Identity is an essential component of financial services. The identity of both individuals and organizations is crucial in enabling or denying access to financial services (e.g. for payments, loans, claims) as financial institutions seek to ward off fraud and risk. As the successful or unsuccessful identification of an organization determines whether it can do business or not (whether transactions are legal, whether business loans are granted, etc.), the identity of an organization is key to economic growth around the world.
Many small family businesses that create jobs in most economies struggle to obtain funding from financial institutions to sustain their operations for the next 12 months. This story is heard on every continent, even in rich countries like the US. In terms of access to credit from financial service providers, many small and medium enterprises (SMEs) today experience the familiar story of financial exclusion, often due to their identity details being deemed insufficient by financial institutions.
Not only SMEs, but also companies have their own problems. A company with a large number of resellers and suppliers knows the real risk of huge financial losses due to social engineering attacks. They could be next. The CISO can’t sleep at night knowing that the process for granting purchasing privileges to authorized employees still relies on the signing of printed forms and the inconsistency of old-school supervisors. Not even last quarter’s expensive pen test can change that.
In both these cases, building a bridge between people’s identities and companies’ identities has the potential to digitally transform businesses and provide greater security, as well as promote financial inclusion and economic growth. Such bridges cannot be built without strong pillars, and those pillars are LEIs (Legal Entity Identifiers) – 20-digit alphanumeric codes that identify legal entities in a global database.
In this article, we explore the benefits of LEIs for financial applications through three innovative business models developed by Ubisecure and their FinTech partners. Let’s define each of these models.
LEIs help in the fight against “stale” companies
The banknotes smelled musty as if they had been stored under the floorboards,” the court said. This glaring example from NatWest shows how millions of dollars of cash enters the financial system to fund illegal activities when there are insufficient anti-money laundering controls in place. To prevent such situations, anti-money laundering regulations require banks and financial institutions to verify who exactly their customers are. One of many typical compliance requirements is the so-called UBO report, where a legal entity must declare its last beneficial owners.
The innovative company, UBO Service, helps streamline these declarations using LEIs. When a financial institution begins its compliance checks for a new client, UBO Service captures information about the entity’s beneficial owners. At that point, the LEI provides accurate information about the identity of the business.
Ben Cronin, managing director of UBO Service, said on the Let’s Talk About Digital Identity podcast, “Because there are a number of standards associated with issuing an LEI, this is in line with our mantra of using official, appropriate and the best sources of data when bringing in a client. So if you get everything right at this early stage, the customer lifecycle is much easier to manage if you capture the really accurate information from the start.”
An authorized representative (e.g. a director) then signs and confirms the full list of beneficial owners. If this matches the information recorded by the registries, the financial institution (an obligated entity) can be confident that it has carried out the appropriate checks to authorize the customer.
A solution like UBO Service needs flexible APIs that allow it to generate LEIs and retrieve live corporate identity information from the Global LEI Foundation (GLEIF) repository in real-time, which is achieved through the partnership with RapidLEI.
This innovative method from Know Your Business (KYB – KYC for B2B) is not limited to financial institutions. Other types of businesses such as funds, foreign exchanges, government agents, lawyers and accounting firms can also benefit from LEIs for KYB.
LEIs help to involve the real job creators.
Even in richer countries, it can be very difficult for small businesses to access credit. The main reason for this is that the financial reputation of a business depends directly on the creditworthiness of the owner. What if the family not only does not own property, but has never built up a good credit rating to prove they are reliable for repayments?
The same anti-money laundering regulations that were helpful in the previous example are often an obstacle for SMEs. Because of these stricter regulations, a small business falls into a high-risk category from a bank’s point of view. What is the reaction of most banks? Well, they prefer not to do business with them at all. The result is that these SMEs end up on the desert island of financial exclusion.
So what is the solution? FinClusive’s mission is to “enable the 2.5 to 3.5 billion people and businesses around the world who are financially excluded or underserved to bank securely and in compliance”. The company is using LEI issuance for its Compliance-as-a-Service (CaaS) solution for financial institutions, which in turn can provide such SMEs with affordable, verifiable identity in a simplified, digital workflow. When a new customer (e.g. an SME) wants to open an account with a financial institution, the process of validating their identity and financial status is carried out in a simplified, fully digital workflow. In this process of validating a new client, the financial institution will generate an LEI for the new client.
The creation of an LEI for an SME at this early stage is of great benefit. From the financial institution’s perspective, it reduces the need for further verification in the near future, as an LEI contains up-to-date information about both the legal entity and its owners and legal representatives, providing transparency about who is on the other side of this potential new business, thus reducing risk – leading to greater engagement.
Amit Sharma, founder and CEO of FinClusive, said in the Let’s Talk About Digital Identity podcast: “The LEI legitimizes them to interact with each other, which is hugely important for security and trust in a world where there are increasingly peer-to-peer businesses.”
LEI and Customer Identity and Access Management (CIAM)
For established companies that have access to financial services, corporate accounts with suppliers are very common. Consider an example: A large company – “Malco” – buys from a computer and electronics supplier – “eCommerce”.
Mike has a minor bicycle accident on the way to Malco’s (his employer’s) office. He is hale and hearty, but his work smartphone is badly damaged and needs to be replaced. To order a new phone, Mike logs on to Malco’s supplier eCommerce and uses the identification service Sign in with RapidLEI – a service that links a person’s identity to the company’s verified identity using the LEI. By using such a service, the supplier has not only securely authenticated Mike, but also verified that Mike has the right to represent Malco (by spending money on its behalf). This is something that a “login with Google”-like service cannot provide.
After successfully logging in, Mike finds that his preferred smartphone exceeds the spending limits originally approved by Malco. No problem, he simply clicks the “Request Higher Spending Limits” button and waits for the CFO to approve it. Grace (CFO) sees the request and approves it, with each step done electronically and no cumbersome emailing/reimbursements etc. back and forth. Finally, Mike receives notification that his request has been approved, securely logs in again and completes the order.
LEIs create a new spectrum of business models that bring benefits to all types of digital identity scenarios. The innovation I have just described offers more than just security and compliance, ensuring that no one is left on an island of financial exclusion. That is the power of organizational identities and individual identities in combination.
If you have a use case of your own that could benefit from incorporating LEIs/LEI issuance, learn more about partnering with RapidLEI – the world’s leading LEI issuer with a groundbreaking API for automated LEI issuance that makes such use cases possible.