What is a primary advantage of RTGS payments?

The primary advantage of Real-Time Gross Settlement (RTGS) payments is that they reduce settlement risk. In an RTGS system, transactions are settled in real time on a gross basis, meaning that each payment is settled individually and immediately, as opposed to being bundled together and settled at a later time. This immediate processing minimizes the risk that a counterparty may default on a payment between the time a transaction is initiated and when it is actually settled, which is a critical aspect of payment systems.

Settlement risk, also known as counterparty risk, arises when there is uncertainty regarding a transaction's completion; for example, one party may fulfill its payment obligation while the other may fail to do so. By ensuring that payments are settled instantly and irrevocably, RTGS significantly cuts down on this risk, enhancing the overall safety and efficiency of the payment system.

In contrast, while cost considerations and the ease of reversing transactions may be important features in other types of payment systems, they do not capture the core benefit of RTGS. Similarly, incentives for early payments may exist in certain payment methods, but they do not define the unique advantage that RTGS offers in terms of settlement security.