RTGS is an acronym for Real-Time Gross Settlement. It is a banking technology designed to strategically allow different banks to move funds through a very secure transaction platform monitored by the Reserve Bank.
For example, one can initiate a bank transfer from Steward Bank to CBZ without the need of withdrawing money for Steward Bank and then go to CBZ and make a direct deposit.
Due to the serious cash shortages prevailing in Zimbabwe, RTGS has become the most suitable choice of transferring money across banks.
But how many of you know what an RTGS is? How does it work? and what are the processes running behind the scenes to get your transfer to its destination bank?
The term RTGS then effectively come into play where the transfer of money or securities takes place from one bank to another on a “real time” and on a “gross” basis.
Settlement in “real time” means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. “Gross settlement” means the transaction is settled on one-to-one basis without bundling or netting with any other transaction.
“Settlement” means that once processed, payments are final and irrevocable.
RTGS systems are typically used for high-value transactions that require and receive immediate clearing. In some countries the RTGS systems may be the only way to get same day cleared funds and so may be used when payments need to be settled urgently.
However, most regular payments would not use a RTGS system, but instead would use a national payment system or network that allows participants to batch and net payments.
RTGS payments typically incur higher transaction costs which used to be $10 in Zimbabwe but the RBZ had since then ordered a 50% slash of those fees down to $5.
RTGS systems are usually operated by a country’s central bank as it is seen as a critical infrastructure for a country’s economy. Economists believe that an efficient national payment system reduces the cost of exchanging goods and services, and is indispensable to the functioning of the Interbank, money, and capital markets.
A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money.
RTGS system does not require any physical exchange of money; the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank A’s account by the amount in question and increasing the balance of Bank B’s account by the same amount.
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.
The objective of RTGS systems by central banks throughout the world is 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. The best RTGS national payment system cover up to 95% of high-value transactions within the national monetary market.