A question that people mostly ask, is if it is possible to do a real-time transfer in the money transfer (remittance) world? The short answer is Yes! Watch the video to find out more.
Hello. My name is Faisal Khan. I’m a banking and a payment consultant. And the question I’m answering today is, ‘Is it possible to do Real-Time transfers in the remittance world?’
The answer is yes, it’s possible and it’s done through a hack if you will of that of what is called prefunding. Let’s say a transaction needs to happen from Chicago to Manila. And you know, you’re a company or a money transfer company licensed in the United States and you want to do an immediate payout in Manila. So how do you do it? Well, if your customer in Chicago is paying you, they’re paying you most likely using a debit card or a credit card or ACH. The very minute, the very second transaction is confirmed, in a traditional system what will happen is, you will wait for that money to be settled into your account in Chicago. Takes maybe two days, maybe three days. Then you will bunch all the transactions together, aggregate them, push them out into Manila via SWIFT; another two, three days and then once your bank receives it in Manila they will do the payout and the distribution which might take another one day.
This marvel is called, you know, funds, good funds and settled model. I have a video on this thing, I’m going to link in the description below. So this is a good funds and settled models. In this case no, there is no risk because there is no credit being extended. There is no counterparty risk other than the fact that a reversal could occur, but that’s a separate matter altogether.
But basically you’re waiting for good funds, then moving them good funds, then moving them. In order to do instant transfer is what you can do is you can work with your bank in Manila and prefund using your own money. So let’s say I take my $50,000, I ship it out to my bank partner in Manila, and I say hold on to this money. The very second I receive a customer who does a transaction, I tell my partner in Manila please release $500 because this customer has done a transaction for $500. Why am I able to do that very confidently and say released? Because I know, I have locked the transaction, I have approved the transaction subject to settlement but at least I have the transaction approved by the customer. It will take two days more for that money to come to my account.
And you know what, I could look at the interest rates today, let’s say the interest rates are 2%, 1%, the cost of borrowing is 1 to 2%. I will look at that, I will loan myself that money that I am paying out in Manila.
So, prefunding is a very easy way of doing instant payments. The money doesn’t really actually move immediately that day. It probably might move foir days later, or six days later. And the prefunded account may have to be topped up every single day or every week depending on how much the volume is, But basically you’re saying if I have an authorization in Chicago, please take it from my money in Manila convert it to Filipino Pesos and payout. And these instructions between Chicago and Manila typically goes over the internet through secure message and it can happen within seconds if you will. Provided there is a switch operator in Manila or there is an infrastructure in Manila that allows you to do an immediate credit into someone’s account.
So, that is how real time transfers can be enabled in the money transfer world and it’s done through a concept called prefunding. If you have any more questions or comments feel free to ask below, I’ll be happy to help. Till next time, take care.
This page was last updated on September 1, 2022.