Making cross-border payments more efficient: The value of the LEI for KYC and onboarding

31 oktober 2023

In today’s global economy, the smooth processing of cross-border payments is crucial. LEI numbers are increasingly important, especially in improving KYC (Know Your Customer) and corporate onboarding processes.

Challenges with KYC and due diligence in the payments industry

Companies carrying out due diligence checks on customers or suppliers face the challenge of accessing the required data, which often comes from different sources. This lack of standardisation and fragmentation hinders efficiency and cost savings in cross-border payments.

However, implementing the Legal Entity Identifier (LEI) within FATF Recommendation 16 could significantly improve these processes. The LEI enables the precise and automatic identification of originators and beneficiaries, saving time and increasing security.

The LEI as a global standard identification system

The Financial Stability Board (FSB) recommends the LEI as a critical part of its roadmap to improve cross-border payments. In collaboration with industry leaders, GLEIF demonstrates how the LEI can be used for various use cases, including KYC and customer onboarding, account holder validation and screening for sanctions.

The key challenge with KYC is often access to the correct data. Trade register data varies widely in terms of its availability and structure. The Global LEI Index is the only open global resource that provides high-quality reference data to uniquely identify legal entities and answer the questions ’Who is who?’ and ’Who owns whom?’

How the LEI improves KYC processes

Currently, KYC processes are often prone to errors as they are based on company names and different identification numbers. However, with the Legal Entity Identifier (LEI), companies could use a standardised, machine-readable identifier that is internationally valid and minimises errors or misunderstandings.

For multinational corporations, the LEI would bring considerable efficiency gains by simplifying the identification of ownership structures and accessing the data of the Global LEI Index. This would facilitate business relationships with offshore companies, where access to company data is often restricted.

Advantages of the LEI for companies in emerging markets

For multinational companies operating in emerging markets, the Legal Entity Identifier (LEI) can serve as a trusted and reliable identity that simplifies onboarding new business partners. The LEI provides a globally valid, standardised identifier that creates trust, as shown by an example from Nigeria, where the LEI strengthened trust in the financial sector.

A McKinsey study found that the introduction of LEI numbers in the global banking sector could reduce annual onboarding costs by up to USD 4 billion. This corresponds to 5 to 10 per cent of annual expenditures on KYC processes.

The LEI as a driver for ’perpetual KYC’ (pKYC)

The standardisation and automation of KYC processes through the Legal Entity Identifier (LEI) could enable future perpetual KYC (pKYC). This would not only reduce companies’ ongoing workload but also keep risk profiles up to date and considerably simplify cross-border payment transactions.

The future of the LEI in cross-border payments

Automating KYC processes is just one example of how the LEI can improve cross-border payments. The Financial Stability Board (FSB) is working on standardising ISO 20022 payment messages that include the Legal Entity Identifier (LEI). This would immediately identify originators and beneficiaries and strengthen trust in international payment flows.