Broad Adoption of Legal Entity Identifiers Could Save the Banking Industry $2-4 Billion

A Q3 Update on Legal Entity Identifiers

Research conducted by McKinsey on behalf of the GLEIF discovered that global adoption of Legal Entity Identifiers (LEIs) could save the banking industry between $2-4 billion USD annually in onboarding costs alone. This figure represents 5-10% of the industries $40 billion annual overall spending on the practice.

The research conducted saw the potential for LEIs to reduce onboarding times by 14% alongside other benefits such as;

  • three to seven fewer days to revenue,
  • improved client retention,
  • delivery of better customer experience,
  • and mitigated compliance and credit risk.

The Broader Picture

We’ve talked a lot about how Legal Entity Identifiers have a place in client onboarding and especially in Know Your Customer (KYC) checks, but LEIs have the potential to unlock revenue in other areas too. This McKinsey report shows that LEIs can address recurring pain points throughout the client lifecycle including;

  1. Manual linking of entity data from disparate internal and external sources – right now, banks expend large amounts of resources on manually matching data or double checking matches in third-party data provider records to ensure that the data is accurate. This is currently a significant pain point.
  2. Difficulty in assessing entities’ legal ownership structure – banks spend a significant amount of time trying to understand a company’s legal and hierarchical structure. The question of ‘who owns whom’ helps to mitigate risk.
  3. Limited transparency into entities’ key officers – such as authorised signatories, who are also needed for transparency and risk mitigation.
  4. Poor customer experience – due to having to make multiple round trips to gather client data and documents required for onboarding and KYC, reporting and other verification processes.

Given that LEIs are already hugely familiar with the banking population as a result from compliance and regulatory demands, the broader adoption of LEIs isn’t an impossible future.

Additionally with the adoption of LEI data mapping, LEIs can easily be mapped into other business identifiers such as ISIN numbers and BIC numbers. The GLEIF is working with banks to create easier adoption of LEIs across the entire customer lifecycle.

LEI Growth Q3

A great example of LEI growth is the recent November report on key developments relevant to the adoption of LEI.

At the end of the third quarter of 2019, the total population exceeded 1.44 million. Around 41,000 LEIs were issued in this period, a growth of 2.9%. By jurisdiction, China saw the highest growth rate of 29.4%, followed by India at 10.6%, Australia 7.7% and South Africa 7.6%. China, India and Australia growth can be largely attributed to new regulatory changes in those jurisdictions.

the banking industry between $2-4 billion USD annually in onboarding costs alone

The LEI system provides absolute transparency on the last time data was updated thanks to the open database of LEIs. It means that LEI renewals of 70% went unchanged compared to the previous quarter f 70.3%. The highest renewal rates by region are Finland (92.6%), Japan (92.1%) and  Liechtenstein (90.6%).

“The business card information available with the LEI reference data, e.g. the official name of a legal entity and its registered address, is referred to as ‘Level 1’ data. It defines ‘who is who’. The Level 1 data is considered fully corroborated if, based on the validation procedures in use by the LEI issuer, there is sufficient information contained in authoritative public sources to corroborate the information that the legal entity has provided for the record. If this is not the case, the business card information available with an LEI record is classified as ‘entity-supplied only’.”

The percentage of fully corroborated level 1 data at the end of Q3 was 80.1% a slight increase on Q2.

When it came to reporting parent information, 89% of the total LEI population had reported on direct and ultimate parent companies. That includes renewal LEIs. 99.9% of LEI registrations of new LEIs this quarter had reported parent information so it looks to be that education is working and more registrations are filling in their full direct and ultimate parent details.

The GLEIF mentions this in report by saying:

“Since February 2019, GLEIF has worked closely with LEI issuing organizations to review the level 2 data, especially legal entities reporting that their parents do not have an LEI, to improve the data quality. At the end of the third quarter, over 21,000 legal entities had updated the information of their direct parents. 7,200 of these have provided the LEIs of their direct parents. Similarly, approximately 21,000 legal entities updated the information of their ultimate parents, and around 6,600 of these reported the LEIs of their ultimate parents.”

Such improvements to the transparency of the LEI system are meeting the goals set out by the FSB and LEI ROC. The share of entities reporting direct parents has, as a result of this campaign, increased by 6% at the end of 2018 and 7% at the end of the third quarter of 2019.

What’s Next For LEIs?

It’s clear that there is a strong future for Legal Entity Identifiers as an entity identification mechanism. The broader adoption of LEIs will be a significant benefit but there are challenges associated with this broader adoption. How do you get the world’s financial organisations to change their current systems and include LEI? Regulations can help but they won’t take it the whole way. We need organisations to take an LEI first approach and adopt best practices and company cultures that see LEIs being fit into all parts of the customer management lifecycle.

Going beyond the banking industry, we see an opportunity for LEIs as the organisational identity of the future and this is why there is already great work underway to tie LEIs to digital certificates and the PKI ecosystem.

To learn more about LEIs, visit our blog and to get your own LEI, visit our shop

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