New research conducted by McKinsey on behalf of the Global Legal Entity Identifier Foundation (GLEIF) has found that wider use of Legal Entity Identifiers (LEIs) across the global banking sector could save the industry around $2-4 billion annually in client onboarding costs alone. With estimated total industry spend on client onboarding equal to $40 billion per year, this could potentially generate cross-sector cost reductions upwards of 5-10% per year.
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.
Greater LEI usage could also help to address common ‘pain points’ in counterparty identification during client lifecycle management: such as the manual linkage of disparate data and the difficulty in accessing entity legal ownership structure; as well as mitigating compliance and credit risk by giving banks more holistic views of clients across internal and external data sources.
Gabriela Skouloudi, partner and co-head of Corporate and Investment Banking in the Americas, McKinsey, comments: “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 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.
Stephan Wolf, GLEIF CEO, notes: “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, 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.”
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 (GLEIS). 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 which links to the most commonly used data sources.