New research undertaken by McKinsey & Company and the Global Legal Entity Identifier Foundation (GLEIF) estimates that broader, global adoption of Legal Entity Identifiers (LEIs) could yield annual savings of over $150m within the investment banking industry and up to $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 the LEI. These findings form part of a white paper published today which examines the potential use cases of the LEI in streamlining legal entity identification.
LEIs create value in two ways:
1) Reducing transactional and operational friction in the identification of transaction counterparties.
2) Making important information about the background of a legal entity in a particular transaction more accessible and traceable.
Collectively, these benefits reduce the time spent on identifying counterparties and improve the reliability of information.
The new research identifies three new use cases for LEIs: capital markets, commercial transactions and the extension of commercial credit. These are especially relevant to large corporations, small businesses and their banking institutions, and investment banks.
In 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 the LEI would also reduce the time spent on data correction and reconciliation.
In commercial transactions, LEIs would enable faster processing of letters of credit and better identification of sellers on e-invoicing networks.
In the extension of commercial credit, LEIs would allow for more robust and efficient KYC on borrowers, as well as better traceability of information on borrowers from multiple sources.
GLEIF CEO, Stephan Wolf, comments: “We hope this paper will broaden the understanding of LEIs and spark further debate about their cost saving and efficiency benefits. The new research clearly illustrates the value of the LEI, but its broad application and adoption depends on the creation of a strong network of advocates. We are therefore actively encouraging organizations, especially large corporations, small businesses and their banking institutions to work together to discuss and consider the adoption of LEIs in day to day processes.”
Analysis taken as part of this project also indicates that there are multiple additional use cases beyond the three identified. 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.