Payment System and Real Time Gross Settlement Systems

(RTGS)

Payment System:
A payment system is a system for the transfer of money. What makes it a "system" is
that it employs cash-substitutes; traditional payment systems are negotiable instruments
such as drafts (e.g., checks), credit cards and other charge cards, documentary credit (such
as L/C) and electronic funds transfers. Some payment systems include credit mechanisms,
but that is essentially a different aspect of payment. Payment systems are used in lieu of
tendering cash in domestic and international transactions and consist of a major service
provided by banks and other financial institutions. In the US, they are regulated by
different state statutes (UCC) and Federal regulations.

Additional forms of payment systems (including physical or electronic infrastructure and

associated procedures and protocols) are used to settle financial transactions in Automated
teller machine networks, Stored-value card networks, bond markets, currency markets,
and futures, derivatives, or options markets, or to transfer funds between financial
institutions. Due to the backing of modern fiat currencies with government bonds,
payment systems are a core part of modern monetary systems. Also, Electronic Payment
is a subset of an e-commerce transaction to include electronic payment for buying and
selling goods or services offered through the Internet.

Functions of Payment Systems Department:

On becoming fully functional, the department will carry out following:

• Formulate payment systems’ policies and facilitate adoption of international best

practices.
• Introduce developmental strategies for modern payment systems.
• Operate real time gross settlement (RTGS) system for fund transfers & securities
transactions efficiently and securely.
• Provide oversight to payment systems operated by others i.e. NIFT, ECH etc.
• Provide SWIFT services to internal departments and SBP BSC (Bank) Offices.
Real Time Gross Settlement Systems (RTGS):
Real Time Gross Settlement Systems (RTGS) are mechanisms that enable banks to make
large-value payments to one another in real-time using online telecommunication
facilities as well as state-of-the-art computer systems. The payments are settled on gross
basis in real time thus minimizing the systemic risks that are inherent in large-value net
settlement systems.
RTGS system is a funds transfer mechanism where transfer of money takes place from
one bank to another on a “real time” and on “gross” basis. This is the fastest possible
money transfer system through the banking channel. Settlement in “real time” means
payment transaction is not subjected to any waiting period. The transactions are settled as
soon as they are processed. “Gross settlement” means the transaction is settled on one to
one basis without bunching with any other transaction. Considering that money transfer
takes place in the books of the central Bank, the payment is taken as final and irrevocable.

Operation of RTGS:

Under normal circumstances the beneficiary branches are expected to receive

the funds in real time as soon as funds are transferred by the remitting bank.
The beneficiary bank has to credit the beneficiary's account within two hours
of receiving the funds transfer message.
The remitting bank receives a message from the Central Bank that money has
been credited to the receiving bank. Based on this the remitting bank can
advise the remitting customer that money has been delivered to the receiving
bank.

RTGS in Pakistan:

Keeping in view the global trend in payment systems development and the growing
payments market in the country, SBP took the decision to implement the RTGS primarily
with assistance from the World Bank.
The implementation process of the project was started in 2005 which was finalized in
2008 when the RTGS System was inaugurated by the Prime Minister of Pakistan on 1st
July 2008, the day when the central bank celebrated its 60th birthday. From 2nd July
2008, 39 direct member institutions started making their large value inter-bank payments
via the new system
The RTGS in Pakistan has been named as Pakistan Real-time Inter-bank Settlement
Mechanism (PRISM). Using this system, the banks holding accounts at SBP are able to
operate their accounts in real time from their own premises via computerized network
between SBP and the participating Banks. With RTGS, Banks are able to settle with
finality their large value transactions affecting their accounts at SBP (e.g. inter-bank
lending/borrowing) immediately, provided sufficient balance is available in their account.
At times, banks may face temporary shortage of funds in their accounts during the day.
This shortage would be catered for in RTGS through the availability of intraday repos (a
form of collateralized lending). Alternatively, the transaction can also be queued in the
system until the required liquidity becomes available.