How do you choose between RTGS and net settlement for cross-border payments?

1 What is RTGS?

RTGS is a system that transfers funds between banks on a one-to-one basis, in real time, and with finality. This means that each payment is processed individually, as soon as it is initiated, and cannot be reversed or cancelled. RTGS reduces the settlement risk and liquidity risk for the participants, as they do not have to wait for the end of the day or rely on intermediaries to clear their payments. However, RTGS also requires more capital and resources from the banks, as they have to maintain sufficient balances in their accounts at all times, and pay higher fees for each transaction.

2 What is net settlement?

Net settlement is a system that aggregates and offsets multiple payments between banks, and settles them at a predetermined time or frequency, usually at the end of the day. This means that each payment is not processed individually, but rather as part of a net position with other payments. Net settlement reduces the operational and transactional costs for the participants, as they do not have to maintain high balances in their accounts or pay fees for each payment. However, net settlement also increases the settlement risk and liquidity risk for the participants, as they have to wait for the final settlement to confirm their payments, and depend on the solvency and performance of other banks.

3 How to compare RTGS and net settlement?

When determining the best settlement method for cross-border payments, a variety of factors should be taken into account. These include the size, frequency, and urgency of payments, as well as the availability and accessibility of the systems. RTGS may be suitable for large, infrequent, or time-sensitive payments due to its faster and safer settlement. On the other hand, net settlement may be more efficient for small, frequent, or less urgent payments due to its lower costs and less administrative burden. Additionally, you need to consider the regulatory and compliance implications of each system in the relevant jurisdictions before choosing a settlement method, such as any reporting, taxation, or anti-money laundering rules that may apply.

4 How to choose the best option for your cross-border payments?

When deciding between RTGS and net settlement for your cross-border payments, it is important to assess your business needs and preferences, and compare them to the benefits and drawbacks of each method. To guide your decision-making process, ask yourself what your objectives and priorities are for your cross-border payments, what the characteristics and expectations of your counterparties are, what the market conditions and trends are for your cross-border payments, and what the best practices and standards for your industry and sector are. Through this evaluation, you can determine which option is more suitable for your specific cross-border payments.

5 How to optimize your cross-border payments?

Once you have chosen your settlement method, you can still optimize your cross-border payments by planning and forecasting cash flows and currency exposures, communicating and coordinating with counterparties and banks, and reviewing and updating policies and procedures. This can help manage liquidity and risk more effectively, avoid unnecessary delays or costs, align expectations and requirements, comply with the latest regulations and standards, and improve efficiency and performance. In doing so, you can enhance your cross-border payments experience, and achieve your treasury goals.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?