Real time Gross settlement is a system for transferring funds between banks. Unlike some systems, currency changes hands instantly. The “total” in its name means that each transaction is completed separately, rather than combined with other transactions.
Real time gross settlement is the instant transfer of funds between one bank and another bank. More than 20 countries around the world have real-time gross settlement plans.
There is also a scheme covering all EU member states. The United States has a real-time total settlement plan called Fedwire. The Canadian equivalent of LVTS is not technically a real time gross settlement plan because the settlement is actually a
real-time application performed at the end of each fiscal day, allowing the instant flow of information and goods to work electronically using the services of the real-time gross settlement plan. Unlike any physical asset changing hands, the total balance of each bank will only change electronically with each transaction.
Therefore, most of these programs are supervised by the national government to ensure that there will be no irregularities. The advantage of this program is that it can effectively eliminate credit and security risks. The payee gets the money almost instantly, so it is easy to ensure that they will not provide related goods or services until they get paid.
Once the payment is made according to this scheme, it is impossible to reverse, because neither party has to withdraw money from the bank, even in a “safe” form, such as a bank draft, there is no security risk. These plans are also good for the banks themselves.
One is that they can track their overall “cash” level throughout the day, because they only need a number, which is continuously updated automatically, without the need to calculate continuous settlement.
Real Time Gross Settlement Plans
The real time gross settlement plan is different from another major system, the net settlement system. It involves summarizing all payments that move back and forth between banks in a day, and then one bank pays another bank a sum of money to be “settled” at the end of the day.
Such a plan may be cheaper because it involves less administrative management. The disadvantage is that depending on the bank involved, customers may find that they cannot transfer money immediately, even if they are using telephone or online banking services if the combination of banks means that the money immediately leaves one customer’s account, but does not arrive at another until the end of the day. For a customer’s account, this can be particularly frustrating.
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