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Interviews

LEI 101 – HOW IT WORKS AND WHY IT ENABLES SMARTER, LESS COSTLY AND MORE RELIABLE DECISIONS ABOUT WHO TO DO BUSINESS WITH

A Q&A with GLEIF’s CEO Stephan Wolf.

 

Who is GLEIF and what is a LEI?

The Financial Stability Board (FSB) established the Global Legal Entity Identifier Foundation (GLEIF) to support the implementation and use of the Legal Entity Identifier (LEI).

 

In the past, accurately identifying legal entities on a global level has been a complex task, requiring a significant investment in time, money and resources. This was because there wasn’t a single, open and up-to-date database giving you all the information you needed.

This lack of transparency ultimately led to financial crises, fraud and market abuse.

 

LEIs trace their origins to the 2008 financial crisis, when regulators and capital market players needed to quickly assess the extent of market participants exposed to Lehman Brothers and each of its hundreds of subsidiaries. This laid bare the critical need for a system to identify and understand exposures at the legal entity level instead of the aggregate, parent-company level. If it had been available at the time, a system that assigns an electronic, standard entity identifier to legally distinct parties would have helped to fill this gap.

 

In order to remedy this, the FSB, together with the finance ministers and central bank governors represented in the G20, advocated developing a universal LEI for any legal entity involved in financial transactions.

 

The LEI is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). Each LEI connects to key reference information describing a legal entity including its ownership structure. LEIs enable smarter, less costly and more reliable decisions about who to do business with, while bringing simplicity to onboarding and transacting.

 

This is why GLEIF exists. We make available the Global LEI Index, which is the only global online source that provides open, standardized and high-quality legal entity reference data.

 

Why are LEIs important?

Current identification processes have significant manual components and often require the use of multiple databases in which a counterparty may be identified by a different name. Many banks and corporations still use names rather than identifiers, resulting in confusion. As an example, a large bank’s client services division recently found that it had an average of five names—with minor variations in its database—for the same organization. Additionally, commonly used databases, different divisions and IT systems within organizations can all have varying versions of the same entity’s name, making it harder to trace and to link information from multiple sources.

 

How do LEIs work?

It’s a simple process. A company that wishes to obtain an LEI chooses its preferred business partner from the list of GLEIF-accredited LEI issuing organizations. Through self-registration, a legal entity that then supplies accurate reference data. This reference information is validated against third party sources, before it’s hosted online for all to use.

By replacing siloed information with a standardized approach, LEIs take the complexity out of business transactions.

Since being introduced, LEIs have allowed public authorities to better evaluate risks, make corrective steps and improve data integrity. And they’re giving businesses the confidence they need to engage in transactions with total visibility, greater certainty and improved control.

 

How do LEIs fix business problems?

In our report – A New Future for Legal Entity Identification – we looked into the challenges of entity identification in financial services. We found that one of the biggest issues lay in onboarding new businesses, with streamlined onboarding far from a reality within the sector. In fact, over half (57%) of salespeople in banks said they spend 27% of their working week (or more than 1.5 days per week) onboarding new client organizations. With half (50%) of financial institutions using, on average, four identifiers to help identify client organizations during the onboarding process, inefficiencies are plaguing the process for many businesses.

 

This has significant consequences; 39% of respondents reported that there is a risk of losing business due to the length and complexity of the process. In fact, the respondents in our study believed that 15% of business is at risk as a result of the client losing patience with the process and 14% is lost because the client’s identity cannot be verified.

 

The stats further highlight how adopting LEIs for each client organization can provide slicker onboarding which leads to improved consistency, less risk of business loss and more efficient use of valuable resources. We’ve found that introducing LEIs into capital market onboarding and securities trade processing could reduce annual trade processing and onboarding costs by 10%. This would lead to a 3.5% reduction in overall capital markets operations costs (or U.S.$150 million in annual savings) for the global investment banking industry alone.

 

Why all businesses should have a LEI

There are millions of business entities on our planet, and it’s increasingly important that we can identify who is who and what is what. The LEI allows everyone to cut costs, accelerate operations and gain deeper insight into the global marketplace.

This means businesses won’t lose time and money due to an inefficient process. They can make smarter, less costly and more reliable decisions about who to do business with, because the LEI becomes the common link that pieces all records associated with an organization together. This provides certainty of identity in all online interactions, and makes it easier for everyone to participate in the global digital marketplace.

 

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Interviews

WHY MANAGING RISK PERFORMANCE WILL BE LENDERS’ BIGGEST CHALLENGE THIS YEAR

Michal Smida, Founder & CEO, Twisto

 

  1. What are the key trends you’re seeing in lending?

Q2 was characterised by a conservative approach and a very proactive reaction to managing credit risk. There was substantial tightening in approval rates for onboarding new clients – this in part is due to the uncertainty of the potential impact of unemployment, as well as the increased challenge of gaining access to capital markets. We saw as much as 50% reductions in approval rates across the industry.

There was also a bigger focus on collections and managing risk in the existing portfolio, this includes more proactive and frequent communication with clients. Q3 has seen an easing of the above measures as prime client portfolios in the EU have recorded positive non-performing loan (NPL) performance. In some cases, customer payment behaviour has improved vs. pre-COVID, with some lenders recording their best performance to date.

 

  1. The 2008 financial crisis was the catalyst for alternative lenders. Do you think the current pandemic will be a similar agent for innovation and change, and if so, what might it look like?

The shift to digital has been an ongoing theme since 2008, which gave rise to many great fintechs, but also pushed banks to digitalise rapidly. What the current crisis has brought is increased customer adoption of what has already been in the market for some time. So we don’t see the change in the product offerings of financial institutions, but rather a change in customer behaviour and their willingness to use digital channels, which are not only much more convenient, but also safer and quicker to use in comparison to traditional offline processes.

 

  1. What are the biggest challenges for lenders in the next 12 months?

Maintaining and further managing risk performance. Q4 will be critical in proving the resilience of the customer base. As governments have stepped in to support businesses and the wider economy, the possible impact on unemployment has been delayed.

This in turn can lead to credit deterioration once the support stops. Venture capital and debt markets effectively shut down in Q2, with reopening noted in Q3. As many lenders require additional capital to sustain growth momentum, the key challenge will be attracting capital from investors who became even more selective and cautious.

 

  1. What do lenders need to prioritise to deliver a better customer experience?

It’s mostly about finding a sweet spot between a smooth customer journey and all the requirements coming from different stakeholders around areas such as risk factors.

Many financial institutions are not so brave in terms of challenging the status quo of the current financial conditions. We are doing our best to make bold decisions that might make a difference at the end of the day.

 

  1. You have already started to make the transition to lending 3.0. Why did you want to build a card programme?

Creating a payment card was the logical next step in fulfilling our vision of simplifying daily payments for customers. We started with simple deferred payments “Buy now. Pay later” for e-commerce, but in an age when the overwhelming majority of payments still occur offline, it was necessary to also enter that market and provide an omni-channel solution. The key was to have a better app and overall experience than traditional card issuers.

This was demonstrated in our recent launch of the Twisto app and card offering in Poland, which has been well received by customers, with over 70,000 sign ups and over 20,000 cards ordered in the first 30 days from launch. We are very pleased with the speed of execution through this launch, and strategic partners like Mastercard and Marqeta have been fundamental to enabling the success of the technology. We look forward to exploring expansion opportunities across the EU on the back of this solution.

 

  1. What’s your vision for your card programme and how it will help you solve your challenges and deliver a better customer experience?

At Twisto we believe that having a plastic card in your wallet is already outdated. Because of this, we’ve committed to our goal to stop issuing plastic cards by 2025. We believe that the future is paying with mobile phones. Thanks to Marqeta and our Digital First certification from Mastercard, we’re one of the first companies in Europe, or even the world, who doesn’t have to issue physical cards.

 

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Interviews

MAXIMISING THE SPEED OF RECOVERY: ALLOCATING CAPITAL EFFECTIVELY

Simon Bittlestone, CEO of Metapraxis

 

How has COVID-19 impacted businesses’ financial plans?

The uncertainty thrown up by the COVID-19 pandemic has meant that many businesses have been feeling the strain and extra pressure on their cashflow. While measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) were put in place, for some businesses, these have been ineffective in providing much needed liquidity. This has affected smaller businesses significantly, as they are much more likely to default on loans than their larger counterparts, and therefore less likely to have a loan approved.

In April this year, a survey showed a pessimistic outlook for SMEs predicting that many would run out of cash in as little as 12 weeks. Taking into account various other factors at the time, Metapraxis predicted this time frame could be shorter still, giving certain businesses just 6 – 8 weeks.

 

What do you think the next few months hold?

While the outlook of businesses may have changed continuously since the beginning of the pandemic, it would be naïve to think we are out of the woods. The worst of the economic recession is still to come, so good allocation of capital and effective management of cashflow is now more  important than ever.

 

What factors do businesses need to consider in order to effectively optimise their strategy?

Financial results depend on how businesses split their capital across different strategies, projects, products or services, as well as various regions. Clearly it would be beneficial to back the most profitable service lines in a time of financial uncertainty, but in order to get this right, businesses need to consider three main points: multiplicity of inputs, complexity of comparison and multiplicity of output.

Multiplicity of inputs looks at the number of assets that can be supported. The more assets there are, the more complex the challenge of coordinating capital allocation appropriately. Tied in with that, a business also needs to be able to realistically compare one asset’s return with another’s. This is the complexity of comparison; it is hard for the board to choose which assets to support if they are not directly comparable with each other. Finally, and perhaps most obviously, all of this needs to fit into the overall goal of the business, and what areas it is trying to maximise.

To add to this already difficult process, multiplicity of output is going to change dramatically over the coming years, as companies begin to consider other factors such as climate impact, employee wellness and social responsibility as outputs.

 

What should businesses be focusing on in the short-term?

Businesses must focus their efforts on financial return. Doing so is a key part of any businesses’ recovery from financial hardship, even if they are caused by unpredictable ‘black swan events’ such as coronavirus.

Many things remain fixed in a short-term model. During recovery from such events there is not generally time to create a whole new product line, or explore a different service, although some more agile businesses have of course been able to achieve this. Building a top down model of the business is therefore key in order to streamline processes and manage cashflow, providing the necessary liquidity to survive.

 

What longer-term changes should businesses be aiming at implementing?

With multiple inputs and outputs to consider, the long-term equation is extremely complex. Businesses often underestimate the importance of building a model that allows directors to see the impact of different factors on profitability and cash flow. The ability to reach long-term goals very much depends on identifying future risks and changes in the market, and being able to react quickly.

This can only be done by analysing historical return on investment by business unit, region and product or service, and applying these ratios to test future assumptions. This allows management to run different scenarios quickly and then test these with operational deliverability. If the management team can analyse how various future scenarios might pan out and what the impact might be on the business, it can use this information to make better decisions.

Any company that doesn’t have a model like this will find themselves at a massive disadvantage as we approach the next two years of economic recovery andit is the finance team who must take responsibility for rectifying that.

 

What is the key takeaway for businesses who are looking to learn from COVID-19?

Capital allocation has always and will always be at the heart of any business’s operations. This is even more prevalent in times of economic recession when managing cashflow becomes even more vital for survival. When a business has a clear historical overview of its portfolio, how well products or services are performing, and how previous scenarios have affected profitability, it can make more informed decisions when it comes to assessing the impact of an unexpected event.

The ability to adapt to fluctuations is hugely important to the board, particularly the CFO, when it comes to successful cashflow management. Agility in financial planning, good scenario modelling and prudent assumptions will allow a business to better weather most storms.

 

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