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Financial Services Industry

Regulatory requirements, a shortage of skilled workers, and short innovation cycles are strategic challenges facing banks and insurance companies.
E-3 Magazine
June 8, 2021
This text has been automatically translated from German to English.

SAP and private equity firm Dediq announced that they have entered into a partnership for the financial services industry. The two companies will jointly expand SAP's financial services portfolio and invest in new industry-specific solutions to better support the banking and insurance industry, which is currently undergoing very rapid change.

These solutions will be based on SAP software and integrated into SAP's portfolio and product roadmap. Subject to regulatory approval, SAP and Dediq will jointly establish a Financial Services Industry (FSI) company in which both companies will have a stake.

Dediq is an entrepreneurial investor focused on information technology and digital companies. Together with its portfolio companies, Dediq works to develop exceptional products and services. Each investment by Dediq is made separately, independently and with an unlimited time horizon.

This is not SAP's first attempt to score points in the banking and insurance business with its own software. With the best accounting program in the world, SAP has been an IT supplier to the vast majority of banks since the R/3 version. However, SAP has almost always failed with bank-specific software. Smaller acquisitions over the past 20 years have never brought sustainable success. Even IBM often failed to replace the large legacy systems at banks and insurance companies. Financial institutions were already relying heavily on information technology when the term standard business software had not yet been established. The virtue of this was that the vast majority of banks developed their software themselves on IBM mainframes.

"Technologies and platforms change the financial services business", writes Mario Zillmann in the Lünendonk trend study "Cloud Transformation. Strategies and measures of banks and insurance companies on the way to the cloud.". Almost two-thirds of banks and insurance companies see the high speed of innovation and technology cycles as a challenge.

Do you see your company threatened by new competitors whose offerings are completely digital (e.g. N26 for banks, Wefox for insurance companies)? All companies; scale from 1 = "no threat" to 5 = "very great threat"; n = 68 (banks), 60 (insurance companies)

They often lack agility and flexibility in the development of digital products and new offerings due to historically grown structures and processes. Around 70 percent of companies see the lack of digital experts as equally problematic.

In addition to these internal factors, the trend toward platform-based business models is one of the most important hurdles for the coming years. At the same time, 53 percent of the study participants are pursuing very specific considerations of participating in platforms and becoming part of ecosystems.

Another 23 percent are currently evaluating possible approaches. "The majority of banks and insurance companies want to become platform providers, not product providers, and thus continue to occupy the customer interface. However, only a few market players will succeed in this in the long term", reports Mario Zillmann, author of the study and partner at Lünendonk and Hossenfelder.

SAP will continue to sell and provide support for SAP solutions for enterprise information management and solutions for banking and insurance. SAP customers will remain SAP customers. The new FSI business unit will invest more in core areas of the financial services sector, such as commercial lending, retail banking, core insurance processes, and insurance and banking finance. The new solutions will be developed as part of SAP's industry cloud solutions and will be built on SAP technologies and applications.

"The financial services industry today faces the difficult task of balancing flexibility and innovation on the one hand with risk, resilience and scalability on the other. With this announcement, SAP is responding to its customers' need to increase the pace of innovation while continuing to provide business-critical products and services to companies in the industry" said Jerry Silva, vice president of IDC Financial Insights.

"By partnering with Dediq, we will further support the digitization of customers in the financial services sector and more quickly deliver innovative cloud solutions that enable our customers to holistically transform their businesses" said SAP CEO Christian Klein. "The financial sector is a key industry for SAP. This step is the best proof of that."

More than 80 percent of the 1,000 largest banks and insurance companies are SAP customers. The new FSI business unit will focus entirely on rapid innovations for core banking and insurance processes and on solutions developed specifically for this industry. The aim is to better meet the requirements of financial service providers in terms of digital innovation and cost efficiency.

"The market for financial service providers opens up huge opportunities for us" said Luka Mucic, SAP's chief financial officer. "To better leverage this potential, we will consistently leverage our unique competencies and provide specially tailored enterprise solutions. Together with Dediq, we will expand our existing portfolio for financial services providers to map banking and insurance processes end-to-end. The primary objective of the new FSI business unit will be to help customers achieve greater flexibility through digital innovations and cloud technology. The new unit will operate very independently and customer-focused and will set its own strategic direction. At the same time, it will be a strong member of the SAP family. Customers will benefit from both SAP's leading technology and the agility of the FSI business unit, which is fully focused on the specific requirements of financial services providers."

Almost 90 percent of banks and insurance companies will therefore increase their digitization budget in 2021 and 2022. One in three companies will even increase the budget by more than ten percent. This means that the budget is increasing even more strongly than in the past three years. In addition, the majority of financial service providers are looking at cross-company digital platform ecosystems. Digitization budgets are therefore being increased. These are the findings of the Lünendonk study "Digital Outlook 2025: Financial Services".

Furthermore, this Lünendonk study states: Most of the banks surveyed are pushing ahead with their technological transformation of the IT landscape to an API-based IT platform in the coming years, which is an important prerequisite for digital business models.

63 percent of banks therefore intend to invest in IT restructuring over the next few years. At the same time, the focus of investment plans is primarily on improving the customer experience along customer touchpoints, proprietary and not necessarily platform-based digital business models, and process optimization with the help of digitization.

The recent SAP partnership with Dediq represents another milestone in the implementation of this strategy. These new solutions are designed to cover all processes in the banking and insurance business and help companies comply with regulatory requirements.

They will be based on integrated data with uniform data models and offer the possibility of moving processes relating to financial services to the SAP Business Technology Platform in the cloud. For example, banking solutions for lending will include every stage of processing, from origination and credit risk assessment to refinancing and bank management, with all related data stored in one central location.

"We are firmly convinced of the strategy of the new FSI business unit" said Matthias Tomann, managing partner at Dediq. "For us, it is clear that the future of software solutions for the financial services industry lies in the cloud. The SAP platform offers unparalleled opportunities when it comes to supporting the core processes of large companies such as banks and insurers, but also providing emerging ecosystems in this industry with the right solutions. Making this vision a reality in financial services is very exciting for us."

Which technology areas will be a priority for your company in the next 36 months?; banks only; scale from 1 = "already implemented" to 4 = "not relevant"; n = 51 to 68

Despite these dynamics of change in the financial services market, two-thirds of Lünendonk study participants perceive the threat to their company from financial services providers with completely digital offerings as low or non-existent, according to the study "Digital Outlook 2025: Financial services strategies of banks and insurance companies for their path to a digital future".

Only six percent of the executives surveyed from the banking sector see a "very great threat" from disruptive offerings, whereas as many as one-third of the insurance executives surveyed (banks: 26 %) see a "certain threat."

The assessments of the majority of those surveyed by Lünendonk lead to the conclusion that banks and insurance companies see themselves as sufficiently well positioned for the adaptation and change measures brought about by digitization to meet their customers' requirements for innovative products, customer experience, and digital business models in the future and to become part of the digital platform economy.

Lünendonk partner Mario Zillmann says this view is surprising against the backdrop of only limited coverage of digital business models in the banking and insurance sector in German-speaking countries on the one hand, and the almost complete coverage of mobile devices in Internet transactions and a resulting rise in online/mobile banking and online insurance on the other.

In summary, Mario Zillmann writes in the foreword to "Digital Outlook 2025" that a crucial issue for the coming years will be to find answers to the emerging digital platform economy and to sustainably improve efficiency and cost structures.

And Zillmann concludes: "Digital technologies such as cloud computing, data analytics, and intelligent automation with the help of artificial intelligence and robotic process automation (RPA) are an important building block for the future strategies of banks and insurance companies. But the change in corporate culture to greater agility and willingness to innovate is also of great importance. So there are many tasks for the future."

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