As part of the launch of the Business as Unusual book (click on badge on left to get to the Amazon page) by Thomas Saueressig and Peter Maier that we helped conduct interviews and research for, we will share excerpts from each of the 10 chapters/300 pages, and also give you a “behind the scenes” view by sharing snippets of some of the over 100 SAP, customer and partner video interviews that ended up in the book.
Here are some excerpts from the fifth Megatrend – The Future of Capital and Risk
In the 2015 movie The Big Short, actors Margot Robbie and Selena Gomez and celebrity chef Anthony Bourdain explained complex financial terms like synthetic collateralized debt obligations (CDOs) using simple, everyday examples. You may laugh at the oversimplification of arcane economic lore, but consider that Hollywood has come a long way since Mary Poppins, set a century earlier, which showed two young kids causing a run on a London bank over a twopence.
In reality, the average person understands very little of the complexity of financial markets. Even industry insiders struggle to keep up with terms unique to financial markets, like “bear hugs,” “sushi bonds,” “suicide pills,” and the “dead cat bounce.”
This chapter focuses on the banking and financial services space, where the stakes are always high and digital innovation percolates throughout the sector. Banking goes back in time to the dawn of history in Mesopotamia with the first coins and evolved into its modern form in Renaissance Italy in the 14th and 15th centuries. Today, fintech startups attack the foundations of a banking system that is rooted deep in history and epitomized by marble-clad buildings. The insurance industry also looks back on thousands of years of history, and the modern concept of property insurance emerged after the Great Fire of London in 1666.
SAP is largely known as an ERP vendor in industrial markets, but we are also an influential player covering a surprising set of spaces and niches in the vital and fluid financial services sector:
- More than 14,000 banks in 150 countries are SAP customers.
- Half of the world’s central banks and 40% of stock exchanges run on SAP.
- SAP banking systems process more than 1 billion financial transactions every day.
- More than 1,000 banks and non-banks run SAP’s core banking solutions, and more than 1,250 banks run SAP solutions for financial accounting, controlling, and risk management.
(Falk Rieker, global head for the banking industry business unit at SAP) has outlined three main trends across the financial services sector—industry convergence, competition for talent, and business networks—that impact industrywide priorities of hyper-personalization, intelligent operations, cryptobanking, performance and compliance.
Beyond its business network portfolio of the SAP Business Network, SAP Concur, and SAP Fieldglass, among others, we are squarely in the middle of conversations about industry-specific networks like Catena-X across sectors. Customers in the financial sector want to discuss how SAP is shaping ecosystems, how we partner, and which lessons we have learned.
Anton Tomic, who covers the insurance sector and is based in Düsseldorf, Germany, talked about new industry networks: “Our insurance customers are looking at mobility of the future, health of the future, housing of the future, travel of the future, and wealth management of the future. They are embedding themselves and looking to increase their services, expanding beyond their traditional insurance premium revenues.”
(Stuart Grant, head of capital markets at SAP) drew on an example of how a toy company expanded into a completely different industry: “It’s a bit like when Lego realized their competition wasn’t other toy manufacturers, but rather the likes of Netflix and Amazon and Disney because what they were actually competing for was the time and attention of their customer, who is often a child. And so that’s why they started creating Lego movies. We see the trend that financial services get distributed and commoditized by other industries, disintermediating banks, and insurers from their customers. Can that trend be reversed? Can financial services organizations actually bring capabilities from other industries into their portfolio and differentiate that way?”
Grant noted opportunities around behavioral banking, which uses data to help consumers set financial goals and then rewards them for positive steps: ”Personalization also extends to customer contracts and fee structures. Financial service providers need to better align with the commercial terms that they have with their customers. Discovery Bank calls their model ‘behavioral banking,’ and it is all about personalization and rewarding customers for responsible and healthy behaviors. Or take our SAP BRIM product for billing and revenue innovation management that is used by many of our investment firm customers. It enables them to roll back from the general ledger environment to accounts receivables and billings, the revenue engine. It helps them plug their revenue leaks.”
Cryptobanking, or the management of digital currency assets, is another priority for SAP’s customers in the financial services space. According to Rieker, SAP helps with the accounting side and the custodial side of managing cryptocurrency accounts. You may have heard that it doesn't take a banking crash to lose cryptocurrencies; a smartphone crash can be enough. Rieker explained how VAST Bank protects cryptocurrency holders: “That information is then stored by the bank, and this has significant advantages because if you lose the key at Coinbase then it’s gone. Here, you don’t lose your assets with the key because the bank has the key as well.”
When you talk to Rieker and his team, you hear mention of clearing banks; new insurance models for emerging e-mobility markets; and ecosystems around real estate, healthcare, and retirement assets. You’ll also hear about SAP’s core banking and insurance products, which are now managed by SAP Fioneer, a joint venture with Dediq GmbH. Rieker can rattle off the names of customers that are using the SAP Fioneer functionality: “Core banking, in our definition, is lending, deposits, checking accounts, and payments. We have hundreds of customers, and they range from large customers like the Commonwealth Bank of Australia and Standard Bank of South Africa, to very small, specialized organizations. We see a large opportunity with fintechs and with small to mid-sized banks to implement our solutions in the cloud. Replacing core banking applications in larger organizations is more complex, quite similar to the slow migration of core ERP functionality in many industrial markets.”
A number of SAP banking customers have settled into unique niches. Rieker cited Compartamos Banco, a Mexican bank that has been a pioneer in extending microloans to women across Latin America: They offer group loans, typically for a group of 10 women with microbusinesses. On average, they are of four-months’ duration and for around $200. But if one of the women can’t pay an installment, the others need to stand in for her. These loans are unsecured, yet amazingly they have a default rate of less than 2%.”
Rabobank, the large Dutch bank, started issuing Renewable Energy Green Bonds in 2016 and has since introduced a complete Sustainable Funding Framework under which several types of sustainable financial instruments can be issued (e.g., bonds, loans, derivatives, commercial paper, certificates of deposit, etc.) According to Forbes, Vast was the “first federally chartered bank [in the US] that allows people to buy, sell and exchange crypto directly from a bank account.” Because crypto prices require much more granular fraction values than traditional currencies, the decimalization feature in SAP system is particularly attractive to banks like Vast, Grant said.
We continue to explore fascinating niches in the financial industry as we turn to discuss the Bank of London—which Grant called “the first new UK clearing bank in over a century.”
The Bank of London was launched in November 2021 and boldly calls itself a “leading edge technology company.” Founder and CEO Anthony Watson introduced himself as “primarily a technologist, not a banker.” He started his career at Microsoft, ran international technology for Wells Fargo, and became the chief information office (CIO) for Europe for Barclays Bank and later for Nike.
Discussing the Bank of London’s technology decisions and SAP’s role, Watson said the first time he was highly impressed with SAP software was at Nike, where 10,000 SKUs per season needed to be processed. He realized its applicability to financial services then, and years later when he was at the Bank of London and had winnowed 17 system choices down to 3, he was sure SAP would make the cut—and we did. Watson said “On a low transaction, low-cost basis, many new solutions probably work well. But if you need something battle-hardened, battle-tested that has significant volumes... Think about Lloyds Bank, which is one of the biggest clearing banks in the UK. Twenty percent of the UK's GDP probably goes through it. It's not going through a cloud-based startup bank. It's going through an iron-clad, hyper-scalable processing engine because Lloyds can't afford to get payments wrong. Ever.”
Watson said the core banking platform is what ultimately makes or breaks a bank’s processing, which is why he chose SAP: “SAP has always been known in the marketplace as a super-reliable platform, but one that is very expensive, and very difficult to change. We've taken out all the unwieldy pieces we don’t need and put our cloud wrapper around the core processor, which we kept intact to become hyper-agile. SAP has its limitations, but nothing is as stable or scalable as its core banking platform, at least that we've seen in the marketplace. It is unwieldy, and we spent two years making sure we had—from a client-customer perspective—a cloud-native, open-API, straight-through processing system.”
Many investment banks are using SAP solutions in creative “off-label” ways. JP Morgan Asset Management has embedded its liquidity platform directly into SAP S/4HANA, so corporate treasurers can invest that capital directly in the markets to improve efficiency. Rieker has called this approach “embedded finance”
The Investors Group has used SAP HANA to aggregate data from many different systems, Grant said. It has combined and aggregated years of product, customer, and transactional data while maintaining the granularity of the data underneath. Then, the company has applied machine learning capabilities on this data to provide its clients an individualized roadmap for their financial lives.
Grant’s unicorn of choice is Mollie, a Europe-based transaction solution that is gradually spreading beyond its Dutch roots. Mollie maximizes the use of the existing frameworks that are already in place: Visa and Mastercard, PayPal, Apple Pay, and others. Mollie acts as an aggregator and provides a consistent transaction framework for retailers regardless of the underlying transport mechanism.
Deutsche Börse Group traces its history back to 1585, but its modern digital incarnation is only 30 years old. Within this short timeframe, Deutsche Börse has become one of the most influential international exchange organizations and market infrastructure providers. It claims that around 60% of the European energy trade flows through its platform, and that the same volume is true for commodities, foreign exchange, and more. Their biggest exchanges are 360T for foreign exchange and Xetra, the fully electronic trading platform where 90% of stock trading in Germany occurs.
Lars Bolanca, senior vice president and the head of corporate IT, explained how Deutsche Börse supports the full value chain of financial markets from pre-trading over trading and clearing to post-trading.
Bolanca noted that Deutsche Börse’s indices business supports nearly 800,000 structured products and is already looking ahead to reconciling tomorrow’s trading patterns against a heavily regulated global marketplace: “And in the future, you’re looking at blockchain applications. How do you manage digital assets independent of borders, for example?”
Having previously worked at SAP, Bolanca said he has been pleased to see SAP become a lot more familiar with the finance sector: “ In our ambition to lead modern technology also in the corporate services world, we keep pushing SAP to upgrade to financial services industry needs when it comes to data protection, managing services in the cloud, audit trails, information security, constant evolution of conformity, real-time reporting on incidents or security breaches, and so on. This is something I would say has accelerated in the last two or three years. Prior to that, SAP appeared—especially due to acquisitions—to be mainly focused on the US market, with products like SAP Ariba and SAP Fieldglass. They have really made good progress in the last couple of years, but still have some way to go.”
Grant agreed with Bolanca’s candid assessment of SAP’s growth in this space: “I think it is a fair statement. Historically, SAP was focused on core banking and core insurance areas. The exchanges, asset management, and investment banking are different animals. SAP has acquired a customer base through various acquisitions and we have a strategy in place.”
Tomic provided a perspective on the challenges the established insurance players have been facing:We estimate that only 40% of insurance companies have a digital go-to-market strategy. They face competition from Google which is experimenting with auto insurance. Amazon has a partnership around small business insurance.”
But this challenge is nothing compared to Ping An out of China, as business analyst Simon Taylor explained on his Substack page: “The story is that Ping An is a tech giant masquerading as an insurance and financial services conglomerate. Annually, Ping An commits 1% of revenue— roughly 10% of profits—to R&D across its ‘five ecosystems’: financial services, healthcare, auto, real estate, and smart city. In another stroke of strategic clarity, they then cut those five ecosystems with three core technologies: AI, cloud, and blockchain.” Its Good Doctor service is merely one example of Ping An’s huge impact.
Reinsurance is a traditional market for SAP, and reinsurance giants Munich Re, Swiss Re, and IRB Brasil all use SAP’s reinsurance solution, part of SAP S/4HANA for insurance. This solution supports all forms of reinsurance—obligatory and facultative, proportional and nonproportional, assumed and ceded, life and non-life.
Tomic pointed out that the SAP Fioneer solution portfolio can run multiple insurance lines of businesses—life, health, property, and casualty—and their related end-to-end processes all on one platform, from policy management to claims. Particularly in Asia, many big insurance carriers run multiple lines of business, which fits nicely into the “super apps” we see across so many industries there.
In our discussion of the Integrated Mobility megatrend in Chapter 3, we broadly considered the impact of CASE trends on the automotive industry. ERGO Mobility Solutions, part of the Munich Re family, was launched in 2017 to understand, influence, and capitalize on disruptive mobility trends.
ERGO’s thinking has followed the CASE framework, seeing possibilities for multimodal, data-driven mobility that involves the following insurance-related features:
- Connected mobility supports pay-per-use insurance, connected assistance, digital and travel concierge services, and even digital claims.
- Autonomous mobility with advanced driver assistance systems and automated vehicles changes the risk structure and risk allocation.
- Car sharing, ride hailing, ride sharing, and mobility as a service use convenient, effective, and efficient insurance models that protect drivers, their passengers, and vehicle owners.
- Battery-powered vehicles carry specific risks and need additional products like battery warranties and insurance for widely distributed charging infrastructures.
Figure 6.3 shows a topology of applications ERGO is deploying to help cover all these scenarios. SAP S/4HANA is the engine behind the box called the Motor Insurance Platform. The layer at the top contains the functions supporting digital interactions with customers, both in car and over better-established mobile and desktop channels. At the bottom, you’ll find a true treasure trove of car and driver data that waits to be exploited by AI and used by smart processes. The middle layer contains modules that connect driver and vehicle data to support designing and selling additional services but also includes functionalities like claims management or collections and disbursements to link car and driver to policy and claims management, augmented by real-time data coming from the vehicle itself.
A twin of this post will include video excerpts from conversations with many of these executives so you can put a face and voice to those in the book.
Other posts on the other chapters to come.
