Identity is a fundamental part of financial services. Identity of both individuals and organisations is critical in enabling or denying access to financial services (e.g. for payments, loans, claims) as financial institutions mitigate against fraud and risk. Given that successful/unsuccessful identification of an organisation determines whether or not it is able to do business (if transactions are legally permitted, if business loans are granted etc.), organisation identity is key to economic growth across the globe.
A large number of family-owned small businesses, the real job creators in most economies, struggle to get funding from financial institutions to secure their next 12 months of operation. This story is heard across all continents, and even in rich countries like the USA. In terms of access to credit from financial services, today many small and medium enterprises (SMEs) experience a familiar story of financial exclusion, often due to their identity information being deemed insufficient by financial institutions.
Beyond SMEs, corporations have their own pain points too. A company with a large number of resellers and suppliers knows the real risk of vast financial losses because of social engineering attacks. They could be next. The CISO can’t sleep at night knowing that the process of giving purchasing rights to authorised employees still relies on signing printed forms, and the inconsistency of old school line managers. Nothing that last quarter’s expensive pen test can help with.
In these two cases, building a bridge between people’s identities and organisations’ identities has the power to transform businesses digitally and deliver superior security, as well as increasing financial inclusion and growing economies. Such bridges cannot be built without strong pillars, and those pillars are the LEIs (Legal Entity Identifiers) – 20-character alphanumeric codes that identify legal entities in a global database.
This article explores the benefits of LEIs for financial use cases through three innovative business models pioneered by Ubisecure and our FinTech partners. Let’s define each of them.
1. LEIs Help Fight against “Musty” Businesses
“The notes smelled musty, as if they had been stored under the floorboards” was said by the court. This blatant example of NatWest shows how cash enters into the financial system in the millions to fund illegal activities when there are insufficient anti-money laundering checks. To mitigate against such situations, anti-money laundering regulations require banks and financial institutions to verify who exactly their customers are. Among many, one typical compliance requirement is called a UBO declaration, whereby a legal entity must declare its ultimate beneficial owners.
One innovative company, UBO Service, is helping to streamline these declarations using LEIs. When a financial institution starts its compliance checks for a new customer, UBO Service captures information on the beneficial owners of the company. At this point, the LEI provides accurate entity identity information.
Ben Cronin, MD at UBO Service, said on the Let’s Talk About Digital Identity podcast: “Because there are a number of standards inherent in getting an LEI issued, that really feeds into our mantra about using official, appropriate and the best-in-class data sources when you’re onboarding a customer. So, by getting that right at that early stage, the lifecycle of that customer is much easier to manage if you capture the really accurate information at the start.”
An executive with the right to represent the company (e.g. a director) will then sign and confirm the full list of beneficial owners. If this matches the information captured from the registries, the financial institution (an obliged entity) has the confidence of having done the appropriate checks to onboard that customer.
A solution like UBO Service needs flexible APIs that allows it to generate LEIs and fetch live entity identity information from the Global LEI Foundation (GLEIF) repository in real time, and this is achieved by partnering with RapidLEI.
This innovative method of Know Your Business (KYB – KYC for B2B) is not exclusive to financial institutions. Other types of companies such as funds, foreign exchanges, state agents, lawyers, accountant firms can benefit from LEIs for KYB.
2. LEIs Help Include the Real Job Creators
Even in richer countries, small businesses can find it very hard to get access to credit. The main reason is that a company’s financial reputation is directly based on the owner’s financial score. What if the family, on top of not owning any property, never built up a good credit score to prove that they are reliable for re-payments?
The same anti-money laundering regulations that helped in the previous example are often a hindrance for SMEs. Due to these stricter regulations, a small company falls into a high-risk category from a bank’s perspective. What is the response from most banks? Well, they prefer not to do business with them at all. Consequently, these SMEs join the lonely island of financial exclusion.
So what’s the solution? FinClusive’s mission is “to bring secure, compliance-centered banking to the 2.5 to 3.5 billion people and businesses worldwide who are financially excluded or underserved”. It is leveraging LEI issuance in its Compliance-as-a-Service (CaaS) solution for financial institutions, who can in turn provide such SMEs with an affordable, verifiable identity in a simplified, digital workflow. When a new customer (e.g. an SME) wishes to open an account with a financial institution, the process of validating their identity and financial status will be done with a simplified, fully digital workflow. In this process of validating a new customer, the financial institution will generate an LEI for the new customer.
The power of creating an LEI for the SME at this early stage is huge. From the financial institution’s perspective, it will reduce the need to do further checks in the near future, as an LEI contains up-to-date information about both the legal entity and its owners and legal representatives, creating transparency around who is at the other side of this potential new deal and therefore reducing risk – resulting in greater inclusion.
Amit Sharma, Found and CEO at FinClusive, said on the Let’s Talk About Digital Identity podcast: the LEI “legitimises them interacting with each other, which in an increasingly peer-to-peer world is hugely important for security and trust.”
3. LEI and Customer Identity and Access Management (CIAM)
Among established companies who have access to financial services, it is very common to have corporate accounts with suppliers. Let’s look at an example: a large company – “Malco” – buying from a computer and electronics supplier – “eCommerce”.
Mike has a small bicycle accident on his way to Malco’s office (his employer). He’s safe and sound but his work smartphone gets badly damaged and inevitably has to be replaced. Mike goes to order a new mobile, logs into Malco’s supplier, eCommerce, using the Sign in with RapidLEI identification service – a service that links an individual’s identity to its verified organisation identity using the LEI. By using such a service, the supplier not only has securely authenticated Mike, but has verified that Mike has the legal right to represent Malco (in spending money on its behalf). That’s something a “Login with Google”-like service can’t offer.
Further, after a successful login, Mike sees that his preferred smartphone exceeds his current spending limits as originally authorised by Malco. No problem, he just clicks the “Request Higher Spending Limits” button and waits until the CFO approves it. Grace (CFO) sees the request and approves it, with every step done electronically and no cumbersome emailing back-and-forth/reimbursements etc. required. Finally, Mike receives a notification that his request has been approved, logs in again securely and completes the order.
Watch a video of this example:
There are two key elements behind this successful scenario:
- Authentication via Sign in with RapidLEI, which not only offers strong authentication but also gives to the service provider (eCommerce computer supplier) information on what are the user’s rights to represent their company. All this information is fetched in real time from the global repository of LEIs.
- “eCommerce” uses advanced electronic delegation (a CIAM feature) to allow an admin user—the CFO — to transfer a set of roles and attributes to another — Mike.
Without this robust service that combines the best of CIAM and organisation identities, the story would involve paperwork and hand-written signatures, and it would be slower and less secure.
LEIs create a new spectrum of business models that bring benefits for all types of digital identity scenarios. The innovation I’ve just described delivers more than security and compliance, by ensuring that nobody is left behind in an island of financial exclusion. That’s the power of organisation identities and individual identities combined.
If you have your own use case that could benefit from the inclusion of LEIs/LEI issuance, find out more about partnering with RapidLEI – the world’s leading LEI issuer, with a pioneering automated LEI issuance API that makes such use cases possible.