American Banker  |  Thursday, November 13, 2008

By Steve Bills

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With a string of core-banking sales abroad in recent years, the enterprise software vendor SAP AG has shown that it can hold its own against the specialized providers that have long dominated the market.

Analysts say its position as one of the top makers of the complex applications that large companies use to link their myriad systems could make it a strong contender for the core processing contracts of large U.S. banks.

This year alone the Walldorf, Germany, company has landed deals to provide core systems for major banking companies in Germany, Canada, the United Kingdom, and Australia.

And though SAP has not signed any core banking deals in the United States, the banking market in this country is clearly in its sights. And it's starting to make progress, notably with a March contract to provide Bank of America Corp. with an enterprise resource planning database, which the Charlotte company plans to use as its general ledger to keep its own books.

SAP reported total sales of $16.2 billion for last year. It does not break out its revenue by industry, but it says at least 14 major banking companies around the world have adopted SAP for Banking since the application was introduced in 2004. They include Nationwide Building Society in Great Britain, Commonwealth Bank of Australia, and three big German companies: Deutsche Bank AG, Deutsche Postbank AG, and Commerzbank AG.

Executives at the vendor say they are working with bankers and other software companies, such as Microsoft, to develop new standards that will make it easier for banks to move to modern systems from the ones they may have been using for decades.

Karen Massey, a senior research analyst at International Data Group Inc.'s Financial Insights, said the breadth of SAP's offerings is serving it well.

"When these banks are evaluating core, are they just evaluating core, or are they evaluating everything?" Ms. Massey said. "SAP has been getting some pretty good wins, and maybe it's because they have that platform" of both core and enterprise software.

Early Efforts
SAP has been trying to break into the U.S. core banking market for several years with little success, and Bill McDermott, the president and chief executive of SAP Americas Inc. and a corporate officer of the parent, said the company has changed its approach, hoping to play to his company's strengths.

"I think we made a little bit of a mistake going back four years ago," when SAP made a big push into the U.S. market, by emphasizing its technology for processing core deposits and loans, Mr. McDermott said.

SAP built its core banking system internally and initially targeted banks in German-speaking countries and then expanded from there. Over the past decade, the company says, it has signed 100 customers worldwide.

By contrast, one of its main rivals in the market for the large corporate computer installations known as enterprise resource planning systems, Oracle Corp. of Redwood City, Calif., has moved into core banking by acquisition. In November 2005 it took a 43% stake in i-flex solutions ltd., buying out the stake of the Mumbai vendor's founder, Citigroup Inc. Since then Oracle has taken majority control of i-flex (now Oracle Financial Services Ltd.) and has made it the centerpiece of its financial services strategy.

In 2004, SAP established a sales office in the United States for its core-banking system; this office has acquired clients in Canada and Mexico. Today SAP Americas is putting less focus on banking-specific applications and more on general corporate applications, Mr. McDermott said.

"How do you manage your business more efficiently on one common platform?" he asked. "We want to help our customers be best-run companies first, then segue that into core banking."

Building Blocks
Dan Drechsel, a senior vice president at SAP and the general manager of its financial services unit, said the strategy is to employ the modular building blocks of service-oriented architecture.

"They're large projects, and a big-bang replacement is not acceptable in today's market," Mr. Drechsel said. "We suggest a 'surround' strategy, which, due to our modular approach to SOA, enables banks to start with product configuration and platform implementation. This allows banks to offer many products quickly, but at the same time limiting the impact of change."

Nationwide Building Society announced in March that it would use SAP for Banking as the centerpiece of a business transformation strategy that will continue at least through 2012.

Edwin Davis, the British thrift company's head of commercial, financial, and risk services, said the project eventually will involve replacing most of its banking platforms and re-engineering its business processes. "We're at the foothills of this mountain."

Nationwide is Britain's No. 2 mortgage lender and term deposit taker, but it has only a foothold in the U.K. checking account market, Mr. Davis said. "We don't generate as much capital as the banks. We're not as efficient."

During the core conversion, Nationwide plans three major software releases, Mr. Davis said. The first will bolster its checking account offerings with customized versions tailored for students, senior citizens, and other targeted markets. The second release will address savings, and the third will address mortgages.

"We've got some fairly vanilla mortgages," he said, but Nationwide is planning for a time when it can offer a variety of loan prouducts — linking mortgage and savings accounts together, for example, to give customers more advantageous rates, or adding "drawdown and borrow" or overpayment features. "That's the beauty of this package. You can configure it to pretty much any product you want to build."

Robert Hunt, a senior analyst at TowerGroup, a Needham, Mass., independent research firm owned by MasterCard Inc., said one reason bankers in other parts of the world are installing new core systems now, while those in the United States largely are not, is that the foreign bankers started out further behind.

In the United States, particularly in the 1970s and 1980s, many midsize banking companies, as well as a number of the country's biggest, bought vendor packages with names such as Hogan, CA, Systematics, and Metavante — systems that in many cases are still in use today, he said.

"The U.S. had this massive benefit from core vendors," Mr. Hunt said. "In Europe, it was all in-house. You didn't have the robust software market. That makes a maintenance issue for the banks in Europe."

As a result, American bankers have been able to focus more attention on automation in their call centers, at their branches, and on the Internet, he said. "We didn't pay much attention" to back-office systems.

Back Office
Mr. Drechsel said American bankers are now paying a growing price for focusing on front-end applications such as teller systems and Internet banking, while leaving back-office systems largely untouched.

"Manual workarounds have built up over three decades," he said. "The underlying infrastructure gets harder and harder to maintain."

SAP has been making inroads in the United States through deals for enterprise resource planning systems, which bankers use to keep their own books. B of A is planning to move its corporate general ledger to SAP's software, and regulatory compliance is one focus of the project.

Mr. Hunt said a stronger emphasis on risk management, including Sarbanes-Oxley Act compliance, is causing larger, more complicated banking companies to re-examine their internal controls.

Bankers are asking, "Do we really have a sound system all the way through?" he said. In some business lines, companies that have grown by acquisition see a need to get all their business units on a common financial platform, while in other cases, they are replacing spreadsheet accounting systems that may not integrate with larger systems of record, he said. "If we looked long enough, we could find everything."

The B of A project is SAP's second general ledger deal with the nation's largest banking companies. It announced in 2005 that JPMorgan Chase & Co. would move its books to the SAP system used by Bank One Corp., which the New York company acquired in July 2004. Bank One had used SAP since 1998.

SAP is moving on other fronts, as well. In April it announced the creation of the Banking Industry Architecture Network, an alliance with Microsoft and a group of financial services companies and other vendors, including Credit Suisse Group, Deutsche Bank, ING Group NV, Deutsche Postbank, and Standard Bank PLC. The 17 members said the group would seek to "develop a nondisruptive, step-by-step evolution" toward service-oriented architecture.

Despite the ongoing credit crisis, Mr. Drechsel said, SAP is finding increasing interest in core conversion as more bankers around the world issue requests for proposals.

"We've seen more RFPs or requests for information in the last six months than we've seen in the last five years," he said. However, "in the U.S., there's more investigation than there is action."

Sales cycles tend to be long for bank core systems, and that is understandable, Mr. Drechsel said. "They're going to be living with the results for 20 or 30 years."

And though he does not expect a flood of core conversions in this country, he said bankers here eventually will see the benefit of upgrading their core systems to meet modern technological standards. "You're likely to see pressure in the marketplace once somebody shows you can do it, and can do it at a reasonable price."

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