Real-time gross settlement is a system for instant transfer of funds between banks, overseen by national governments to prevent foul play. It eliminates credit and security risks and allows banks to keep track of cash levels. It differs from net settlement systems, which can be cheaper but slower.
Real-time gross settlement is a system for transferring funds between one bank and another. Unlike some systems, money changes hands instantly. The “gross” in the name refers to the fact that each transaction is completed individually rather than combined with others.
More than 20 counties around the world have a real-time gross settlement scheme. There is also a scheme with coverage for all member states of the European Union. The United States has a real-time gross settlement scheme called Fedwire. The Canadian equivalent, LVTS, is not technically a real-time gross settlement scheme, as settlements actually take place at the end of each financial day.
Services using a real-time gross settlement scheme operate electronically. Instead of physical assets changing hands, the overall balance of the respective bank simply changes electronically with each transaction. Because of this, most of these schemes are overseen by the national government to make sure there is no foul play.
Such schemes have the advantage that they effectively eliminate credit and security risks. The person receiving the payment gets the money almost instantly and can therefore easily ensure that they do not supply the relevant good or service until they receive payment. Once a payment is made under such a scheme, it cannot be reversed. There is also virtually no security risk, since neither party has to withdraw the money from the bank, even in a “safe” form, such as a money order.
The schemes also have advantages for the banks themselves. The main one is that they can keep track of your overall “cash” levels throughout the day. Because they simply have a number that is constantly and automatically updated, there is no need to calculate a checking account.
A real-time gross settlement scheme differs from the other main system, known as net settlement systems. These include counting all payments that move back and forth between banks during a day, then one bank pays another a single amount to “settlement” at the end of the day. Such schemes can be cheaper to run as there is less administration involved. The downside is that, depending on the banks involved, customers may find that they cannot transfer money instantly, even if they are using a phone or internet banking service. This can be particularly frustrating if the bank mix means money leaves one customer’s account immediately but doesn’t reach the other customer’s account until the end of the day.
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