The Power of Legal Entity Identifiers to Transform Client Lifecycle Management in Banking

The following is a guest blog authored by Stephan Wolf, CEO, Global Legal Entity Identifier Foundation (GLEIF)

A recent report, conducted by McKinsey on behalf of the Global Legal Entity Identifier Foundation (GLEIF) has identified a significant opportunity for banks to reduce costs and improve profitability while enhancing customer experience and mitigating compliance and credit risk. The report concluded that wider use of Legal Entity Identifiers (LEIs) across the global banking sector could save the industry $2-4 billion USD* annually in client onboarding costs alone. The total industry spend on client onboarding is equal to an estimated $40 billion USD per year. Productivity improvements gained through LEI usage could generate cross-sector cost reductions of between 5-10% annually. 

LEIs are already used in capital markets globally, where regulators have mandated their use for reporting over-the-counter derivatives transactions. The research, however, makes it clear that the ability of LEIs to simplify entity identification in the digital age has the potential to unlock substantially more quantifiable value for banks in the near to mid-term. To realize this value, the report recommends that banks use LEIs to support all stages of the customer management lifecycle, not just in capital markets but across all banking business lines, such as trade financing, corporate banking, and payments. 

The study also found that: 

  • In addition to delivering improved efficiencies and lower costs, widespread LEI usage can generate topline benefits for banks, such as between three to seven fewer days to receive payment, improved client retention and a better customer experience, thanks to streamlined processes. 

  • Wider use of LEIs could address common ‘pain points’ in counterparty identification during client lifecycle management, such as the manual linkage of disparate data and accessing entity legal ownership structure.

  • The LEI could help mitigate compliance and credit risk, as it gives banks more holistic views of clients across internal and external data sources.

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. With so much to gain, banks should not 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. 

Gabriela Skouloudi, partner and co-head of Corporate and Investment Banking in the Americas, McKinsey, commented:

“The interviews [conducted as part of the report] 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 authorized signatories; and poor customer experience due to multiple round trips to gather client data and documents. 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.” 

The research report follows other recent calls for wider LEI usage by banks by influential industry stakeholders including the Financial Stability Board (FSB) in its recently published peer review, Thematic Review on Implementation of the Legal Entity Identifier (LEI), as well as the Payments Market Practice Group, in its Adoption of LEI in Payment Messages report. 

As a next step, GLEIF is evaluating the feasibility of changes proposed by the report, including an evolution of the Global Legal Entity Identifier System. GLEIF will also 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 that links to the most commonly used data sources.  

To ensure that the future evolution of the Global Legal Entity Identifier System is fully informed by, and in line with, the banking sector’s requirements, GLEIF aims to conduct its assessment on the report’s proposals with maximum engagement from the global banking community. To support that objective, financial institutions are strongly encouraged to join the GLEIF Globally Important Financial Institutions (GIFI) Relationship Group to participate in the ensuing discussion on the support needed for banks to integrate the LEI into the client management processes.   

The GLEIF GIFI Relationship Group facilitates communication between GLEIF, banks, financial institutions, and other key LEI stakeholders making it possible for members to express their views on LEI services and for GLEIF to understand the requirements of LEI data users. 

As GLEIF assesses the feasibility of proposals made in the report, direct interaction with banks is essential if we are to fully understand the needs of the sector and how GLEIF services and the Global Legal Entity Identifier System can best support it. We warmly welcome all interaction with banks and other financial institutions on this topic and would urge those interested in learning more to join the GLEIF GIFI Relationship Group for deeper insight and to ensure their voice is heard as we shape the future of the Global Legal Entity Identifier System together. We are excited that wider use of the LEI brings such significant potential benefits to the banking sector and our priority at this stage is to support voluntary adoption of the LEI in banking use cases beyond regulatory reporting so that these benefits can be fully realized.

For further information on joining the GLEIF GIFI Relationship Group, please email info@gleif.org

To view an infographic which outlines key findings of the McKinsey report, undertaken on behalf of GLEIF, please visit here.  

*Source: McKinsey Cost per Trade Survey, Thomson Reuters "KYC Compliance: The Rising Challenge for Financial Institutions" report, GLEIS 2.0 voice of customer and expert interviews. McKinsey conducted a voice of the customer exercise involving interviews of over 70 stakeholders, including market participants across more than five sectors, current LEI registrants and users, Local Operating Units, regulators and potential Global LEI System partners. 

  • Calculation: FTE productivity gain of (10% to 15% [~2-4 hours] of ~25 hours per onboarding case) multiplied by percentage of total onboarding costs attributable to FTEs (~57%) then multiplied by the estimated total industry spend on client onboarding ($40 billion per year). FTE productivity was based on “voice of customer” and expert interviews and includes both the estimated reduction and FTE hours per onboarding case. Percentage of total client onboarding costs attributable to FTEs based on the average cost of FTEs in the client onboarding function at 10 tier-1 banks (McKinsey Cost Per Trade Survey) divided by total client onboarding cost (European Association of Corporate Treasurers). Total industry client onboarding spend based on a Thomson Reuters report: KYC Compliance: The Rising Challenge for Financial Institutions.

About the author:

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.

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