The legal entity identifier (LEI) could save the banking industry as much as US$4bn a year in client onboarding costs alone, according to research conducted by McKinsey.
Carried out on behalf of the Global Legal Entity Identifier Foundation (GLEIF), the study involved over 50 interviews with banks of various sizes and geographic reach, banking regulators, and other sector participants and experts.
“The interviews surfaced four key pain points that banks experience in relation to client identification and verification: manual linking of entity data from disparate internal and external sources; difficulties in assessing entities’ legal ownership structure; limited transparency into entities’ key officers, such as authorised signatories; and poor customer experience due to multiple round trips to gather client data and documents,” says Gabriela Skouloudi, partner and co-head of corporate and investment banking in the Americas at McKinsey. “If an LEI was obtained at the start of onboarding, many of these challenges could be resolved, with the net effect being expedited counterparty identification and verification processes. Know your customer compliance may also be expedited.”
Established in 2014 by the G20, the LEI is a unique, electronic, 20-digit standard identifier for legal entities, including financial institutions, corporations, governments and companies. Just like a passport or a car registration number, the LEI represents a common and recognisable code which can be used to connect to key reference information that enables clear and unique identification of legal entities participating in global financial transactions.
Uptake thus far has been slow. As of the first quarter of 2019, 1.3 million companies in 224 jurisdictions had acquired an LEI, and this is mostly because they have been forced to do so by regulators. Currently, the LEI is required for over-the-counter derivatives transaction reporting by all legal entities in India, and is also mandatory for European Union (EU) and non-EU legal entities involved in certain financial transactions.
Further analysis by McKinsey concludes that wider use of the LEI to streamline processes for connecting with both internal and external data sources could cut client onboarding times by around 14%, and generate cross-sector cost reductions of as much as 10% every year. McKinsey therefore recommends that banks expand LEI usage beyond derivatives to all banking business lines, such as trade financing, corporate banking and payments.
“The significant potential savings for the banking industry, which are outlined in this study, should compel the sector to sit up and take notice of the near-term value that can be derived from adopting LEIs more widely,” says Stephan Wolf, CEO of GLEIF. “With so much to gain, there really is no excuse for banks to delay making LEIs foundational to customer lifecycle management processes across all areas of business. Compliance driven adoption in capital markets means that banks are already familiar with the LEI. Voluntary expansion of LEI usage into other business banking lines is the new frontier in progressive thinking, and can only lead to a win-win situation for both banks and their clients.”
The research report follows other recent calls for wider LEI usage. In July this year, the Asian Development Bank (ADB) carried out a survey to see just how feasible it would be to mandate usage of the identifier across Asia. Over three-quarters of the survey respondents considered the LEI registration fees to be acceptable and within their reach, and the ADB concluded that the LEI was both affordable and easy to obtain by SMEs and large companies alike. Speaking to GTR at the time, Steven Beck, the ADB’s head of trade and supply chain finance, said: “We have encouraged partner banks in our trade finance business to acquire an LEI, and the rate of adoption is over 80%. We are going to get to 100%, because we’ll insist that all of them have one.”
As a next step, GLEIF says it will assess actions it can take to encourage banks to voluntarily adopt LEIs more broadly, such as enhancing the value proposition of the LEI by making it a data connector which links to the most commonly used data sources. It also says it encourages financial institutions to join the GLEIF Globally Important Financial Institutions Relationship Group, to ensure a participative discussion on the support needed for banks to integrate the LEI into their processes.