Prefunding
Prefunding is placing money with a payout partner or in a destination-country account before transfers are paid out. Recipients can then be paid without waiting for funds to arrive.
How it works
A money transfer operator deposits funds ahead of demand in the receiving market. The money may sit at a local bank or with a disbursement partner. When a customer sends a transfer, the payout draws on that balance. The operator then replenishes the balance, usually on a schedule driven by transaction volume.
Prefunding is a large working-capital item for remittance firms. Remitly reported disbursement prefunding of about $219.6 million at 30 September 2024, up from $195.8 million at the end of 2023. It said these balances sit mainly with partners in India, Mexico and the Philippines. Money parked this way cannot be used elsewhere, so sizing drives funding cost.
Common errors include sizing every corridor to the same number of days and ignoring weekend and holiday gaps. Another is counting a top-up as available before the partner confirms receipt. Prefunded balances also create counterparty exposure to whoever holds them.
Example
Illustrative example: A firm's Mexico corridor pays out $1,200,000 a day. Treasury targets three days of cover, so it prefunds $3,600,000 with its payout partner. After two days of payouts totalling $2,400,000, the balance is $1,200,000. A $2,400,000 top-up restores the three-day target of $3,600,000.
Frequently asked questions
Is prefunding the same as holding a nostro balance?
Not always. A nostro is an account one bank holds with another. Prefunding is a business practice; the money may sit in a nostro, a partner's ledger or a local bank account, depending on the corridor.
How much should we prefund in each corridor?
Cover expected payouts until the next top-up can land, plus a buffer for volume swings, weekends and holidays. The figure differs by corridor because volumes, cut-off times and settlement speeds differ.
Related terms
Sources
- Remitly Global, Inc. Form 10-Q for the quarter ended 30 September 2024 · U.S. Securities and Exchange Commission (EDGAR)
- Why is pre-funding required in the money transfer world? · Faisal Khan
- International Money Express, Inc. Form 10-K for fiscal year 2024 · U.S. Securities and Exchange Commission (EDGAR)
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