Will RTGS/ACH Systems be Replaced by Faster Payment Systems?

When I was the Program Director for the implementation of Faster Payments (FPS) at a Top 5 UK Bank during 2006-9, it was a significant milestone in the world of financial technology. During one of our meetings in early 2008, we anticipated various scenarios and challenges that might arise with the new payment systems. Little did I know that just seven years later, Bacs would break all-time processing volume records, processing over 100 million payments a day.

These records were a testament to the resilience and ongoing success of traditional payment systems like RTGS (Real-time Gross Settlement) and ACH (Automated Clearing House). Despite the advancements in technology and the introduction of faster payment systems similar to Australia’s New Payment Platform (NPP), these traditional systems continue to play a significant role in the global financial landscape. In this article, we will delve into why RTGS and ACH systems are unlikely to disappear, despite the rise of faster payment systems.

RTGS - The Backbone of Large Transactions

Real-time Gross Settlement (RTGS) systems are specifically designed for processing large and urgent transactions. Unlike faster payment systems that primarily handle smaller, instant transfers, RTGS systems are optimized for making large payments quickly, accurately, and securely. These systems are critical for financial institutions and governments to ensure the timely settlement of large sums, such as government payments, inter-bank transactions, and securities trading.

One of the key reasons why RTGS systems will not die out is their dedicated focus on large-value transactions. These systems are subject to strict regulatory oversight and strict settlement procedures, ensuring that every transaction is processed securely and efficiently. For instance, RTGS systems are ideal for cross-border payments and treasury management activities that require immediate and final settlement. This makes RTGS an indispensable tool in the financial ecosystem.

ACH - The Workhorse of the US Market

Automated Clearing House (ACH) systems have become the backbone of the US market. ACH transactions are used for a wide range of payments, including direct deposit, utility payments, and payroll disbursements. These systems are particularly effective for bulk transactions and have become deeply embedded into the fabric of the US financial system.

The robustness and widespread usage of ACH systems make them difficult to replace. Unlike FPS systems that are designed for faster and smaller transactions, ACH systems handle a large volume of transactions with varying payment times. The success of ACH systems is evident in the fact that it would take significant time and effort to transition all the entities that rely on this system to a faster settlement system. Furthermore, the sheer size of the US market means that even a tiered approach to payment systems, such as providing options for 3-day, 1-day, and instant payments, would take considerable time to implement.

Flexibility and Tiered Approaches

Despite the advancement of faster payment systems, a hybrid approach is likely to prevail. For instance, some financial institutions may offer tiered payment options where customers can choose between slower and faster payment methods based on their needs. This tiered approach acknowledges the fact that not all transactions require immediate settlement, and certain entities still require the reliability and security that RTGS and ACH systems provide.

Moreover, as the technology continues to evolve, faster payment systems will likely coexist with traditional systems. This coexistence ensures that both consumers and businesses can have access to a range of payment options, each tailored to specific needs. Additionally, the development of new technologies such as blockchain and distributed ledger systems may complement existing systems rather than replace them completely. These newer technologies can enhance the security, speed, and transparency of existing payment infrastructures.

Conclusion

While faster payment systems like the NPP in Australia and Swift GPI in Europe are revolutionizing the way payments are made, traditional systems such as RTGS and ACH are highly unlikely to die out. The unique strengths of RTGS in handling large-value transactions and ACH in managing a high volume of payments ensure that these systems remain relevant and integral to the global financial landscape. As financial institutions continue to innovate and adapt to new technologies, the role of traditional payment systems will evolve, but they will not be phased out anytime soon.

Therefore, it is safe to conclude that RTGS, ACH, and faster payment systems will coexist in the financial sector, each serving different but complementary roles. This coexistence will ensure a more robust and resilient financial ecosystem that can meet the evolving needs of its users.