perspective
Why Prefunding Persists
The $10 trillion prefunding trap is not a bug in cross-border payments. It is a feature, carefully maintained by the actors who benefit from it.
Published
Prefunding persists because reform transfers value away from concentrated incumbents while the benefits are diffuse, delayed, and politically fragmented.
Reader Brief
The $10 trillion prefunding trap is not a bug in cross-border payments. It is a feature, carefully maintained by the actors who benefit from it. This piece maps the political economy: who gains, what keeps reform slow, and what breaks the lock.
What's Inside
The status-quo coalition, the Olson logic behind slow reform, the triggers that break the lock, and the corridor-by-corridor forecast.
This Perspective starts with the actors extracting value from prefunding, then explains why a concentrated status-quo coalition can hold back a diffuse reform coalition. It then maps the triggers that break the political lock and ends with the limits and counterarguments that keep the forecast grounded.
Four actors extract value from prefunding - G-SIBs, central banks, compliance vendors, and incumbent PSPs.
None are villains. Each responds rationally to inherited incentives. G-SIBs earn 100-300 bps NIM on $3-5T in nostro/vostro deposits. Central banks prefer visible flows over efficient ones. Compliance vendors earn per-relationship rents. Incumbent PSPs capture spread on the cost stack.
Olson logic: concentrated costs beat diffuse benefits because the reform side is loose and the status quo is organized.
The beneficiaries of reform, meaning everyone who sends a cross-border payment, are large, diffuse, and unorganized. The beneficiaries of the status quo, meaning a few G-SIBs and a few compliance vendors, are concentrated and organized. The asymmetry of organization explains why reform lags economics by roughly a decade [1].
Three triggers break the political lock: FX crisis, G-SIB exit, and a reform-minded governor.
Nigeria 2023-2024, where FX crisis reversed the 2021 crypto ban. Basel IV de-risking, where each G-SIB exit forces local reform. Kenya CBK and Malaysia BNM, where governors treat payments modernization as signature policy. Each has been observed in at least one jurisdiction since 2020.
Forecast: 20-30% reduction in globally prefunded capital from 2026 to 2030, corridor by corridor rather than systemically.
Fifteen to twenty-five jurisdictions will have all three forces aligned by 2028. The $10T trap does not collapse. It shrinks corridor by corridor as the status quo coalition loses locally. The total stays enormous. The trend is what matters.
The Question
The economics, technology, and regulation may all be visible, yet the capital remains trapped.
If prefunding immobilizes $10 trillion globally and costs operators hundreds of billions in annual opportunity cost, why has no one fixed it? This is the puzzle. The economics have been obvious for a decade. The technology has been adequate for five years. The regulation has been emerging since 2023. And yet the capital remains trapped. The answer is not that reform is technically hard. It is that reform transfers value away from actors who would rather keep it. The persistence is a political outcome, not a technical one.
Why the technical narrative misleads.
Most payments analysis treats prefunding as a technical problem awaiting a technical solution. Better rails will fix it. This framing explains why prefunding has not been fixed yet, because better rails did not exist. It does not explain why prefunding persists even as better rails appear. Political economy explains the second half. Once you see who benefits, the pace of reform starts to make sense.
Who Benefits From The Status Quo
Four actor groups extract value from the prefunding system as it exists.
Four actors extract value from the prefunding system as it exists. G-SIBs capture float income, central banks retain visibility, compliance infrastructure earns per-relationship rents, and incumbent PSPs capture spread on the cost stack.
- **G-SIBs:** float income on prefunded balances.
- **Central banks:** visible flows inside the supervised banking perimeter.
- **Compliance infrastructure:** per-relationship rents from the existing correspondent structure.
- **Incumbent PSPs:** spread capture on the existing cost stack.
None of these four actors is a villain in this story. Each responds rationally to the incentive structure they inherited. The system persists because changing it costs them specifically, and benefits them diffusely.
Why diffuse benefits lose to concentrated costs.
This is Mancur Olson's *Logic of Collective Action* applied to payments infrastructure [1]. The beneficiaries of reform, meaning everyone who sends a cross-border payment, are large, diffuse, and unorganized. The beneficiaries of the status quo, meaning a few G-SIBs, a few compliance vendors, and a few incumbent PSPs, are concentrated, organized, and well-resourced. In every political arena where these two groups face each other, the concentrated group wins for longer than the economics would suggest. Payments reform is a particularly stark example because the economics have been against the status quo since roughly 2015.
G-SIB Float Economics
Prefunding money is not idle from the bank perspective. It is deposits that fund the balance sheet.
Prefunding money is not idle from the bank's perspective. It is deposits. It funds the bank's balance sheet at near-zero cost.
- $3-5T G-SIB nostro / vostro deposits generating float income globally. The source frames this as the portion of prefunding that supports global systemically important banks.
- 100-300 bps Net interest margin G-SIBs capture on prefunded balances. The source treats this as embedded in correspondent economics rather than separately disclosed.
Applied across the global G-SIB correspondent book, this is a multi-hundred-billion-dollar annual revenue line. It does not appear as a separate line item in G-SIB financial statements because it is embedded in net interest income. But it is a substantial portion of correspondent banking's P&L.
Why this is not disclosed separately.
G-SIB segment reporting aggregates correspondent banking with other wholesale banking lines. The float component is not broken out. This is not accidental. It is defensible accounting but it is also convenient opacity. Reform advocates cannot cite the exact number. Critics of reform can claim it is small. The information asymmetry favors the incumbent side of the debate.
What a bank loses when prefunding collapses.
If a correspondent relationship moves from T+2 prefunded to T+0 on-demand settlement, the G-SIB loses both the float income and the fee revenue associated with the relationship. The fee revenue is easier to replace. The float income is harder. This is why G-SIBs have been slow to promote T+0 tokenized deposit settlement even though they have the technology. T+0 is good for the customer and bad for the bank's net interest margin [3].
Central Bank Inertia
Central banks often prefer visible but inefficient flows to efficient flows that require new supervisory capacity.
Central banks prefer the system they can see. Prefunding concentrates cross-border activity inside the supervised banking perimeter. That makes it visible. Alternatives move activity off the perimeter and into rails the central bank does not yet supervise.
| Rail | Central-bank visibility tradeoff |
|---|---|
| Prefunded correspondent banking | Visible to the central bank. |
| Tokenized deposits | Visible, but requires new supervisory effort. |
| Regulated stablecoins | Partially visible. |
| Informal stablecoins | Invisible. |
A central bank facing a choice between visible but inefficient and efficient but requiring new supervisory capability often chooses the first. Not out of malice. Out of institutional capacity constraints.
Why reactive-archetype central banks resist longest.
A central bank in a reactive archetype, meaning most emerging markets, inherited crypto rules written for speculation. Extending those rules to payments would require legislative action, capital budget for new supervision, and political willingness to admit that the existing framework is misclassifying flows. None of these are zero-cost. The cheapest option for a reactive central bank is to maintain the existing framework and let the informal flows grow unsupervised. This is why reactive-to-permissive transitions lag so far behind when the economics would otherwise favor them.
What a forward-leaning central bank looks like.
The CBK in Kenya and BNM in Malaysia have both signaled willingness to issue frameworks for regulated stablecoin payments. Both face institutional capacity constraints and neither has moved at the pace reform advocates would prefer. But both are meaningfully ahead of the median emerging-market central bank. What distinguishes them is a Governor or Deputy Governor who has chosen to spend institutional capital on the issue. That is the scarce resource. It is not technical capability.
The Reform Lobbies
Reform advocates push for change from different endpoints, and those endpoints do not always align.
Reform advocates are not monolithic. Four distinct groups push for change, often against each other, which is part of why reform moves slowly.
| Reform bloc | What they want | What they oppose |
|---|---|---|
| Fintech operators | Licensed stablecoin rails, reduced bank intermediation | CBDC substitution, restrictive regulation |
| Reform-minded central banks | Tokenized deposit networks, wholesale CBDC | Unsupervised stablecoins at retail scale |
| Corporate treasuries | T+0 settlement, transparent pricing, working capital release | Operational complexity from multiple rails |
| Consumer advocates | Sub-3% remittance cost, fee transparency | Unlicensed rails that expose users to fraud |
Why the reform lobbies cannot align.
Each reform bloc has a preferred endpoint. Fintech operators want their licensed rails to win. Central banks want tokenized deposits or CBDCs to win. Corporate treasuries are agnostic but risk-averse. Consumer advocates want the cheapest option but reject unlicensed rails. These preferences do not compose into a single coalition. The reform side is a loose federation. The status quo side is a tight oligopoly. The asymmetry of organization matters.
When reform blocs do align.
Two catalysts align the reform blocs: FX stress in a specific jurisdiction, because everyone wants the corridor fixed, and a visible failure in the incumbent system, such as the 2023 USD correspondent crunch in parts of Africa temporarily aligning reform lobbies. These alignments are episodic, not structural. They produce pockets of reform. They do not produce systemic reform until enough pockets accumulate.
Evidence And Sources
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- The Logic of Collective Action - Mancur Olson / Harvard University Press
- Correspondent Banking Data Report - Financial Stability Board
- How Tokenized Deposits Could Transform Bank Liquidity Economics - Tom Zschach / LinkedIn
- Circle: The $27T trapped capital thesis - MEXC News
- Why Liquidity Fragmentation Holds Back Global Payments - Circle
- Why Do Pre-Funded Nostro and Vostro Accounts Create Inefficiencies - Outlook India
- Cross-border payments in 2026: friction and reform - The Payments Association
- Cross-Border Payments Programme Reports - BIS CPMI