Alternative realities

When software and services giant SAP announced its Financial Services Network (FSN) at Sibos 2013 in Dubai, a few eyebrows were raised at the level of bank support for the project.

Citi was the headline partner, having signed a commercial agreement to use the network. The project had been in development for over a year and was pilot-tested by a group of tier-one financial institutions, including Bank of America Merrill Lynch (BAML), Deutsche Bank, Nordea, Royal Bank of Scotland and Standard Chartered.

The SAP FSN is a cloud-based, bank to corporate platform designed to cover transactions such as payments, reconciliations and remittances. Typical payments include corporate payments to suppliers, which are sent to the bank automatically via the FSN. Likewise, reconciliations are handled automatically by the platform, replacing the previous process of manually collecting paper statements.

A year since the launch there has been little in the way of fanfare announcements of further implementations – expect a few during Sibos, of course – but the potential for connecting SAP’s enterprise resource planning (ERP) customers to their banks is a clear alternative to Swift’s Alliance.

SAP has more than 100,000 customers across all industries, from multinationals such as Unilever down to small and medium enterprises (SMEs). In many cases, the SAP ERP software is a key part of their financial systems and the company has made a clear strategy of becoming an important part of their connectivity strategies.

Earlier this month SAP acquired travel expenses software firm Concur Technologies in a deal worth $8.3 billion. SAP hopes the deal will help it to unlock what it sees as a huge opportunity tied up in the $1.2 trillion corporate spend on travel worldwide. The move follows similar acquisitions – Ariba and Fieldglass – which have bolstered SAP’s reach in business to business networks.

The acquisition of Concur, which offers a cloud-based travel expense management platform, will give SAP 23,000 customers and 25 million active users in a range of verticals in more than 150 countries.

It also gives SAP a significant business to business (B2B) partner network of airlines, hotel and car rental companies.

“The acquisition of Concur is consistent with our relentless focus on the business network,” says Bill McDermott, chief executive of SAP. With Ariba, Fieldglass (acquired in March this year) and now Concur, the company will be in charge of processing nearly $10 trillion in global B2B spending, which to some extent explains its willingness to shell out such a hefty amount of cash in this latest deal.

The mouth-watering thought, for some, is the possibility of connecting all of that to the banking and payments world. For others, there is the possibility that SAP’s connectivity in the commercial world will usurp Swift’s efforts to bring corporates on to its network, which currently has some 1000 corporate members.

A third scenario is that corporates will use FSN to communicate directly with each other, even to the point of using it as an alternative payments network, though theories of how that would work in practice get very vague.

“FSN is very interesting,” says Bob Lyddon, of Lyddon Consulting Services and managing director of the Ibos Association international cash management banking club. “Where I think it is different from Swift for Corporates is that it includes corporate to corporate connectivity, at least on paper. The key linking item in there is Ariba. In principle that gives FSN a much wider sweep by allowing corporates to talk to one another over Swift.”

But he says the numerical difference between the FSN and Swift networks is less important than might at first be thought. “The fundamental of SAP is they have 100,000 corporates as opposed to Swift’s 1000, but Swift actually has 1000 BICs for corporates and that represents 40,000 legal entities that are using Swift for their business,” he says. “SAP must have many more users, but they might all be within the same group. How do you count whether they’re autonomous installations that all belong to the same group?”

SAP is also used by smaller corporates that might be classed as falling within the business banking segment rather than corporate banking.

Lyddon also has doubts about the ease of integration: “Having seen how SAP is installed, I know that no two are the same, so I’m very sceptical about whether each user of SAP will use a slightly different flavour of data,” he says. “Some reports during the migration to the single euro payments area [Sepa] were a little disappointing in terms of the amount of work the corporates were left to do. Given that each bank has a slightly different flavour, if you multiply that by the number of corporates, you end up having quite a lot of bespoke work.”

Having a translation service in the middle is a short-term expedient in his view and is expensive: “You are into a level of cost that seems to me to beg the question do you need another one? All banks have FileACT and can accept a range of formats via that. Also, importantly, it has Swift security behind it. Swift doesn’t pretend that it has put loads of intelligence on the network. It is only a transportation mechanism. SAP says it is really easy to connect to all the banks but they don’t seem to have appreciated the intelligence that is needed in the middle. Is there a realistic appreciation of the difficulties? I say there can’t be.”

Tom Durkin, global head of integrated channel solutions, BAML, says the translation element effectively could be subsumed into other parts of the process: “FSN doesn’t necessarily extend our reach to clients; clients come to us for a broader banking relationship. This is another way for them to connect … we are not going to say it’s one network or the other because we don’t want to limit specific channels into the bank. The other thing that is interesting and probably will add more value for what corporates should be looking at it is the aspect of the service bureau, where we are already seeing the consolidation of the providers. FSN is a product that the corporate already has a relationship with, so it is more of an extension of that and you don’t have someone in the middle.”

At the moment, the question is largely about cost and some might see FSN as a stick with which to beat Swift into reducing its prices. Lyddon points out that it is already moving in that direction, observing that the great majority of corporates on the Swift network have joined since Swift introduced the low-cost Alliance Lite programme.

Others say that it is a question of horses for courses. “When we talk to some of our larger and mid-cap clients, they don’t have 20 banking relationships, they have three or four and if they already have a relationship with SAP or a SAP-like vendor, that solution may be more cost-effective because they don’t need to get to 20 points,” says Cindy Murray, head of global treasury product platforms and echannels, BAML.

“Certainly SAP is an alternative that will meet the needs of certain types of client – a client that is on SAP and is looking to upgrade as well as to connect to multiple banks. SAP is an alternative if they can upgrade and implement additional functionality by leveraging SAP FSN at the same time as eliminating the connectivity that they have with their banks.”

One area where SAP and others see benefits of the link to ERP systems – and other suppliers like Oracle are also making moves in this area – is in improving financial information within the corporate, such as in account reconciliation.

SAP’s focus on added value services is based on the fact that it is the most natural point at which to connect the actual applications. For example, it could call specific data from payment run files that need to be included in reconciliation files that go back to the general ledger. This would create a broader benefit that comes back to establishing the bank connectivity, streamlining those aspects and monitoring it.

“One of the benefits for being in the middle is the capability to take a legacy file and transform that, on behalf of the client, into an industry standard,” says Durkin. “That’s certainly a longer term benefit. That’s what service bureaus are doing; look at the clients’ reluctance to pull away from legacy automated clearing house files for Sepa in Europe.”

This is another reason the solution would be attractive to smaller clients that are more likely to need the kind of transformation services that would have been supplied by a Swift service bureau or some other third party.

While Oracle and other large IT suppliers consider how they move into this space, there are even more potentially disruptive alternative network models such as Amazon Web Services, which Durkin says has potential. “If you think about it as a hosting model, it has been hosting smaller businesses and is moving upscale – it has even won some government contracts –more into the private cloud rather than the public cloud. They could be a potential option for connectivity: though I haven’t seen them move too far, it is essentially the same model.”

But while the topology of payment network interconnectedness is changing, it is not a binary situation and it is not really new.

“This is not a new competitive threat,” says Durkin. “Swift is not the only network today: banks like ourselves have investments in electronic banking, which are other networks in a sense, so it is not as if Swift doesn’t face a competitive balance today. This is another challenge to ensure that their focus on corporates is targeted, has benefits and keeps improving. Swift already has to compete with electronic banking channels and proprietary host to host communications. When someone wants to move to Swift they are usually coming from a legacy host to host environment. This is about the corporate’s decision-making process when they put the payment business up for bid or they are looking at a regional solution. They don’t move this on a whim and it is not about the connectivity, it is really about the payments.”

More realistically, say several observers, there will be coexistence between the two environments and others that will inevitably spring up in the future. Some suggest that the different models and background of the SAP and Swift camps will make some sort of long-term partnership between the two inevitable. SAP has a more real-time environment compared to the store and forward messaging structure of Swift and its energies are focused on investing in areas such as its Hana in-memory computing architecture and cloud computing.

In the meantime, there is a very obvious hurdle to overcome. “SAP has to go after the corporates that haven’t already gone down the Swift path because it is very costly to unwind that and was very painful to implement in the first place,” says Murray. “I don’t think many of the large corporates that have implemented Swift are going to say let’s look at alternatives. It is not going to be a priority for them to unwind something that took them years to build.”