systems.
Example of Batch Processing in the UK: BACS (Bankers’ Automated Clearing Services)
One of the most well-known batch processing systems in the UK is BACS (Bankers’ Automated Clearing Services). BACS is widely used for processing large volumes of transactions around 8 in 10 salary payments in the UK are done via bacs.
Characteristics of BACS:
- Batch Processing: Transactions are collected and processed in groups rather than individually.
- Settlement Times: Typically takes three working days for transactions to clear.
- Ease of Use: Businesses can easily export BACS files using their payroll software, which can then be uploaded to their bank’s online portal for processing multiple payroll payments efficiently.
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