Why Prefunding Persists
Prefunding can persist after a new payment rail appears because replacing it reallocates liquidity, control, legal responsibility and operational risk.
By Anton Titov, Founder · Plexo Institute
Technology alone does not decide whether prefunding changes. A route also needs a lawful operating model, willing participants, liquidity and an allocation of risk that the parties accept.
Prefunding is not only a technology problem. It persists because reform redistributes risk, control, and institutional incentives. This piece maps why the lock changes corridor by corridor.
What's Inside
A route-level framework for testing why a new settlement option has not displaced prefunding.
This Perspective separates the funding mechanism from the institutional choices around it. It offers a political-economy lens, then sets out the evidence needed to test that lens for a named corridor. It is not a forecast of global capital release or a claim about any institution’s private motive.
A correspondent bank may earn account, payment, FX, credit or other revenue; a supervisor may value visibility and legal control; a service provider may be paid for existing processes; and a user may value cost, access or predictability. Those are possible incentives, not a measured global allocation of benefit. Public reporting does not isolate a global prefunding revenue line for any group.
Olson's work offers a way to ask whether transition costs are concentrated while benefits are dispersed. It does not prove that a particular bank, regulator or provider is blocking a particular route, nor does it supply a timetable for reform. The test is to identify the actual parties, costs, benefits, decision rights and alternatives in the named corridor.
A route may change when the current arrangement becomes visibly inadequate, a permitted alternative is operationally credible and the relevant institutions have capacity to approve, supervise and operate it. These are conditions to investigate, not a universal sequence or a claim that a crisis, bank exit or individual appointment determines regulatory change.
Reform is most plausible where a visible payment problem, a credible operational alternative, and political capacity align. The pace and capital effect should be measured per corridor; public data do not support a global reduction forecast.
The Question
The economics, technology, and regulation may all be visible, yet the capital remains trapped.
Why does prefunding persist even where a faster settlement option exists? The puzzle is not only technical. Reform changes who holds liquidity, who controls settlement, and who bears operational and compliance risk. The persistence is therefore often an institutional and political outcome, not merely a technology choice.
A new rail can change transfer mechanics without changing the legal claim, funding, controls, liquidity, customer access or risk allocation of an end-to-end payment. That is why technical availability alone may not displace an existing funding arrangement.
Political economy is one additional lens: identify who must accept a changed allocation of cost, responsibility and control. It should be tested with documentary evidence rather than inferred from the existence of a new technology.
Who Benefits From The Status Quo
Four types of participants can face different incentives when a funding model changes.
A change from prefunded to another funding model can affect a bank’s account and fee economics, a supervisor’s visibility and control framework, a provider’s operating model, and a user’s cost or access. None of those effects should be assumed without evidence for the named parties and corridor.
Concentrated Benefits Beat Diffuse Savings
The actors paid by today's complexity can coordinate; the people who would save money from reform are scattered.
Organized now
Immediate rent pools
- floatBalance income and client control
- spreadFX and corridor pricing power
- toolsForecasting and reconciliation revenue
Scattered later
Diffuse unlock dividend
Many businesses would save a little capital, but no single group owns enough upside to force reform alone.
reform loses the coordination contestBanks: possible account, payment, FX, credit or liquidity economics to examine.
Supervisors and central banks: possible changes to visibility, legal authority and supervisory workload.
Service providers: possible changes to data, control and operating-service demand.
Users and payment providers: possible changes to price, access, liquidity and operational complexity.
No participant should be assigned a motive from the general structure alone. The practical exercise is to ask which costs, benefits, decision rights and risks move under the proposed design, and whether the relevant party has agreed to that change.
Olson's collective-action framework suggests a question: are transition costs carried by a small number of decision-makers while gains accrue to a broader group? If so, coordination can be difficult.
It does not establish that the incumbent side wins in every policy process, that payment economics point one way, or that a delay reflects deliberate resistance. Use the framework alongside legal, operational, pricing and customer evidence for the specific corridor.
G-SIB Float Economics
Public disclosures rarely isolate the economics of a particular nostro or prefunding arrangement.
A prefunded account can affect a bank's liquidity, balance-sheet and service economics. The effect depends on the legal account type, rate, currency, balance behaviour, hedging, credit terms, regulation and internal transfer-pricing approach. It cannot be inferred from the balance alone.
A named bank or corridor can disclose its own balances and economics; a global aggregate needs a defined source population.
Those inputs are not available as a global public series.
Correspondent-bank revenue and float economics are generally reported inside broader wholesale-banking lines, not as a separately auditable global prefunding number. The incentive claim here is interpretive and should be tested with named-bank or corridor evidence.
Public segment reporting may combine correspondent-banking activity with broader wholesale-banking lines. A reader should not turn that aggregation into an implied global float estimate or evidence of a deliberate incentive.
A defensible analysis needs a named bank or corridor, disclosed balances or fees where available, a period, a rate assumption and stated limitations.
If an arrangement changes its funding timing, a bank's liquidity, credit, fee and operational economics may change. The direction and magnitude cannot be inferred without its terms and balance-sheet treatment.
A bank's choice to use or not use a tokenised or on-demand settlement design can reflect many factors, including legal scope, customer demand, systems, liquidity, controls, capital and commercial priorities. Public sources must support any claim about a named bank's reason.
Central Bank Inertia
A new payment model can require changes to supervision, law, data and operating capacity.
A supervisor or central bank may need visibility, legal authority, data access, operational capacity and a clear allocation of responsibility before it is comfortable with a new payment model. The resulting approach varies by jurisdiction and cannot be reduced to a preference for one rail.
Control Without Visibility Becomes Fragile
A restrictive rule can preserve the appearance of control while pushing real payment demand outside observable rails.
Legacy banking
Visible but slow
Activity stays inside supervised banks, but the route is expensive and brittle.
Licensed rail
Visible and faster
Reporting capacity moves with the payment rail, so supervision sees the flow.
Restriction
Control looks intact
The rulebook blocks operators without reducing user demand.
Leakage
Informal channels grow
The regulator keeps authority on paper and loses the transaction data.
| Rail | Central-bank visibility tradeoff |
|---|---|
Prefunded correspondent banking | Visibility and authority depend on the institutions, reporting rules and relevant jurisdiction. |
Tokenized deposits | Review the issuer, ledger, intermediaries, reporting and legal framework. |
Regulated stablecoins | Review issuer disclosures, intermediaries, transaction data, reporting and local legal authority. |
Unregulated or informal activity | Visibility may be limited, fragmented or indirect; do not assume it is zero. |
Institutional capacity can affect the timing of change, but it is one factor among legal mandate, policy objectives, market structure, consumer protection and cross-border cooperation. Any claim about a regulator’s motivation needs evidence from its own publications or decisions.
A jurisdiction with a restrictive or incomplete framework may need legislation, supervisory capacity, reporting infrastructure and market engagement before it can oversee a new payment design. The required path is jurisdiction-specific.
Do not assume that a regulator is “resisting” a rail or allowing informal activity by choice. Read the current law, consultation, licence conditions and enforcement posture before drawing that conclusion.
A regulator can signal interest in a payment innovation through consultations, licences, pilots, guidance or formal rulemaking. Those actions should be linked to the regulator’s own dated documents.
Individual leadership may matter, but public evidence rarely supports a simple attribution of a jurisdiction’s payment policy to one officeholder. Assess the formal mandate, institution and enacted measures instead.
The Reform Lobbies
Reform advocates push for change from different endpoints, and those endpoints do not always align.
A proposed change may involve payment providers, regulated institutions, supervisors, corporate users and consumers. Their objectives can overlap or conflict, and their actual positions should be documented rather than assumed from a category label.
| Potential participant | Questions to investigate | Why it can matter |
|---|---|---|
Payment providers and fintechs | Which licences, access routes and commercial terms the proposed model needs | They may supply or depend on a new operational route |
Regulated institutions and supervisors | Legal authority, risk allocation, reporting, safeguarding and operating controls | They determine whether an arrangement is permitted and supervised |
Corporate users | Funding timing, FX, liquidity, accounting, reliability and integration cost | They may adopt a route only if its documented operational value exceeds transition cost |
Consumers and advocates | Price, access, protection, disclosure and redress | They can surface the user outcomes and protection requirements a model must meet |
Participants may prefer different end states and have different risk tolerances. A provider may favour a route it can operate; a supervisor may prioritise legal certainty; a user may prioritise price, access or reliability.
These differences can complicate coordination, but they do not demonstrate that one side is a cohesive coalition or that another side is an oligopoly. The actual decision rights, contracts and policy process must be mapped for the corridor.
A visible payment problem can create a common incentive to test a lawful alternative, particularly where users, operators and authorities agree on the problem definition. A shared objective does not remove the need for evidence on permission, liquidity, controls, data, funding and legal recourse.
Any local change should be assessed from its published decision, authorised scope and observed operation rather than extrapolated into systemic reform.
The Change Triggers
Conditions that can make a local redesign easier to consider; they are not a prediction rule.
A route can be reconsidered when its current performance is inadequate, a permitted alternative can be demonstrated and the relevant institutions can adopt and supervise it. FX stress, a provider’s route change or formal regulatory engagement may be relevant facts, but none automatically determines the outcome.
Only Shocks Break The Political Lock
Prefunding stays politically locked until economic pain, a credible alternative, and an accountable reform owner line up.
Default state
Technical inefficiency stays tolerated.
Everyone knows prefunding is wasteful, but no one owns enough political upside to spend reform capital.
- tumbler 1
Economic failure
FX scarcity or bank exits make the old route visibly unsafe.
- tumbler 2
Credible alternative
A licensed settlement path exists before the crisis peaks.
- tumbler 3
Reform owner
A governor or ministry accepts accountability for the switch.
| Condition to examine | Potential pressure | Evidence needed |
|---|---|---|
FX or liquidity stress | A visible cost or access problem may increase demand for alternatives | Dated official and market evidence about the specific corridor and the legal response |
Correspondent or provider route change | Loss or change of service may prompt a resilience review | Current service terms, alternatives, supervisory response and actual access outcome |
Formal regulatory engagement | A consultation, licence, pilot or rulemaking can create a permitted path | The regulator’s own dated documents, legal basis and scope |
FX or liquidity stress can expose a payment corridor’s cost, access or funding constraints. It may cause policymakers and operators to reassess available options.
It does not establish that a stablecoin route is lawful, safe, liquid or suitable. The relevant evidence is the jurisdiction’s dated laws, notices, authorisations and observed route conditions.
A correspondent’s route change can require a bank and supervisor to assess continuity, alternative providers, funding and legal access. Its effect depends on the accounts and contingencies that actually exist.
Do not infer a loss of a currency, a regulatory outcome or a stablecoin transition from a single exit. Confirm the named service, the remaining route options and official response.
Institutional leadership can help prioritise a payment-modernisation programme, but leadership alone is not proof of a policy outcome. Durable change requires a legal basis, operating capacity, relevant market participants and an implemented supervisory framework.
Assess official consultations, regulations, licences and operational milestones rather than assigning a jurisdiction’s outcome to a single individual.
What Breaks The Lock
A route can change when an evidenced problem, permitted design and operating capacity align.
A corridor may change when its current route has an evidenced problem, a permitted alternative can demonstrate its operating model and the relevant parties can implement and supervise it. This is a route-level framework, not a forecast of global capital release or regulatory change.
This is not a global reform forecast. It is a corridor-by-corridor substitution thesis: where incentives and supervisory capacity align, operators can test a different settlement design and publish the measured liquidity effect. Aggregation should wait for comparable, disclosed corridor evidence.
The mechanism and historical data references in this piece can be sourced. The political-economy interpretation is judgment, and public evidence does not establish a global float motive, uniform central-bank incentive or universal reform coalition.
The claim here is limited: technical availability is not enough to demonstrate route substitution. A proposed change must also clear legal, operational, liquidity, control and incentive tests in the relevant corridor.
Counter-Arguments & Limitations
The strongest critiques challenge whether float income is overstated and whether market cost gravity will outrun political triggers.
Every perspective has boundaries. Political economy is one explanation among several, and available public sources do not quantify a global float incentive or determine the timing of route substitution.
The argument is valid: a nostro balance does not reveal a bank’s net interest margin, hedging, transfer pricing, capital cost or fully allocated profitability. Public segment reporting is usually insufficient to establish a global motivation.
The limitation is decisive rather than convenient. This Perspective therefore does not use float income as a measured explanation for market-wide persistence. A bank-level claim requires its own dated disclosures or direct evidence; a corridor-level claim requires disclosed balances, terms and cost assumptions.
Cost, speed or operational improvements may matter, but an announced or observed ledger transfer is not a complete comparison with an end-to-end payment route. The route also has legal, funding, FX, liquidity, controls, recipient-crediting and recovery components.
The appropriate test is a dated, like-for-like corridor measurement. It should compare total cost, completion time, liquidity use, failure handling and legal recourse under the actual permissions and terms. Neither technology availability nor political framing predicts the result by itself.
About the Author
About This Perspective
Scope, disclosure, data vintage, and method.
Plexo develops clearing-network architecture for licensed financial institutions. Plexo Institute publishes a perspective on the market in which Plexo operates. This interpretation is not neutral research and does not substitute for legal, operational, liquidity or counterparty diligence on a named route.
The framework uses political-economy literature, including Olson, as an interpretive lens. It draws factual context on correspondent-banking and cross-border-payment frictions from FSB and BIS materials. The actor, trigger and route analysis is a checklist for a named corridor, not a measurement of private incentives or a jurisdiction forecast. Regulatory status and operating facts require a fresh primary-source review before use in a decision.
Continue Reading
The Prefunding Trap - the payment-liquidity mechanism and the method needed for a reproducible corridor calculation.
The regulatory archetype framework this piece relies on - how jurisdictional stance shapes stablecoin infrastructure localization.
Why Basel IV accelerates the unlock - the capital rules that make correspondent banking less defensible at the margin.
References
Olson, M. The Logic of Collective Action. Harvard University Press, 1965.
Financial Stability Board. Correspondent Banking Data Report. Historical series; use the stated observation date.
Circle. Why Liquidity Fragmentation Holds Back Global Payments. Issuer commentary; not independent evidence of a global total.
BIS CPMI. Cross-Border Payments Programme Reports. Use the relevant dated report for system and policy context.
References
4 references- The Logic of Collective Action — Mancur Olson / Harvard University Press
- Correspondent Banking Data Report — Financial Stability Board
- Why Liquidity Fragmentation Holds Back Global Payments — Circle
- Cross-Border Payments Programme Reports — BIS CPMI