This pre-funding model requires each CPP to pre-fund their payout partners using USD. This involves a CPP transferring local currency to USD, and paying it into their payout partners ac- counts (nostro and vostro accounts) as collateral for eventual end-customer payout.
The Pre-Funding Model
The pre-funding model forces CPP’s to lock up their working capital in the form of pre-funded liquidity with their payout partners all around the world. This makes cross-border payments highly inefficient as it requires the right amount of capital to be pre-funded to the right place (i.e. payout partner) at the right time, every time.
For example, SendMoney Ltd. (a CPP) expects to send $1,000,000 in transactions over the coming weekend from Country A (SendMoney’s local country) to Country B and to Country C. Under the pre-fund model, SendMoney Ltd. buys $2,000,000 USD and pre-funds $1,000,000 into their payout partners nostro and vostro accounts in Country B and C.
However, during the weekend the actual payments are $500,000 to Country B and $1,500,000 to Country C. In this scenario, some or all of the payments to Country C will fail, creating FX risks, transfer delays and customer dissatisfaction for SendMoney Ltd. Whilst the payments to Country B will succeed, MoneySwitch will have $500,000 excess working capital in the account of the payout partner which is unproductive as it is in the wrong place at the wrong time.