What is Pre-Funding and How Does It Work?

What is pre-funding? How does it work and where is this pre-funded money kept?

Here is an example that very briefly discusses how pre-funding money works: https://www.youtube.com/watch?v=-NiW5…

Transcription:

Hello. Have you ever wondered what prefunding is in the money transfer world? My name is Faisal Khan. I’m a banking and a payment consultant and today I’ll explain the concept of prefunding.

Prefunding is basically funding what you do. What does it mean to fund? Prefund pre means before. What does before funding means? Well, before funding means in the money transfer world or in the payments world pre, the pre stands for before the funds are actually good funds and settled. I’m going to link to a video below that explains how prefunding works in a real time example. But to understand the concept of prefunding, it is basically taking money, your own money and pushing it out into a beneficiary country or with a beneficiary partner bank or with a beneficiary money transfer operator where that money will be utilized. So, if you’re doing a transfer from UK to Nigeria, you may be licensed in the United Kingdom, and you have a partner in Nigeria or a bank in Nigeria. And that bank says if you want me to pay out either you send the money or you have a prefund with me and I will dip into the cookie jar and whenever you tell me I will, you know, take that money, convert it to Nairas and pay it out to the beneficiary. What prefund does is it short circuits the time it takes for the funds to actually move from the United Kingdom into Nigeria. Because let’s see if I am a customer and I walk into a shop, and I give my cash and I say send it to Nigeria, typically let’s say I walk in at 7:00 p.m. Now, at 7:00 p.m. that cash is no good because it has to be deposited into the bank tomorrow morning. So, next day the cash will be deposited, it’ll show up in my statement towards the end of the day. Then I will do a SWIFT transfer to my bank in Nigeria. Then the Nigerian bank will receive it after maybe two days. It may be a weekend in between and when they receive it then they will push it out to the partner bank and the partner bank to the beneficiary itself. A process that could take three to four days. When you prefunded it, you short circuit it. You see I have received the money in London, please release the money from my prefund account in Nigeria.

So the pre stands for before the actual settlement takes place which will actually happen, you know, three or four days later. When you buy a stock you know, it’s always it’s the transaction day plus two, T plus two. That means that the day of the transaction, two days afterward is when the settlement will take place. The pre in this case is the settlement period. If the settlement period is 6 days, the pre means we’re going to snap it down to one day. And that is why prefunding is extremely important in the money transfer world.

Typically if you work in a RaaS environment, you will be asked to prefund accounts and you know the prefunding can start from as low as $25,000 or $10,000 and a beneficiary country. If you are working with an aggregator, they may require aggregated pool, so they’ll say ok, keep $50,000 and we will keep distributing the money wherever you may be operating in. The countries that you may be operating in. In some cases, they will say listen, our minimum requirement is $50,000 and you have to top it up every day if it goes below, let’s say, $10,000 or something. So, there are many ways to prefund, but basic essential is you taking your own money, keeping it somewhere else in order to short circuit the time for a payout.

I hope I was able to answer the question. If you have any more, feel free to ask, or feel free to ask a question or leave a comment in the section below and I’ll be happy to answer. Till next time, have a good one.

This page was last updated on December 14, 2021.