10 Risk Factors Impacting Cross Border B2B Payments – Post I

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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.

We will look at the other risk factors tomorrow.

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