Part II - The Why and How

Why does real-time matter?

All-day, every-day real-time gross settlement

First, real-time gross settlement (“RTGS”). What is it? Breaking it into parts, we have real-time and gross settlement. Real-time settlement is when payments’ clearing (sending the message) and settlement (moving the money) occur more or less concurrently. This is in contrast to deferred settlement that happens on a set schedule, e.g. EOD. Gross settlement is when settlement happens on a transaction-by-transaction basis. This is in contrast to a net settlement basis where payments are batched together and netted to grand totals. For reference, ACH and same-day ACH are deferred net settlement systems.

Putting it together, RTGS is a model where there is continuous clearing and settlement of funds on a payment-by-payment basis. RTP and FedNow are the only faster payment systems in the US that will offer RTGS 24x7x365.

With RTGS, a transaction will only be completed if the originating participant has an adequate balance in its account. Credit risk between participants is therefore eliminated and real-time settlement enables immediate finality of all payments. However, demands on liquidity and thus liquidity risk in this model are higher. One of the major differences between RTP and FedNow, as noted in Part I, is liquidity management. Let’s look at each.