McKinsey & Company and GLEIF Identify Significant Savings, Efficiencies and Greater Reliability in Entity Verification Processes
A new white paper explores the wide application of the LEI with combined potential savings of at least U.S.$650m annually
Author: Stephan Wolf
Estimated Reading Time: 5 minutes
McKinsey & Company has been working with the Global Legal Entity Identifier Foundation (GLEIF) to examine the potential use cases of the Legal Entity Identifier (LEI) in streamlining entity verification processes. The resulting joint white paper (see ‘related links’ below) estimates that broader, global adoption of the LEI could yield annual savings of over U.S.$150m within the investment banking industry and up to U.S.$500m for banks in the issuance of letters of credit. Annual savings in investment banking would include at least 10 percent of total operational costs for onboarding clients and trading processing through the use of LEIs.
The Global LEI System assigns 20-digit alpha-numeric LEIs to uniquely identify legal entities participating in transactions across the globe. Each LEI contains information about an entity’s ownership structure and thus answers the questions ‘who is who’ and ‘who owns whom’ among market participants. GLEIF provides online search capabilities through its Global LEI Index, a central repository of open, standardized, historical and current LEI reference data. Any interested party can access and search the complete LEI data pool free of charge using the web-based LEI search tool.
The LEI’s business value lies in the fact that current identification and verification processes have significant manual components and often require the use of multiple databases in which a counterparty may be identified by different names.
There are two broad areas in which the LEI has business value to collectively reduce the time spent on identifying counterparties and improving the reliability of information:
Reduces transactional and operational friction, both within and among organizations. For example, within an organization, the use of the LEI can facilitate more efficient, precise communication among functional departments business units. Across different systems and organizations, the LEI can simplify and expedite reconciliation among different systems or networks, enabling faster identity verification when using multiple data sources.
It makes important information about the background of a legal entity in a transaction more accessible and traceable. For example, commercial credit providers could use the LEI to verify an entity’s ownership structure before granting credit, and banks could use them to match multiple legal documents to a client when processing a specific transaction.
The white paper also identifies three new use cases for the LEI – capital markets, commercial transactions and the extension of commercial credit. These use cases are especially relevant to large corporations, small businesses and their banking institutions, and investment banks.
For each use case, the specific benefits are outlined below:
Capital markets: The LEI’s primary value is derived from reducing the cost of onboarding clients and of middle- and back-office activities related to the processing of stocks, bonds and other securities trades. All such activities could be simplified and streamlined if LEI use were more broadly adopted throughout the lifecycle of the client relationship. The use of LEIs in the onboarding and trading phases of the client relationship would also reduce the time spent on data correction and reconciliation necessitated by inconsistent identification of legal entities.
Commercial transactions: LEIs enable faster processing of letters of credit and better identification of sellers on e-invoicing networks.
The extension of commercial credit: LEIs allow for more robust and efficient know your customer (KYC) diligence on borrowers, as well as better traceability of information on borrowers from multiple sources.
Look out for GLEIF communication about upcoming blogs which will examine each of these use cases in more detail.
As well as this, the research project also indicates that there are multiple additional use cases beyond the three above. Operational efficiencies, cost savings, reduction of time to transact with clients, and more reliable information can be gained by introducing the LEI into almost any process that requires identification and verification of a counterparty and that has a manual component. This resulting easier counterparty identification will open the door to further automation and digitalization of financial and commercial transactions across the globe.
The white paper clearly illustrates the value of the LEI but its broad application and adoption depends on the creation of a strong network of advocates. Here at GLEIF, we are actively encouraging organizations to consider the adoption of LEIs in their day to day processes and we hope this paper will broaden the understanding around potential use of LEIs, as well as sparking further debate about their cost saving and efficiency benefits. The potential uses for the LEI extend well beyond the current uptake and GLEIF is keen to explore this idea with other organizations in a variety of sectors.
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Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO.