How are real-time payments settled?*
The only other answer I saw refers to cross-border payments. I found that a bit strange in the context of this question since, AFAIK, there are no cross-border realtime payments. There are, of course, plenty of domestic real time payments.
Since the question does not mention credit card explicitly, I’m assuming that’s not under the purview.
Accordingly, the context of this answer is domestic, realtime bank account linked payments. There are two types of such payments:
- High value RTGS aka Corporate Payments e.g. RTGS (India), CHAPS (UK), FedWire (USA).
- Low value A2A RTP aka Retail Payments e.g. UPI-IMPS (India), FPS (UK), Zelle (USA).
RTGS stands for Real Time Gross Settlement. As the name suggests, each payment is settled individually in realtime on “gross” basis. The actual settlement process goes through the following steps:
- Debit payor’s account at payor bank with payment value
- Debit payor bank’s nostro account at scheme operator with payment value (RTGS scheme operator is often the country’s central bank)
- Credit payee bank’s nostro account at scheme operator with payment value
- Credit payee’s account at payee bank with payment value.
In actual practice, the debits and credits in the above process would include fees but, for the sake of simplicity, I have skipped that.
A2A RTP stands for Account-to-Account Real Time Payment. Here, a batch of payments is settled periodically on net basis. Net basis means adding up all debits and credits to all other banks for the payments that were processed during the batch. To reduce the counterparty settlement risk, the interval between the payment and settlement is kept to hours rather than days. This is achieved by running multiple settlement cycles in a day. The actual settlement process goes through the same steps as in the case of RTGS, except with individual payment value replaced by “net payment value”, which is the net amount payable / receivable by different banks to one another for the batch.