SAP Reference Architecture for Banking

SAP S4HANA has been extremely successful in the last 5 years in enabling a digital core that is simple yet all-encompassing for Finance and Supply Chain functions. Over the last 5 decades, SAP has transformed the ERP landscape for organizations across most business sectors – Manufacturing, Pharmaceuticals, Auto, Energy and Utilities, Consumer Products and Retail to name a few – through a combination of the digital core with S4HANA embellished with industry specific (IS) solutions.

Financial Services – Banking and Insurance – has been the final frontier for SAP for some time now. Banking and Insurance majors have traditionally employed Oracle or Peoplesoft for back-office operations integrating with core banking and insurance applications to cater to general ledger accounting, accounts payable and receivables and taxation. In 2021, SAP and investment company Dediq jointly formed a new entity, SAP Fioneer (www.sapfioneer.com) to focus on and expand SAP’s financial services portfolio to better serve the rapidly evolving banking and insurance industry with innovation, cloud technology, and solutions for end-to-end banking and insurance processes.

Based on my consulting experiences with banking customers, I am attempting to lay out an SAP reference architecture for Banking that can be adopted by banks for their digital transformation initiatives led by the CFO, CPO and CHRO. This architecture is centred on an SAP S4HANA digital core focused on general ledger accounting, product accounting and analysis, accounts payable and receivables, intercompany and taxation as well as for key business solutions around master data, data platform, financial consolidation and disclosure, planning and budgeting, profitability and cost management and analytics.

The below graphic shows a potential reference architecture. This architecture can be adopted for greenfield and brownfield transformation programs. I will describe each of the components in the subsequent section. 

Figure: SAP reference architecture for Banking

1)     SAP S4HANA: S4HANA is SAP’s digital backbone for Finance and Supply chain back-office functions. Leading global banks are employing S4HANA as a multi-entity, multi-ledger, multi-GAAP back-office platform that can enable financial accounting as well as financial supply chain functions in a templatized fashion. With on-premise and cloud deployment options, S4HANA provides a cutting-edge and innovative digital core that can extended with SAP’s Business Technology Platform (refer to item#17) to enable banks to transform their business models to meet the ever-changing environment.

2)     Data Platform with SAP FSDP or BW4HANA: Banks require a scalable data platform to house a Banking data model that can meet the Financial and Risk data and analytical needs. Such a data platform can be enabled in 2 ways. In either case, the data integration strategy is more or less the same with a staging layer, an integration layer and a data model layer.

a.      Using SAP Financial Services Data Platform (FSDP): FSDP is SAP’s Finance and Risk data platform based on SAP HANA. It comprises a Banking data model christened FSDM that models banking and trading data transactions (e.g., financial contracts like loans) and can integrated to core banking applications (e.g., Temenos T24) and trading platforms (e.g., Murex) to provide an end-to-end Financial and Risk data view. This data integration using SAP’s Smart Data Integration (SDI) platform can either be file-batch based for close of business reporting or streaming using APIs for more real-time scenarios. At the time of writing, SAP FSDM is still evolving to the maturity provides by other data models like Teradata FS-LDM; however, I anticipate that SAP will continue to mature the model as more and more customers deploy FSDP as their preferred data platform.

b.      Using SAP Business Warehouse (BW4HANA): Customers, who want to build a data model from scratch can employ SAP BW4HANA to integrate data from banking and trading applications. This is a more traditional approach employing proven SAP integration techniques to extract, transform and load business data into custom data models that are fully aligned with the bank’s data needs. BW4HANA provides additional benefits of being able to employ hierarchies and master data as well as security and authorization concepts aligned to other SAP modules like FPSL, PaPM as described in subsequent sections.

3)     Product Sub-Ledger with SAP FPSL: To enable banks to derive financial accounting for banking and trading financial instruments, SAP Financial Products Sub-Ledger (FPSL) provides an innovative platform to manage products using a separate multi-entity, multi-ledger, multi-GAAP sub-ledger that is real-time integrated to the general ledger. Such a product could enable banks to meet regulatory requirements such as IFRS9 (Scope for the financial instruments and investments) and IFRS15 (Revenue recognition related to deferral / accrual of revenue based on performance obligations). FPSL is generally integrated as an output from FSDP (or BW4HANA) using SDI so that detailed transactions from FSDP can be converted into product accounting entries by generating accounting events. Accounting information from FPSL is real-time integrated with the Financial Ledger at an entity-profit center-cost center-ledger level.

4)     Financial General Ledger (FI-GL): This is the heart of S4HANA’s Financial accounting engine that is the base for all external and internal reporting. A typical scope for FI-GL within an S4HANA program includes

a.      The set-up of the bank’s organizational structure (legal entities, profit centers, cost centers, business areas, customer segments (e.g., commercial banking, retail banking) and products

b.      The integration of accounting entries from the product sub-ledger for banking and trading business

c.      The integration of other account sub-ledgers for accounts payables and receivables

d.      The integration of any cost or revenue recharges generated from transfer pricing or other business processes from PaPM

e.      The integration of inter-company transactions

f.       The integration of any budgetary controls generated from budgeting modules like SAP Analytics Cloud (SAC) Planning

5)     Sales and Distribution (SD): While a full-fledged SD module is an overkill for banking business, I have seen the usage restricted to use cases requiring intercompany billing and settlement processes. For example, any intercompany or inter-unit recharges generated out of the transfer pricing process may get settled using standard SAP Sales and Distribution process, real-time integrated with the general ledger.

6)     Controlling (CO): The CO module typically catered to management accounting scenarios like Profit Center Accounting and Cost Center Accounting including overhead management, allocation and analytics. With the advent of S4HANA and the quite popular “universal journal”, Financial and Management accounting are integrated, better than ever thus providing a better-than-ever opportunity to homogenize external and internal reporting.

7)     Profitability and Performance Management (PaPM): PaPM is an exciting new module from SAP that aims to provide solutions to some of the below use cases for banks.

a.      Cost Allocations and Profitability: This is a classic use case where customer segment and product managers are assessed as part of performance management frameworks on cost austerity measures. PaPM provides a business-owned solution to enable driver-based cost allocations and profitability to address product, segment, channel profitability scenarios.

b.      Transfer Pricing: This is another classic use where banks need the ability to value the margin contribution from different legal entities to address taxation needs. Funds transfer pricing to measure the contribution of different sources of funding to the overall bank’s profitability is another classic use case that PaPM is used for.

c.      Value Chain Sustainability: With sustainability emerging as a key priority for every CXO, PaPM provides solutions to calculate the bank’s sustainability quotients across the value chain thereby providing inputs to sustainability reporting

d.      Business Modelling: PaPM is also an excellent tool to enable banks to perform scenario analysis (what-if scenarios) and even address stress testing scenarios to evaluate the bank’s business plans and business viability initiatives.

8)     Group Reporting (GR): For banks with global operations and requirements to disclose financials in different GAAPs and account standards, SAP’s Group Reporting provides an excellent platform to harmonize, consolidate and report group financials. Group Reporting is real-time integrated with S4HANA Financial Ledger (FI-GL) and has the ability to easily integrate financials from entities that are not on S4HANA. With the ever-popular Excel reporting interface and a set of standard Fiori apps to enable an intuitive analytical experience, Group Reporting is very quickly becoming the CFO’s companion for a smooth and controlled financial close and disclosure function.

9)     Master Data Governance (MDG): Few would disagree that the key to a good financial analytical experience is trusted and governed master data. The ability to harmonize master data including hierarchies and versions across SAP and non-SAP estates, enable a maker-checker governance for managing organizational changes including restructuring and having the ability to distribute governed master data across the enterprise is key to having trusted financial master data. This is where SAP’s Master Data Governance (MDG) suite comes in handy. In an embedded set-up within S4HANA or a hub (standalone) set-up, MDG with built-in data quality, data control and governance methods is a vital cog in a bank’s SAP digital armor.

10)  Ariba: Ariba is SAP’s SaaS offering to enable a better contract management and financial supply chain management function. With key innovations, SAP Ariba is helping banks transform the procurement function around areas like:

a.      Spend Management – by bringing together spend information from various sources thereby enabling effective cost management

b.      Supplier Management – by enabling a better supplier onboarding, supplier contracting and guided buying experience      

c.      Supplier Experience – by enabling better insights into supplier performance as well as sentiment analysis using feedback from Qualtrics

11)  SuccessFactors: SuccessFactors is SAP’s one-stop Human Resource Management solution providing banking customers with an efficient cloud-based offering to manage Personnel Administration, Organizational Management, Benefits, Payroll and Learning and Development. With real-time API integration with S4HANA and MDG, SuccessFactors is fast becoming a trusted platform for the CHRO to enable an agile workforce.

12)  Concur – Concur is SAP’s SaaS offering to manage the business travel and expense management function. Concur has solutions to increase corporate card adoption, spend visibility as well as automated reconciliation and payment process. Concur, like SuccessFactors and Ariba, is API-integrated with S4HANA in order to enable the cost ledger to be always real-time synced.

13)  SAP Analytics Cloud (SAC) – SAC is SAP’s cloud analytics offering that is extremely popular for analytics and business planning and budgeting scenarios.

a.      Analytics – SAC is now considered as the enterprise application for analytical scenarios within (and in some cases even outside) the SAP data estate, independent of the source application. SAC has excellent data integration capabilities with SAP enterprise, cloud and database sources thereby enabling the opportunity to mesh data sets as per business needs. With excellent storyboarding capabilities including the ability to integrate in-built and predictive and AI-ML features like time-series, classifications and decision trees and with built-in Excel capabilities, SAC is the now the preferred tool of choice for SAP analytics.

b.      Budgeting, Planning and Forecasting – SAC is also enabling banks to perform corporate and divisional budgeting, planning and forecasting scenarios. SAC is real-time integrated with S4HANA, BW4HANA and PaPM, among other applications within the SAP stack. SAC is a fully-business owned planning platform with the ability to model planning applications and perform data inputs and planning calculations in a collaborative manner with Outlook integration to manage budgeting cycles. SAC stories can mesh actual and budget data for variance scenarios.

14)  Analysis for Office (AFO) – AFO is an Excel-based analytical platform that can render business data from a variety of SAP and non-SAP sources to provide an intuitive Excel-based reporting experience for Finance professionals.

15)  Fiori – Fiori is SAP’s next-gen UI that is providing a common user-experience for business users independent of the underlying SAP application. Built on HTML5 technology, Fiori enables rendering of business transactions and analytics in an integrated fashion across a variety of form factors including desktops, mobile phones and tablets. Fiori provides an integrated user experience by embedding transactional and analytical reports contextually within the business process thereby providing an enriched business process experience.

16)  Business Technology Platform (BTP) – Business Technology Platform (BTP) is SAP’s cloud innovation platform which brings together data and analytics, AI, application integration, business process customization and automation in an integrated environment. Whether the SAP deployment is on-premise or on cloud hyperscaler, SAP BTP enables banks to keep their ERP core lean and clean and move customizations to the cloud thereby ensuring a scalable and future-proof platform. As most global banks adopt a ‘cloud-first’ approach, BTP is a must-have capability in a bank’s digital core. It provides ability to build integrations between SAP applications and other bank cloud applications using SAP’s cloud integration platforms. BTP provides the ability to build native cloud applications to address specific innovation and data-driven intelligence use cases for an SAP business process. For example, one of our customers is using BTP to build an AI application that will detect anomalies in large-volume FI-GL and payment transactions based on pre-determined patterns and alert payment clerks when outliers are detected.

17)  Data Integration Platform – I have generally observed that banks employ a data lake as a landing zone for data sets from transactional processing (TP) systems to prevent data access directly to TP systems. This could either be a cloud data platform or a Hadoop data lake. In either case, unless the TP system is API-enabled, data integration into the SAP platform starts at this intermediate data lake. For inbound and outbound integrations to the SAP estate, there are 2 options that I have generally seen adopted.

a.      Smart Data Integration (SDI) – As most of the applications in the reference architecture are based out of SAP’s in-memory HANA platform, SDI is a very popular integration platform used. SDI provides excellent batch and real-time integration capabilities to most SAP, cloud, databased and file-based applications. On the outbound side, HANA semantics views that can mesh business transactions and accounting data and expose to APIs or file-batch integration to downstream applications are very popular.

b.      SAP BW-based Integration techniques – In the case where BW4HANA is the bank’s data platform, SAP BW-based integration techniques like ODP, db-connect and Open hub rule.

In some cases, I have also seen banks adopt non-SAP integration platforms like Informatica and Kafka (for streaming data) to integrate data in and out of the SAP platform; however, the prevalence of SAP integration platforms is generally higher for licensing reasons.

This blog aimed at providing a functional view of the various SAP applications without focusing too much on the infrastructure or deployment options. I hope this blog evinced interest. Thank you for your attention and I look forward to your feedback or questions.

Post Edit: Thanks for your review and feedback. Some of you have opined about SAP Data Warehouse Cloud (DWC) and SAP Data Intelligence (DI) for data platform and data orchestration/AI platform use cases respectively. I agree. DWC could be great addition to the reference architecture for advanced analytical use cases especially where data mesh architectures for domain-based data products are sought. DI could be a great addition as a data science platform with advanced data orchestration, transformation, AI model training and scaling capabilities.