Prefunding
Prefunding means placing money with a payout partner or correspondent before transactions are sent, so the partner can release funds locally without waiting for settlement to arrive. The balance is drawn down as payouts are made and topped up before it runs out.
Also called: pre-funding · prefunded account · collateralised prefunding
Payout partners release money to beneficiaries from their own local balances. If a partner waits for the operator’s money to arrive first, the corridor runs at the speed of international settlement. Prefunding removes that wait: funds are placed with the partner in advance, each payout draws the position down, and a top-up is sent before it is exhausted.
The arrangement takes several shapes. The money may sit in the operator’s own nostro account, as a balance on the partner’s books, or as collateral pledged to the partner. Some partners grant a credit line instead, which removes the funding need and replaces it with a credit assessment and a price. These look almost identical on a flow diagram and behave very differently on a balance sheet.
In practice
Prefunding converts a settlement delay into a working-capital cost — the cash is committed to the corridor instead of the business. It is a liquidity arrangement, not a legal protection: money sitting with a partner is an exposure to that partner unless the contract and the account structure are built to make it something else.
Example
An operator wires 500,000 dollars to its Manila partner on Monday. Every payout that day draws the position down; by Wednesday 380,000 has been paid out and 120,000 remains, triggering a top-up. Beneficiaries were paid from the partner’s own liquidity against that balance, so nobody waited on a bank. The cost is that 500,000 dollars sat in Manila all week and funded nothing else.
Commonly confused with
| Term | How it differs |
|---|---|
| Reserve account | A reserve is money a partner holds back as security against losses you might cause; prefunding is money you place in advance to be spent on payouts. |
| Nostro account | A nostro is your own account in another bank’s books — the same account that bank calls a vostro. Prefunding may sit in one, or it may be a balance on a partner’s books that you do not own. |
See also
- Nostro AccountA nostro account is an account a bank holds in a foreign currency at a bank in that currency’s home market, literally “our account with you.” It is how a bank keeps a working balance in a currency it cannot hold at its own central bank.
- FloatFloat is customer money sitting with a payment firm between the moment it is received and the moment the beneficiary is paid, together with the working-capital and interest effects of holding that balance. Whether the firm may keep those benefits is set by its regime and its customer terms.
- SettlementSettlement is the point at which value actually moves between parties and the obligation between them is discharged. It is a separate step from clearing, which only works out who owes what, and from finality, which is the moment the transfer can no longer be reversed.
- Reserve AccountA reserve account holds funds a bank, acquirer or partner keeps back against future chargebacks, refunds or unsettled exposure, released on an agreed schedule. The money is economically yours, but it is out of your hands while it is held.