In a money services business, prefunding might indeed be viewed as a type of “trapped” capital. Prefunding refers to the practice where the service provider must set aside or transfer funds in advance to ensure that the money is available for disbursement at the designated location. This is common in industries like remittances or other money transfer services.
While this is a necessary part of doing business, prefunding can tie up significant capital that could be used for other things, like expanding the business, investing in new technologies, or other operational expenses. In this sense, it’s “trapped” because it can’t be used for these other purposes until the transactions it’s allocated to are completed.
Moreover, depending on the destination of the funds, the risks and regulatory obligations associated with prefunding can be significant. In jurisdictions with stringent anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, there could be high compliance costs and potential penalties for non-compliance, further increasing the costs associated with this trapped capital.
To mitigate this, some businesses are exploring new technologies, like blockchain, that could potentially lower the costs associated with prefunding by creating more efficient and transparent systems for transferring funds.
This page was last updated on May 26, 2023.