Monday, September 19, 2016

10 RISKS WITH CROSS BORDER B2B PAYMENTS

10 Risk Factors Impacting Cross Border B2B Payments – Post I

download
The following post is written by Leslie Stroh, former editor and publisher of The Exporter.  Leslie Stroh is now involved in two bockchain start-ups, and sits on the advisory board of the Weissman Center for International Business, Baruch College, CUNY.
Creating a business to business payment system is very different from creating a consumer retail payment system.  Cross border business payment systems have to deal with three major issues, profit maximization, tax minimization, as well as risk management.
Multi-national, multi-level, multi-product organizations with multiple capital structures face FOUR operationally different branch and bound non-optimal algorithmic solution structures. That is like planting four trees close together and figuring out which branch belongs to which tree from a distance.
RISK is the common denominator whether the transaction uses one of the approximately 200 sovereign currencies, or one of the approximately 3,400 crypto-coins indexing presumably some form of a blockchain.
The 10 primary risk factors are:
  1. Payor risk
  2. Time risk
  3. Currency exchange risk
  4. Two state regulatory risk
  5. Enforcement risk
  6. KYC responsibility risk
  7. Security/Privacy
  8. Interoperability risk
  9. Trigger event risk
  10. Reconciliation-blockchain risk
Lets look at each of these risk factors separately:

Payor risk

The Hawala monetary system used in poor countries such as Somalia to transfer cash cross border appears to be more effective from a risk perspective. In a hawala system, the payor is a person delivering money to a person, who arranges for a person to deliver money to a person. No money, no payment, no risk.

 Time risk

The faster a transaction is completed the less risk of circumstances changing. Extending credit over time is inherently risky. Clearing houses with mutualized capital reserves essentially solve this problem. Credit risk can be mitigated by credit enhancement procedures.

Currency exchange risk

The relative value of a currency to any other currency changes with time. There is no reason to believe that any one transaction will be settled in the same currency, even though it may be denominated in the same currency.
Going from 200 cross exchange rates to 3,600 (including crypto coins) will be a programming nightmare. Who bears the exchange risk is the critical question?

Regulatory risk

Cross border trade by definition is operating in two regulatory environments, both of which must be satisfied. With multiple legal jurisdictions there are multiple cross border opportunities to be in violation of regulatory procedures particularly for contracts, even smart contracts.

Enforcement risk

For failure to perform at any level, what is the enforcement process, and more particularly, the enforcement cost?

KYC risk

Hawala works person to person, as does a consumer remittance to a relative. Payments become more difficult when one factors in the corporate structure of organization, principal, authorized agent (employee) and executing party who may have the reverse institutional structure. Forget technology, remember liability.
Identifying the social business network participants, all business locations, and special purpose entities with a unique numerical identifier creates an address database risk issue of who maintains, and at what cost.
Wink, wink, nod, nod shedding of systemic KYC responsibility is at the heart of the Bangladesh hack.


10 Risk Factors Impacting Cross Border B2B Payments – Post 2

download
The following post is written by Leslie Stroh, former editor and publisher of The Exporter.  Leslie Stroh is now involved in two bockchain start-ups, and sits on the advisory board of the Weissman Center for International Business, Baruch College, CUNY.
As most of us know, sending a payment across borders through banks can be both time consuming and expensive. I can travel from Vancouver, Canada to Barcelona quicker than money can get there. In fact, we know that if I send $100, the receiver will get something less, and neither of you know how much less depending on how many hands are in the pie taking a piece. The quest for real-time B2B cross border payments can seem like the search for the holy grail.
Yesterday we looked at five risk factors to address with cross border B2B payment systems. Today we look at five more:

Security/Privacy

The idea of a public record of transactions strikes at the very heart of privacy. Security is the base of privacy. A hack is nothing more than breaking and entering, which has existed as a legal concept of home protection for a long time.
The only people/organzations who need to know about a transaction are the buyer and the seller with their network participants and the legally constituted regulatory authority within their sovereign jurisdiction however defined.

Inter-operability/Inter-connectivity risk

Interoperability is like making a blood transfusion from your arm to the recipients arm. Inter-connections allows for the collection in one place and the distribution in another.
Inter-operability means putting a foreign body in your body to harmonize the functions of your operating organs. That is a long way away. Inter-connectivity is a much more achievable goal. With 200 sovereign nations and 3,400 crypto coins the likelihood of a new gold standard evolving, with attendant problems, is remote—well beyond six sigma.
In other words, the cobbled together legacy systems of banks are not likely to evolve as an inter-operable whole.

Trigger risk

Ask yourself, what triggers a payment? How do you define it? How does a smart contract define it? How does applicable court precedent define it—acceptably in both cross border jurisdictions. Enforcement risk is the by-product of payment trigger risk.
By definition new smart contracts do not yet have a legal history.

Reconciliation risk

Reconciliation depends upon record retention. Blockchain is essentially a sealed bankers box, or evidence envelope that has a pre-determined audit trail. Courts have been dealing with evidence trails for years. Blockchain is a technological solution, amongst other solutions. All evidence solutions depend upon judicial acceptance.
This gets at the very simple point. If the payor (risk 1.) wants to pay, they will. If they don’t want to pay, the cost of enforcement may outweigh the profits on numerous successful transactions.

 Technology vs Experience

Hawala and other payment systems have evolved over thousands of years through experience. Human nature hasn’t changed. At the end of the business day, people make decisions. It is the height of hubris to try to eliminate the impact of people.
In Kanesh, 2,500 BCE, they sealed contracts in clay evidence bags, and stored them in a sealed room. They also had a functional adjudication system for dispute resolution. The key difference was that inheritors inherited liabilities as well as assets.
Risk 1 (payor risk) and Risk 10 (reconciliation risk) expressed as crypto currency index and blockchain are the proposed as the basis for a technological revolution, without incorporating mitigation of all the other risks inherent in a cross border business transaction.
This is nuts.
And the idea that competing businesses will adopt one inter-operable (instead of inter-connected) system is Alice in Wonderland (with apologies to Alice).
Business is a culturally defined social network operating at many levels. The technologists have too few assumptions in their business model.