The DTNS system and RTGS system have their own advantages and drawbacks. The RTGS system is superior in reducing settlement risk. On the other hand, the DTNS system has an advantage on the level of liquidity required for settlement. This means that there is a trade-off between the two systems in terms of risk and efficiency. With knowledge of the pros and cons of the two systems, the most appropriate system should be adopted according to the feature of payments which are processed in the system.
TopTwo Basic Payment Systems
Designated-Time Net Settlement (DTNS) System
In a DTNS system, payment orders which participants submit over the course of a day are accumulated in the system. At the end of the day, the “netting” takes place and the “net position” of each participant is calculated. The net positions are informed to each participant and then, the settlements of the net positions are executed, typically once, at the end of the day. To be more precise, the net debtors are required to pay-in the net debt amount to the system account, and upon receipt of all these funds, the system makes pay-outs the net credit amount to the net creditors.
The netting brings about the reduction of the number and overall value of payments. However, the finality of settlement is only achieved at the end of the day. The DTNS system is also called “Deferred Net Settlement” (DNS) system, emphasizing the late settlement.
According to the classifications in Chapter 2, the DTNS system is “Net settlement system” and “Designated-time settlement system.” It is often adopted in “Private payment system.” Some DTNS systems may be “Large-value payment systems” and others may be “Retail payment systems.” Some of DTNS systems are “Same-day payment systems” and others are “Next-day payment systems.”
Real-Time Gross Settlement (RTGS) System
In a RTGS system, each payment order is settled individually in the full amount of the payment order (i.e. on a gross basis). If the payer has sufficient balances (or credit availability) in its account, each payment order is settled immediately on arrival in the system (i.e. on a real-time basis).
When the payer’s account balance is insufficient to process the payment order, the order is typically queued in the system, or sent back to the payer as an error order. The RTGS system has the advantage that payments become final as soon as the order is sent to the system, so that the intraday risk exposure does not build up. On the other hand, the downside of the RTGS system is that it requires a higher level of liquidity for settlement compared to the DTNS system.
According to the classification in Chapter 2, the RTGS system is “Gross settlement system” and “Real-time settlement system.” It is often adopted in “Central bank payment system” and “Payment system with central bank money.” Usually, it is “Large-value payment system” and “Same-day payment system” by definition.
Comparisons Of Two Basic Payment Systems
With these features of the DTNS and RTGS system in mind, the comparisons of two systems can be made as follows, from the aspects of (i) settlement risk, (ii) required liquidity and (iii) operational burden.