Steven Beck & Alexander Malaket: Global ID system could revolutionize finance

Blogs are the author’s own opinion and not necessarily representative of Finastra or the World Trade Board.

Easier cross-border trade and a reduction in financial crime rely on a simple fintech solution

Blog post by World Trade Board members Steven Beck, Asian Development Bank & Alexander Malaket, Opus Advisory Services.

It’s difficult to keep up with all the noise, hype and hope that financial technology (FinTech) will solve all the problems that impede trade. Even for the most technologically-minded, the pace of change and innovation taking place is dizzying.

So, in the midst of all this, the World Trade Symposium and the World Trade Board are working to bring together trade, finance, technology, government, development and NGO communities to collaboratively realize fintech’s potential. A particular focus is on inclusiveness and the aim of making a positive difference in people’s lives, including in developing countries.

Following a successful inaugural Symposium in London in June of 2016, our Board members, delegates and partners are working on several ideas, as reflected in the World Trade Symposium 2016 Action Plan, each aligned with our vision and with the mandates of international institutions and multilaterals like the Asian Development Bank, or business organizations like the International Chamber of Commerce.

One of the opportunities we are both fired up about is surprisingly simple, perhaps even uninspiring at its core – a global effort, mandated through the Financial Stability Board, to implement a global ID number for businesses that provides a clear and trusted picture of “who is who”, “who owns whom” and “who owns what”.

A global identifier system is critical to facilitating trade…

Steven Beck, Head of Trade Finance, Asian Development Bank

The benefits of a well-designed and effectively deployed global identifier system can be very significant – even transformational – supporting commercial and trade activity in the most complex markets around the world, enhancing security, compliance and regulatory oversight around businesses and related financial flows, helping small businesses to engage in global supply chains by providing a degree of assurance as to their identity…the list of benefits is long and still being developed. Those who stand to gain most are small businesses in developing countries.

What is already clear though, is that a solid, high-quality identifier system with global scope and support can be very important to trade, certainly to finance and financial regulation, to facilitating commercial engagement and therefore inclusiveness for businesses in developing economies. And this means more growth, more jobs, and less poverty.

Still wondering what’s the big deal with digital identities for companies? Try searching for something in your own database without some kind of identifier and it’s really tough, if not impossible. Imagine the time and expense a bank or regulators incur in finding information on a company halfway across the world.

It’s these time-consuming and costly challenges that impede a financial institution’s ability to conduct anti-financial crimes due diligence on potential clients, and result in high cost and high risk so banks become reluctant to provide finance to small and medium-sized businesses (SMEs), particularly those based in developing economies where limited infrastructure makes it difficult to do even basic research about a company and its principals.

These same challenges contribute to ‘de-risking’, a phenomenon we’ve seen over the past few years wherein banks reduce or terminate activities in certain markets, relationships with other banks and with commercial clients – relationships that are critical to trade – especially in emerging markets, where information is scant and less reliable, and by its absence, creates a distorted picture of risk in those markets. In some cases, banks have pulled out of countries entirely, which not only hampers trade, but risks plunging a country into isolation.

Imagine having one trusted global entity that could identify the company you’re looking for, and provide information on ‘who is who,’ ‘who owns whom,’ and ‘who owns what,’ free of cost for users through the internet. Imagine how that would advance banks’ ability to manage financial crimes risk, an important impediment to providing finance to many companies, especially SMEs. Consider what an important contribution such an organization could make, to allow companies to conduct research on potential buyers, suppliers or partners around the world, even in markets where technology is limited and commercial practice is still evolving.

What a powerful way to reduce risk, lower incidences of fraud, ensure that commercial activity is legitimate and the financial flows are directed to legitimate enterprises, and not to criminal or terrorist-linked entities. What a great tool to facilitate cross-border trade in a big way, to help facilitate the engagement of businesses based in developing and emerging markets, to perhaps help reduce the cost of financing through improved certainty, visibility and reduced risk, based on 95% certainty in identifying an entity based on a global program.

…so we’re representing it on the World Trade Board.

Alexander R. Malaket, Opus Advisory Services

Such a program has existed since 2014. The Global Legal Entity Identifier Foundation (GLEIF), created by the Financial Stability Board, is a not-for-profit organization that supports the implementation and use of the Legal Entity Identifier (LEI).

We are so convinced of the importance of this initiative, and of its potential for great success and impact, that the GLEIF is represented on the WTS Board, and its potential, after only two years in existence, is starting to gain serious traction.

The Financial Stability Board was mandated by G20 to set up the system. GLEIF manages a network of partners, the LEI issuing organizations, to provide trusted services and open, reliable data for unique legal entity identification worldwide. GLEIF is overseen by the LEI Regulatory Oversight Committee, which is made up of regulatory authorities and central banks from around the globe.

Companies pay a nominal fee (less than $100, depending on the jurisdiction) for an LEI and a small annual fee to maintain it to the LEI issuing organization of its choice. Just under 500,000 companies now have these identifiers, ADB being one of them. Most of these entities are based in the US and Europe where regulations including Dodd-Frank and European Market Infrastructure Regulation require the use of LEIs to uniquely identify counterparties to transactions in regulatory reporting.

Where are we now?

While GLEIF already is able to verify ‘who is who’. next year GLEIF will start developing a capacity to verify ‘who owns whom.’ After that, the GLEIF system will develop the capacity to verify ‘who own what’. GLEIF lays the foundation for innovations to solve a broad range of problems, particularly for trade and other cross border transactions.

The key to much of fintech’s promise is rooted in accessing, sorting, registering and tracking huge amounts of data. This makes assessing risk easier and cheaper, and – as a result – business operations more secure. This could lead to a significant impact on access to finance for SMEs, enhance the ability of governments to track tax avoidance schemes, and greatly improve identification of, and enforcement action against, criminal or terrorist-affiliated organizations. All of this taken together will support more growth and job creation, and developing countries could be the greatest beneficiaries.

Many countries already have an identification system established, but many don’t. Those that don’t needn’t create one; they can just leapfrog and encourage, or require through legislation, their companies to acquire LEIs. Those countries that do currently have ID systems should consider mapping these to LEIs for global harmonization.

GLEIF makes available an essential piece of infrastructure for global economy of the future. It contributes to taking us to a more open, transparent and inclusive form of globalization, to the benefit of all concerned.

So, go out today and obtain your own LEI, and make a direct contribution to the evolution of the global architecture for trade, finance and development.