#12 in the LEI Lightbulb Blog Series - The Value of the LEI in Cross-Border Payments: Enhancing Corporate Invoice Reconciliation
In this blog, GLEIF’s Head of Business Operations, Clare Rowley, shines a light on how the payments industry is deriving value from the LEI in cross-border payments by exploring the world of e-invoice reconciliation and highlighting a pilot project showing how the LEI can boost interoperability and counterparty trust between Japan-EU trading partners.
Author: Clare Rowley
The need to harmonize cross-border trust services continues to grow in line with the ever-increasing volume of trade and commerce taking place across digital platforms, globally. In this effort, the LEI can play a fundamental enabling role.
The Financial Stability Board (FSB) has already endorsed the LEI for supporting the goals of its G20-endorsed Roadmap for Enhancing Cross-Border Payments. To demonstrate the LEI's value when transmitted in cross-border payment flows, GLEIF has been working with leading payments industry stakeholders to explore a variety of key use-cases including: corporate invoice reconciliation; KYC and customer onboarding; account-to-account owner validation; and screening efficiency for watch lists and sanctions.
In 2019, some 550 billion invoices were estimated to be sent globally, a figure that is forecasted to quadruple by 2035. Such vast numbers highlight how even a small efficiency gain in the classic e-invoice operating model can have a massive positive impact on the efficiency of the global digital economy. A notable sticking point in the system lies in the practice of sending and receiving e-invoices across borders and legal jurisdictions. If more already-verified data can be built into the model, the job of maintaining trust between trading partners will become easier, cheaper and faster, thus removing friction from the payment flows that power global economic growth.
What is invoice reconciliation and why is it important?
Invoice reconciliation is the process of matching invoices received from vendors to the records in company accounting systems. It is designed to ensure that all invoices have been received and processed, with the overall aim of showing that there are no discrepancies between what has been billed and what has been paid.
There are several reasons invoice reconciliation is an important tool for businesses. First, it helps avoid over or underpaying for goods or services. By ensuring that the prices on invoices match those in the purchase order, businesses shouldn’t pay more than agreed. A robust invoice reconciliation process can also ensure businesses are aware of discrepancies early on so that they can be rectified before they cause major problems. Overall, invoice reconciliation means bookkeeping and financial statements are consistently accurate. There are additional benefits to be had when the process is automated, as businesses can free up time and resources spent on manual checks that can be better spent elsewhere.
However, for all these benefits to be realized, and streamlined reconciliation to become a reality especially in the context of cross-border payments, the data shared between entities must be standardized. If this data is presented in different formats, not only is its automation impossible, but it is also extremely difficult for either party to adequately verify the other’s identity.
As a globally recognized identifier, the LEI enables clear and unique identification of legal entities participating in transactions, including financial and digital exchanges, by connecting to key reference information made publicly accessible on GLEIF’s website via the Global LEI Index. It is the only global online resource that provides open, standardized, and high-quality legal entity reference data. Each LEI contains information about an entity’s ownership structure, answering the questions of ‘who is who’ and ‘who owns whom’.
How can the LEI enhance e-invoice reconciliation?
The LEI is already helping to solve the problem of cross-border counterparty verification for e-invoicing through a proof-of-concept (POC) pilot, undertaken with several Japanese partners, which integrates the LEI into the eSeals used to verify the authenticity of e-invoices exchanged between Japanese and EU organizations.
The use of the eSeal - an electronic signature associated with a legal entity - is a popular means of confirming the authenticity of a digital document, like an e-invoice, shared between trading entities. Outside of the EU (where member states must comply with the region's eIDAS regulations) however, there is no international uniformity in eSeal format or requirements. Consequently, there is no mutually recognized way for the recipient of a sealed document to verify the authenticity of the sender’s identity beyond national borders. This lack of standardization means the eSeal cannot currently be used to verify documents or companies internationally, resulting in a lack of trust in cross-border e-invoice reconciliation, which in turn increases the need for manual processing.
The value of the LEI
The pilot has demonstrated how embedding the sender's LEI within the eSeal used to digitally seal their e-invoice can bring significant international gains in both interoperability and counterparty trust. The initiative was undertaken to support a Japanese consortium program which aims to develop entity-level trust services that are mutually recognizable by Japanese and European organizations.
The POC enables the authenticity of both the e-invoice document (via the eSeal) and the sending organization (via their LEI, embedded in the eSeal credential), to be confirmed simultaneously, together with the exact time of the document's sealing. It also shows how the process can be undertaken reciprocally, with the digitally sealed invoice issued by a Japanese organization to a European organization and vice versa. The authenticity of the LEI-embedded eSeal has been confirmed thanks to the recognition by both regions of the underlying POC trust framework.
Through this POC, GLEIF has demonstrated how the LEI can quickly establish an additional trust layer and facilitate the international interoperability of trust services. The nature of the LEI - as a globally accepted and trusted form of entity ID - also supports the realization of Data Free Flow with Trust (DFFT) – a G20 endorsed guiding principle for international cooperation on data flows. Here, the LEI can be considered as one of many technological tools supporting DFFT for global businesses to mitigate the risk and cost of moving data across borders, while also respecting the varying requirements of regional and national trade regulations.
The future of the LEI in cross-border payment flows
Zooming out from the advantages that the LEI can bring in the e-invoice reconciliation process, it's important to note that this is just one payments use case where the LEI's benefits are being harnessed to enhance cross-border payment flows. It has much broader value to facilitating payments generally. As part of its Roadmap for Enhancing Cross-Border Payments, and in collaboration with other industry standard-setting bodies, the FSB is currently working to promote standardization in ISO 20022 payments messaging. This includes the definition and harmonization of data fields - including identifiers - being transmitted along the payment chain.
Should the LEI be integrated into ISO 20022 messaging, the value that has been demonstrated by its inclusion in the eSeals POC for e-invoice reconciliation will increase manifold across many more cross-border payment use cases. The logic behind including the LEI’s inclusion, in both e-Invoices and payment messages, is simple: when it is added as a data attribute, any originator or beneficiary legal entity can be precisely, instantly, and automatically identified across borders facilitating both trust and automation.
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Clare Rowley is the Head of Business Operations at the Global Legal Entity Identifier Foundation (GLEIF). Prior to working with GLEIF, Ms. Rowley worked at the United States Federal Deposit Insurance Corporation where she led technology initiatives improving bank resolution programs and contributed to research on subprime mortgages. Ms. Rowley is a CFA® charter holder and holds a MS in Predictive Analytics from Northwestern University.