Capital Optimization and Solvency and Accounting Planning with SAP Banking

Dear Colleagues,

As organizations often operate in multiple locations and industries, it is critical to establish a common language for communication with their counterparts. Financial planning, reporting, disclosure, and consolidation form the basis of this language and are crucial to a company's information systems.

In the past, companies created flat-structure financial statements with numerous general ledger (GL) accounts to represent both the economic nature of accounting events and the analytical position in which they occurred. However, as businesses became more complex and regulatory requirements more stringent, the increasing number of analytical dimensions and economic event types resulted in large charts of accounts with thousands of GL accounts. Additionally, the structure of financial statements often varied among affiliates within the same group, making consolidation a challenging task.

To address these issues, SAP introduced the Flexible General Ledger and Universal Journal of S4 HANA, which introduced the concept of a multi-dimensional ledger. In this system, the analytical positions are represented by combinations of dimensions in the coding block, while the economic nature of the accounting event is represented by the GL account. This technology facilitated the harmonization and simplification of charts of accounts among affiliates within a group, making it easier to produce homogenous financial statements and facilitating their reconciliation and consolidation.

SAP S/4HANA Finance for group reporting includes a complete set of financial consolidation capabilities, including currency translation, inter-unit eliminations, data validation, and real-time company and group scope analysis reports. It also features seamless integration with SAP Analytics Cloud for central reporting and visualization of consolidated and non-consolidated financial information.

However, SAP has not yet released a complete solution for solvency and fair value accounting planning, including collateral revaluation, commitments postings, and value at risk analysis. An alternative to this is to complement the planning capabilities of SAP S/4HANA Finance with the solvency calculation capabilities of the SAP Credit Risk Analyzer and the IFRS-9 accounting capabilities of SAP Financial Products Subledger, using planning data rather than actual data.

Integrating in the same Planning cycle the Accounting Valuation and the Capital consumption forecast allows us to identify the expected benefit by market segment and weighted by the capital consumption of that segment. Establishing the basic pillar to Optimize Capital.

These are the guidelines followed by our team in the construction of our Capital Optimization system, built on top of the Integrated Financial and Risk Architecture.

Our Capital Optimization system speaks with the business processes of our clients' SAP Systems translating them in terms of Capital and Liquidity generation and consumption. With this information the Capital Optimization system measures the deficits and surpluses of capital and liquidity of the business processes and proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. 

If you are interested, do not hesitate to contact me at ferran.frances@capitency.com 

I look forward to reading your comments.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi  #sapfinance #saps4hana #sapbanking #sapanalyticscloud #capitaloptimization

Collateral Management and Capital Optimization with the SAP Integrated Financial and Risk Architecture.

Dear,

We are in a process of systemic transformation of the Financial System, from a model based on Volume to a model based on Capital Optimization.

The Integrated Financial and Risk Architecture of SAP Banking offers multiple functionalities to support a holistic Capital Optimization process, but today we will look at its capacity for the efficient management of bank's collateral management.

One of the main consequences of the 2008 Financial Crisis was the recognition that the Financial System was severely undercapitalized; the subject was approached with two complementary approaches.

Governments and central banks recapitalized the financial system with bailouts, distressed asset relief programs, and cycles of quantitative easing.

The regulators focus on increasing and making visible the Capital Requirements with new Solvency and Accounting standards (IFRS 9, IFRS 15, IFRS 16, IFRS 17, Basel III, Basel IV, etc.)

The recapitalization of the Financial System has been a temporary measure. The global debt has continued to grow and the weak economic growth has generated new capitalization tensions; more visible as the end of quantitative easing cycles in Europe is announced.

With the advent of Quantitative Tightening, non-performing assets will become illiquid, reducing their value and once again increasing capitalization problems.

In this scenario of scarcity of capital, all forms of capital must be managed efficiently, and guarantees are probably the form of capital with the least representation in the Bank's Information Systems.

Bank information systems are ledger-centric, and since collateral is not represented on the balance sheet, the bank's IT architects have not paid much attention to modeling it.

Like any other right or obligation of banks, collateral management has an Operational and an Analytical component.

Operational Collateral Management focuses on the technical details of the collateral and its contractual relationship with the asset, the risk of which is being hedged,

Analytical Collateral Management focuses on the sustainable value of collateral and its ability to reduce capital consumption, and limit the provision for impairment of the asset whose risk is being hedged.

In the SAP Integrated Financial and Risk Artchitecture collateral is modeled in two different objects.

- As SDL-Financial Transaction to represent the contractual relationship between the collateral and the asset.

- As an RDL entry that represents the effective capacity of the guarantee to reduce exposures to Credit Risk and limit provisions for impairment.

Although a guarantee has a Nominal Value, it can have several different Credit Risk mitigation capacities, according to the Solvency calculation approach that the bank is following; Simplified Standardized, Comprehensive Standardized, Basic IRB and Advanced IRB.

Many times a group of guarantees covers a group of exposures; Determining the most efficient distribution of collateral to exposures reduces the capital consumed, which is the basis of Dynamic Collateral Management, one of the main Capital Optimization techniques.

HANA's high-performance in-memory computing capabilities make it easy to create simulation scenarios and stress tests, but before banks can take advantage of them, they must improve the representation of collateral in their information systems.

The Integrated Financial and Risk Architecture of SAP Banking provides a centralized collateral repository, facilitating regulatory reporting, calculation of risk-weighted asset provisions and impairment, stress testing of collateral values and simulation scenarios for capital optimization.

These are the guidelines followed by our team in the construction of our Capital Optimization system, built on top of the Integrated Financial and Risk Architecture.

Our Capital Optimization system speaks with the business processes of our clients' SAP Systems translating them in terms of Capital and Liquidity generation and consumption. With this information the Capital Optimization system measures the deficits and surpluses of capital and liquidity of the business processes and proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com 

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

#capitalcrisis #capitalscarcity #sapbanking #energycrisis #capitaloptimization

Capital Optimization with SAP Banking vs reporting with Central Data Hubs

 Dear,

Capital Optimization requires making visible the generation of value by processes and business segments, weighted by their capital consumption.

The General Ledger does not have the capacity to provide this analysis capacity and this is a big problem if we take into account that the General Ledger is at the center of the banking Information Systems.

Measuring the generation of value weighted by capital consumption makes it necessary to represent the organization's accounting, solvency and liquidity situation in an integrated manner, including off-balance sheet items such as commitments, derivative contracts or collateral agreements.

Integration requires the processing of large data tables and the management of large blocks of memory, because each transaction must read and update data records from other areas. This was an unapproachable challenge until a few years ago. For this reason, banking information systems were built as separate silos of information, communicated by interfaces and intermediate tables, with very little integration between them. 

Many banks are tackling this problem with the construction of Central Data Hubs with which they try to respond to the accounting and solvency regulatory reporting requirements, although in most cases with mediocre results.

Central Data Hubs receive data from all the operational, silo style, systems of the bank, homogenize the data, and finally store it in an standardized format. So it can be delivered from there to the other analytical and regulatory reporting systems of the banking landscape. 

I’ve seen several of these initiatives in the last years, and they all present common difficulties.

Project design follows an ad-hoc/on-demand approach. Data architects collect data requirements from the data consumer systems, and design the data repository according to these requirements. And then, define the interfaces for collecting data from the source systems and populating the data in the destination systems.

To some extent, this approach implies reinventing the wheel, according to the bank’s own experience, and limited integration capabilities of the bank’s information architecture.

SAP has proposed a revolutionary, holistic approach, to manage the analytical requirements of banks. This is the Finance and Risk Data Platform, which takes advantage of the SAP Integrated Financial and Risk Architecture.

The Finance and Risk Data Platform has been designed to fulfill present and future Accounting, Risk and Liquidity regulatory requirements, as an alternative to the ad-hoc/on-demand approach of the Central Data Hubs.

The Finance and Risk Data Platform combines:

- The accumulated knowledge in the design and development of the Integrated Financial and Risk Architecture of Bank Analyzer during the last 2 decades. The Primary Data Objects of the Bank Analyzer Source Data Layer as an standard template of the Operational Data, and the Result Types of the Results Data Layer as an standard template of Analytical Data. 

Data Architects take advantage of these standard templates as a basic reference, and enhance them for fulfilling the bank’s specific requirements, without breaking the integrity of the data-model.

- The high-performing capabilities of SAP HANA for storing and managing very-high volumes of data, without intermediate tables and assuring the referential integrity of the database.

- The Extract, Transformation and Loading capabilities of SAP Smart Data Integration in Premise and in the Cloud. 

- The Analytical Layers of SAP Bank Analyzer Risk Engines, Liquidity and Risk Management on HANA, Intraday Real-time Liquidity Management, etc. 

These are the guidelines followed by our team in the construction of our Capital Optimization system, built on top of the Integrated Financial and Risk Architecture.

Our Capital Optimization system speaks with the business processes of our clients' SAP Systems translating them in terms of Capital and Liquidity generation and consumption. With this information the Capital Optimization system measures the deficits and surpluses of capital and liquidity of the business processes and proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com 

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Capital Optimization and Capital Allocations with SAP Banking and Predictive Analytics

Dear,

We are in a new economic scenario, a scenario of scarcity of Capital due to the combined effect of two forces that harm the economy.

- Weak growth. The shortage of energy and other natural resources is weakening economic growth. Weak growth limits capital generation.

- Excess debt that overconsumes capital.

If capital is overconsumed and not regenerated at the same rate, capital becomes scarce and capital is the most important resource of the financial system.

Efficient management of a scarce resource requires Planning. The capital optimization process begins by planning your consumption and the expected return on the underlying investment. With this analysis we will weight the return on investment by its capital consumption, prioritizing those segments with the best performance weighted by their capital consumption.

You can find a small example in this video.

https://www.youtube.com/watch?v=GkcVF5CWVrU&t

The process continues with the monitoring of the deviations between the planning of Income and Capital Consumption with the actual results.

Portfolio Management must look to the future and future is full of uncertainty. Managing uncertainty is managing capital, taking corrective actions when reality deviates from planning above the tolerance threshold.

The tolerance level must be consistent with the assigned capital, the required guarantees and the hedging strategies. Only in this way will we be managing the portfolio holistically, as this new structural environment of capital scarcity demands.

This classical vision has acquired new potential with the development of analytical tools and machine learning.

Thanks to the integration capacity of SAP Predictive Analytics with the rest of the SAP Business Suite components, including SAP Banking, this potential is even greater, as I will try to show you in the following scenarios.

Time Series Forecast

A Time Series forecast identifies key trends that directly influence future performance. Time Series Forecasting is useful for estimating future values of a measure where we have a time dimension available to help us identify a trend. Time series predictions are always time dependent.

In a capital consumption weighted income planning process, Time Series Forecasting is very useful to estimate several critical elements such as the following:

- Future Cash-Flows.

- Default Probabilities.

- Loss Given Defaults.

- Future Collateral Values.

Depending on the magnitude to be estimated, we must select the relevant data series for the estimation. The values taken by the target variable in the past and its corresponding dates. This Time-Serie is called the signal which will be analyzed by the Time Series Forecasting process of SAP Predictive Analytics.

Data accuracy is a critical success factor and our main competitive advantage as we take advantage of the integration capabilities of SAP Bank Analyzer Credit Risk Analyzer and SAP Predictive Analytics Cloud (Source Data Layer, Data Sources, Ad Hoc Reporting, Historical Database and Open Hubs).

Classification

Classification is the process of separating data into classes. In this scenario, the target is discrete, and the goal is to separate data into groups in a meaningful way.

In Capital Optimization, classification is particularly useful for segmentation of my counterparties and financial exposures. Typically, a Bank’s portfolio is managed in a repository where each Financial Transaction and its Counterparty contains the Product, Address, Level of Studies, Industry, Collateral Type, Region, Age, etc.

Classification supports the process of separating the Financial Transactions of our Portfolio between Rating Levels and showing how particular data influencers like Industry, or Region change based on Rating Level.

In SAP Analytics Cloud Predictive Scenarios, the system analyzes data using a discrete binary variable while simultaneously considering other variables in the data set. These are known as Influencer Contributions, which show how influencers affect the ranking result.

The Credit Risk analyst can also view individual statistics for each influencer in SAP Analytics Cloud, and the software calculates all of these statistics immediately when training a ranking scenario. SAP Analytics Cloud also generates contribution graphs that visually show how each class contributes to the total data set.

This scenario is particularly useful for supporting the automatization of assigning assets to tranches in a Securitization process.

Regression

Regression Analysis is a way of sorting out which variables have the most impact in a dataset. The target is continuous in this method and is primarily used to show the relationship between two or more variables in a dataset. For example, a Credit Risk analyst would use regression analysis to determine whether there is a correlation between users’ Level of Studies and average Delinquency Level. Traditionally, this involves taking all the data, plotting it on a scatter plot for the two variables, and finding an average line if the data fits a particular trend. This would then be done for other variables that are not included in the initial regression in the traditional method. In SAP Analytics Cloud, the Credit Risk analyst would simply pick one variable and the software automatically generates regressions, complete with relevant statistical data, for all variables in the dataset and how they relate to the target variable.

Conclusion

The methodology is much more efficient when we combine the three families of algorithms and build models in which we establish the dimensions of study and those that have a more direct influence on them. For example.- The level of education has a direct influence on the level of income, and this, together with the volume of expenses, influences the Delinquency Level. This approach provides a more robust model than another in which we analyze how the level of education impacts the Delinquency Level, without taking into account the volume of expenses. 

In our case, we have dedicated the last 12 years to building Credit Risk models that take advantage of the information contained in the SAP Systems of the non-financial economy. 

These models, built on SAP Banking systems, are integrated with the business processes of our clients' SAP Systems to Plan, Segment and Monitor the Capital Consumption of their business processes.

Even more, our proposal measures the Capital and Liquidity consumed and generated by the processes of the real economy managed with SAP Systems, detecting the deficits and surpluses of capital and liquidity of the process. With this information, it proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com 

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Vendors Credit Risk and Capital Optimization with SAP Banking.

Dear,

As a consequence of energy scarcity and excess debt, the world is entering fully into a new systemic phase of capital scarcity.

Energy shortage → Weak growth/decrease

Excess Debt → Excessive Capital Consumption

If Capital is overconsumed due to excess debt and does not regenerate at the same speed due to lack of Growth, Capital becomes scarce. And Capital is the most important resource in the financial system, therefore the priority must be to optimize it.

The need to optimize capital brings new business processes and massively deploy business processes that until now had been a minority.

For example; The credit risk function has traditionally been limited to the exposure that suppliers had with their clients, but not the other way around.

The Credit Risk module, within the Financial Supply Chain Management area, made it possible to measure the Credit Risk exposure to customers and based on sophisticated rules, categorize customers and block the exit of merchandise, the creation of the delivery or the Order confirmation.

But credit risk management for supplier exposures presents special challenges. A confirmed purchase/sale order is technically a Forward contract and will be an Asset or a Liability depending on the difference between the Fair Value and the Strike Price of the purchase-sale contract and if the Purchase Order is an Asset (because the Fair Value is higher than the Strike Price), the client will be exposed to the Provider's Credit Risk.

SAP purchasing and sales modules do not have the ability to determine the Fair Value of a Contract and the potential credit risk exposure of a Purchase Order. Historically this has not been a serious problem and was resolved with penalty conditions for poor service, but the scarcity of Capital is changing this forever.

An undercapitalized system manifests itself with increasing volatility; The weak growth and excess debt is transferred to the price of the main commodities and energy, which are necessary components in production, increasing the volatility of the price of the products and services that require them.

This volatility increases the market risk of these products, in some cases reaching the Fair Value of the marketed product above the Strike Price, turning it into an Asset for the Client and exposing it to the Credit Risk of its Supplier.

Forward contracts manage this scenario with the help of collaterals that protect both parties against the potentially volatile Credit Risk, and with the determination of Margin Calls in case the collateral is insufficient.

The combination of the SAP Sales, Purchasing and Logistics Execution Modules, with the FSCM Credit Risk and SAP Banking Market Risk, Credit Risk and Collateral Management functionalities would respond to the requirements of this scenario, facilitating the efficient execution of the contract. Purchase/Sale and Capital Optimization.

During the last 12 years we have worked on this integration, developing the process that allows extracting the best of the functionalities of the Logistics and SAP Banking areas to satisfy the needs of the Purchase/Sale process in a complicated environment such as the current one.

More generically, our proposal measures the Capital and Liquidity consumed and generated by the processes of the real economy managed with SAP Systems, detecting the deficits and surpluses of capital and liquidity of the process. With this information, it proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Energy Crisis, Capital Crisis, Stock Management and Capital Optimization with Integrated Processes in SAP Banking.

Dear,

Bloomberg published an article indicating that 60% of British factories are at risk of going under as energy bills soar. 

https://www.business-standard.com/article/international/60-of-british-factories-at-risk-of-going-under-as-energy-bills-soar-122090300111_1.html

This is not a surprise, since the financial crisis of October 2008 the world has entered a new systemic phase of Capital scarcity. Just look at the evolution of the balance sheet of the Federal Reserve in this period and you will see it.

https://www.statista.com/statistics/1121448/fed-balance-sheet-timeline/

There are two main factors determining this new environment of capital scarcity.

The lack of growth, as a consequence of the shortage of energy (peak-oil) and the excess of debt (public and private debt).

The excess of debt over-consumes capital and the lack of growth prevents it from being generated. Both factors are structural and therefore determine the new economic environment.

But capital is the most important resource in the financial system, and if it has become scarce, the priority is to optimize it. 

The Second Law of Thermodynamics teaches us that to optimize a resource in a system it is necessary to reduce its entropy and that entropy is reduced with information. 

And information theory teaches us that the exchange of information requires a common language between sender and receiver.

The highest level of information exchange to reduce entropy is process integration, when the sender and receiver collaborate on the process and share the information needed to plan and execute it efficiently.

SAP has been since its foundation the leader in process integration. First integrating the processes of the departments of a company, then the information of the companies within a group and finally integrating processes between groups of companies until reaching 70% of the World GDP.

Financial services have remained isolated from this integration process, very few banks have transformed their processes to SAP and none have integrated their processes with those of their clients.

But the new economic environment of scarcity of capital has come with new challenges. Since the start of the COVID-19 pandemic, supply chains have suffered severe tensions and those tensions have been exacerbated by the war in Ukraine and the energy crisis.

For instance, when more than half of the companies in the United Kingdom announce that they have solvency problems, traditional credit analysis is insufficient.

SAP has excellent solutions for Credit Risk management in the area of Financial Supply Chain Management, but these solutions are limited to the analysis of the historical performance of counterparties and the volume of risk exposure.

In times of systemic change, history changes direction and historical default data is insufficient to estimate future credit risk. As an example, just look at the credit risk of online retail companies and physical stores in the last 3 years.

If looking at the historical performance of our counterparties is not enough, we will have to estimate their future.

SAP systems provide a lot of useful information to estimate the future result and performance of a company. It is about analyzing it in a systematic way to draw conclusions about its future performance.

For example, a company that produces and distributes perishable products will reduce waste and improve the level of service with efficient management of the shelf-life of its products. SAP offers us powerful tools for the efficient management of the shelf-life of perishable products. Available to Promise with Product Allocations functionalities, consensus based planning and forecasting, vendor-managed-inventory scenarios, etc. It seems reasonable to think that companies with the know-how and technology to carry out these processes improve their stock management, which puts them on the path to better future results.

But we will only reduce the risk by moving from intuitive to systematic analysis. The uncertainty of these difficult times requires moving from reactive to proactive management and only the integration of processes can take us to that level of efficient capital management.

Our proposal measures the Capital and Liquidity consumed and generated by the processes of the real economy managed with SAP Systems, detecting the deficits and surpluses of capital and liquidity of the process. With this information, it proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Disruption of the Supply Chains, Systems Dynamics, Theory of Constraints and Capital Optimization with SAP Banking.

 Dear,

Logistics chains have been under great pressure since the fall of 2020. When societies recovered activity after coming out of the COVID-19 confinements, and consumption recovered, including a certain rebound in demand, the goods began to to accumulate in the ports, freight prices skyrocketed and inventories began to drop.

Complex supply chains have a tendency to behave this way. The complexity of the supply chain increases its entropy, and when an unexpected event occurs, the disruption is transmitted through the system, multiplying its effects. This nonlinear behavior is called the bullwhip effect, also known as the Forrester effect, and was first described by MIT Professor Jay Forrester's, in his book Industrial Dynamics (1961).

In 1984, the Israeli Physicist Eliyahu M. Goldratt proposed the Theory of Constraints as a solution to the non-linear behavior of organizations, described by Systems Dynamics. According to this Theory of Management, Organizations can achieve their Objectives, managing a reduced number of magnitudes or restrictions. Dr. Goldratt published his proposal in the management-oriented novel The Goal (1984).

During the last 30 years, SAP has transformed organizations by establishing a common language that allows them to integrate their processes, manage their constraints holistically, reduce their entropy and improve efficiency.

First, integrating intracompany processes, then intercompany processes within and outside its group of companies.

In 1998 SAP released its Advanced Planner & Optimizer software, which following the proposals of the Theory of Constraints, has multiplied the efficiency of Supply Chains and reduced the number of their disruptions.

Unfortunately, the economic system is under a level of stress that is not comparable to any other in the last 30 years. The complexity of supply chains has grown exponentially as a result of globalization, and in the last 3 years they have suffered the impact of several events with great disruptive potential. It was first hit by the worst pandemic since the 1918 influenza pandemic, followed by rising raw material and energy prices, multiplied by Russia's military intervention in Ukraine.

In this stressed environment, not all organizations are experiencing the impact of disruption in the same way. Those that have invested efficiently in implementing the Technology and Processes proposed by the best logistics practices (SAP Best Practices), have a greater capacity to manage bottlenecks, proposing alternatives, prioritizing corrective actions, reducing costs and improving, within possible, the level of service.

By reducing costs and improving the level of service, more efficient companies are improving their competitive position against those that lack these capabilities, improving their results, market capitalization and future solvency.

Integrating the business processes between the supply chain partners allows them to detect and manage the bottlenecks with the greatest disruptive potential in the system as a whole. Reducing the stress of these bottlenecks improves the resilience of the entire system, something critical when we manage complex, non-linear, highly entropic systems that can experience chaotic behavior.

The financial system is also a complex, non-linear, highly entropic and potentially chaotic system. The destructive potential of periodic financial crises and recessions, and the less frequent but much more destructive depressions, are ample proof of this.

I have worked as a SAP Consultant for 30 years, first in Real Economy (SD, MM, PP, APO, BIW, etc.) and since 2007, also as a SAP Analytical Banking Consultant.

From my first day as a SAP Banking Analytics consultant, I was impressed by the lack of integration of banking processes and the destructive potential of its disruption, as we all experienced in 2008.

As befits the value proposition that the company has offered for half a century, SAP Banking has solid proposals for the integration of financial processes, with benefits analogous to those that this integration has brought to the real economy. However, and despite what many of us thought in 2009, after the financial crisis of the previous year, the transformation of processes in the Financial System is far from having taken place.

Moreover, in the same way that the integration of processes in the real economy began between departments of the same legal entity but grew to incorporate external partners, the Financial System should integrate the processes of the real economy and is far from achieving it.

This is serious because the stressful economic environment, in addition to debt levels unseen in the history of capitalism, are a powerful disruptive force in the financial system. This disruptive force has the potential to destabilize the system and cause non-linear effects and without integration we will be unable to manage the bottlenecks, as proposed by the Theory of Constraints.

I detected this risk in 2010 and started working on a process integration proposal based on SAP Best Practices for financial services and real economy industries, and on top of it, the principles described by System Dynamics and the Theory of Constraints. 

During these years I explained the proposal to other colleagues and we put together a team to integrate financial and non-financial processes supported by SAP technology.

Our proposal measures the Capital and Liquidity consumed and generated by the processes of the real economy, detecting the deficits and surpluses of capital and liquidity of the process. With this information, it proposes financial instruments to offset these deficits and surpluses, optimizing the consumption of capital and liquidity of the system.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Process Integration, Dynamic Collateral Management and Capital Optimization with SAP Banking.

Dear,

Capital is the most critical resource of the Financial System, and it has become very scarce as a result of excessive indebtedness and weak economic growth.

https://edition.cnn.com/2022/05/05/investing/double-dip-recession-economy-inflation/index.html

https://blogs.imf.org/2022/04/11/dangerous-global-debt-burden-requires-decisive-cooperation/

If Capital is scarce, the most critical activity of the Financial System is Capital Optimization that drives and will drive its transformation from the current model based on Volume to a new model based on Efficient Capital Management.

One of the most effective techniques in Capital Optimization is Dynamic Collateral Management which I will try to describe in this article.

A classic method for Risk Mitigation (Reduction of capital consumption), recognized by all the Basel agreements and solvency regulations, is the management of guarantees or collateralization.

In collateral management we can follow two approaches.

• Static collateral management. The Bank has an exposure (account receivable or asset) and requests guarantees to cover the Default Risk of the exposure. The greater the exposure, the greater the collateral required. The degree of collateralization is determined by the difference between the amount of the exposure and the value of the guarantee.

• Dynamic collateral management. On the other hand, according to the Basel agreement, Capital consumption does not depend directly on the Bank's exposure to Risk, but rather on Risk exposures “weighted” by the risk level of the exposures. Consequently, the requested level of collateralization depends on the amount and risk of the exposure, and the value and risk of the collateral, and it changes (dynamically) with them.

If we analyze in detail the two previous approaches, we will see that the decision to follow one or the other has significant consequences in the management of capital.

In the first case, the collateralization does not depend on the risk of the exposure and the collateral (rating), but only on the Degree of Collateralization with respect to the Exposure Amount. On the contrary, in the second case, the risk of the collateral and the exposure are included in the Calculation of Risk-Weighted Assets and, consequently, in the degree of collateralization.

The second approach is more risk sensitive allowing more efficient collateral management, and it is particularly useful when a pool of collaterals covers multiple exposures. Determining the most efficient allocation of collateral to exposures reduces the capital consumed. This reduction in Capital consumption is the basis of Dynamic Collateral Management, one of the main Capital Optimization techniques.

Balancing collateral and exposures to optimize return on risk-adjusted capital (RAROC) is no easy task. The Loss Given Default depends on the amount of the exposure and counterparty's rating (or its Probability of Default), and the value and rating of the collateral. All these magnitudes are continuously fluctuating. Consequently, the allocation of Collateral portions from a Collateral Pool to the bank's exposures must be a dynamic activity that must be adjusted as the market and counterparty’s conditions change.

For example, as the counterparty's rating improves, or the value of the collateral increases, the Loss Given Default will be reduced until it reaches a limit, in which a better rating or greater collateralization does not reduce the risk-weighted assets. This collateral excess can be released and used in another risk exposure, improving the performance of the portfolio, without penalizing the bank’s capital consumption.

On the other hand, if the value of the collateral declines or the counterparty's rating worsens, higher portions of the collateral pool will be required to reduce capital consumption, triggering, if needed, a margin call.

This technique is very useful in environments of scarcity of Capital but requires an accurate calculation of the collateralization levels of the bank's exposures.

At this point we should ask ourselves; how to obtain the information required for the dynamic calculation of the collateralization levels?

The answer has been provided by SAP for the last 30 years; “Process Integration”.

The business processes of companies in the real economy generate and consume capital and liquidity, but with a maturity mismatch that comes from the business maturation cycle. Simplifying, the business process consumes resources at the beginning of the business cycle and generates revenue at the end. If this maturity mismatch is not covered with internal resources, it will be covered by the financial system, obtaining a yield that remunerates the investor for the cost of Capital.

Detailed modeling of the capital consumption of the process, including the exposures and their risk weighting, provides the capacity of dynamique and efficient allocation of collaterals, reducing the capital consumption of the system.

Approximately 70% of the world's GDP is managed with SAP systems, offering an accurate measure of resource consumption and revenue generation, as well as its planning and deviations from planned values. Just the information we need to calculate capital consumption and generation and efficiently allocate available collateral.

Our system, built on SAP technology, integrates with the processes of the real economy (managed with SAP), and determines its capital and liquidity consumption. With this information, it proposes financial instruments that cover deficits or excesses of capital and liquidity, adjusting the price to the risk of the operation.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

How SAP is building the most successful Metaverse and Capital Optimization with SAP Banking.

Dear,

In the last few months, we have become familiar with Mark Zuckerberg's Metaverse initiative, which promises us a virtual world focused on social connection and facilitated by Virtual and Augmented Reality.

Personally, I have doubts about the short-term potential of the initiative, and the capacity of monetizing it in the short-medium term. Before his corporation loses the competitive edge it gained from the successful launch of Facebook 18 years ago.

Furthermore, and with much less publicity in the mass media, SAP is developing a network that will revolutionize business interaction much sooner than most expect.

The success of an initiative is the result of two forces, market pull and technology push, or in other words what the technology offers and what the market demands.

SAP Business Network for Supply Chain has come at the best time to successfully combine the two forces.

SAP Business Network for Supply Chain is an open logistics network that connects business partners for inter-company collaboration and insights. SAP Logistics Business Network provides a central entry point to manage logistics transactions, exchange documents with key business partners, and gain transparency across the complete value chain.

https://www.youtube.com/watch?v=0Jp46bdOCY4&list=PLmGEBnWFTjqRlZIf5EaqJNUEoJecbJ5WX&index=3

SAP is the Information Technology that manages approximately 70% of the world's GDP and in the last 30 years has standardized business processes, to the point of becoming the language with which organizations interact.

The integration processes between companies managed with SAP such as Purchases, Sales, Logistics Planning, etc. are carried out fundamentally with this Technology, enjoying that compatibility and homogeneity of processes and thereby reducing integration costs and improving coordination between them.

Standardization is not limited to Technology but also to Human-Computer interaction. As a curiosity, you can find how many Logistics Director or Financial Director job offers require knowledge of SAP.

As I heard a colleague say a few weeks ago; "SAP is to today's business community what the Latin language was to the Roman Empire."

Additionally, The global business community has been under severe stress since December 2019. First, the COVID-19 pandemic and the corresponding lockdowns, which reduced economic activity until the summer of 2021. With the economic revival came supply chain disruptions that were increasing during the Autumn of 2021 until they got out of control with the Russian military intervention in Ukraine.

The shortage of energy, raw materials and all kinds of products and services is not going to disappear in the short-medium term, in fact for many experts it is structural.

In this environment, only the coordination of business processes, based on the availability of accurate and real-time information on the status of these processes, can improve the level of service and reduce the waste of resources.

For all of the above, SAP Business Network for Supply Chain is going to have rapid acceptance, much faster than Mark Zuckerberg's Metaverse. It is in a position to offer what the market demands in a time of great need.

But this great initiative has a limitation, among the business partners that participate and collaborate, we will not find Financial Services providers.

The reason is the scant presence of SAP technology in banking and insurance corporations, which isolates them from business reality because they do not speak the same language. And it prevents them from being effectively integrated into the business processes of 70% of the World's GDP.

Our team detected this opportunity 10 years ago and we started working on the solution.

Optimizing solvency and liquidity requires synchronizing flows of consumption and generation of capital and liquidity, with business flows, sharing information that allows synchronization.

To do so, we follow the same logic that SAP has followed in its deployment in the real economy for the last 30 years. First we implement the SAP Banking processes, following the SAP Best Practices.

Second, we modeled the business processes of the real economy, in terms of generation and consumption of capital and liquidity, on SAP Banking systems.

In this way, we have the technology to proactively offer financial instruments, covering the capital and liquidity gaps of the business processes and optimizing the consumption of capital and liquidity of the system. 

Making an analogy, it would be like the Vendor Managed Inventory processes, typical of logistics, but adapted to the reality and constraints of Financial Services.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Energy Crisis, Capital Crisis and Capital Optimization with SAP Banking.

 Dear,

As we commented in the previous article, the war in Ukraine has accelerated the process of the energy crisis that has been brewing for years. In fact, when humans extracted the first barrel of oil and built an industrial society on top of it, they were taking the first steps toward the demise of the oil economy.

Capitalism is a system that needs continuous growth to sustain itself, and as industrial growth involves the consumption of limited resources, it is unsustainable on a planet of finite resources.

Unsustainability is intrinsic to the industrial society of the last 200 years. But when a system evolves in an unsustainable way, there comes a time when it becomes unstable, and that is what most of the people will find unexpectedly in the coming months.

The scarcity of resources, fundamentally energy, will weaken economic growth very soon. Weak growth, combined with the largest debt in the history of capitalism, results in an economic environment of capital scarcity.

The price of oil jumped from 60 to 120 USD per barrel in the last 12 months, and some analysts predict that the price could reach 200 USD per barrel in the coming months.

In my opinion, this analysis is incorrect, the price of oil cannot remain above 100 USD per barrel for a long period of time, because a significant part of the demand cannot support these price levels and disappears.  This destruction of demand is nothing more than a destruction of capital. The coupling between energy consumption and economic growth has been amply demonstrated in economic science. And again weak growth, combined with excess debt (the largest in the history of capitalism) makes us enter into a new economic environment of capital scarcity.

For years, economists have taught us that it was necessary to fight against oligopolies and monopolies to facilitate economic growth. This was the case in an economic environment with abundance of natural resources, but this is no longer the case, nor will it be for a long time.

For example, the concentration of GDP and the increase in inequality is nothing more than a consequence of the scarcity of capital.

Thus, we are entering an environment of scarcity of capital and its distribution is concentrated in fewer and fewer economic agents, and this has consequences.

From the perspective of Capital Optimization, the critical success factor is to identify the economic agents and processes best adapted to the new environment. These economic agents will be able to gain market share with the disappearance of their competitors, and thus compensate for the reduction in unit margin, which will be inevitable in this environment of capital scarcity.

Approximately 70% of the world's GDP runs on SAP systems, and while the new economic model deepens the concentration of GDP, this percentage will grow. This makes SAP the key player in the capital optimization process.

Add to the above the collaboration/communication scenarios that the Internet of Things or Artificial Intelligence (SAP Leonardo) is bringing, which multiplies the potential of SAP in its role as the main integrator of business processes between companies.

With all this, SAP has become much more than a software system and it is in fact the "language" spoken by most of the world's GDP.

However, financial services have remained isolated from this integration process, but this has placed them in an untenable position.

The optimization of solvency and liquidity is based on the same principle as the optimization of inventory, transport costs or production capacity. All system optimization processes are based on the second law of thermodynamics which, in a nutshell, tells us that an optimization process requires reducing the entropy of the system with information.

Communication theory teaches us that the transmission of information is more efficient using a standardized communication language, and that the efficiency grows with the number of agents using the same standard. If SAP has become the standard communication language for 70% of the world's GDP and growing, there is no alternative, the financial system must speak SAP for optimizing capital.

If the previous statement is true, why has the financial system remained disconnected from the integration and standardization process that has occurred in the non-financial economy?

There are multiple reasons, but the main one is that the pressure to optimize capital was never high enough.

Many of us believed that the financial crisis of 2008 represented the beginning of the end of a financial system driven by volume and not by capital optimization, and for a few months it gave that impression. But the “Too Big to Fail”, the Troubled Asset Relief Programs, the Bailouts, the Quantitative Easing Cycles and the growth of Shadow Banking made it clear that this was not the case.

However, as a physicist, I knew that an unsustainable system someday becomes unstable, and decided to work on a capital optimization model, that would be necessary when the capital scarcity made the financial system unstable.

This day has come; the combination of weak growth, as a consequence of the scarcity of energy resources (although not only energy), and the excess of debt (the largest in the history of capitalism) makes it urgent to transform the financial system, from a model based on volume to a model based on capital optimization.

Our system, built on SAP technology, integrates with the processes of the real economy (managed with SAP), and determines its capital and liquidity consumption. With this information, it proposes financial instruments that cover deficits or excesses of capital and liquidity, adjusting the price to the risk of the operation.

Making an analogy, it works like inventory replenishment and optimization processes, in which we reduce the cost of inventory obsolescence, sharing information on real demand, transport capacity, etc., but optimizing solvency and liquidity instead of inventory obsolescence.

We are confident that this value proposition creates a significant competitive advantage in today's capital-scarce environment. And the advantage will increase while the environment worsens, as unfortunately it will happen.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Ukraine War, Capital Scarcity and Capital Optimization with SAP Banking

 Dear,

The last few weeks have been very difficult. Since the Russian military intervention in Ukraine began, our societies have been subjected to deep stress, both emotional and economic.

I am afraid that the confusion generated by the emotional shock of the harsh images of deaths, bombings and refugees makes difficult a balanced analysis of economic reality. Analysis that, however, is more necessary than ever.

My main background is Physics, and from a very young age I learned that Energy is the ability to Produce Work, and some time later I understood the causal relationship between the availability of energy and economic growth.

Tensions in the energy markets began just as the restrictions of the COVID-19 pandemic were being eased, reactivating the economy. These tensions that caused inflation to spike have been accelerated and multiplied by the economic effects of the war in Ukraine and subsequent sanctions and retaliation.

In order to control inflation, central banks have reduced liquidity injections, repeating a pattern of behavior that we already saw in the summer of 2008.

Unlike then, the banking system seems better capitalized, but shadow banking assets are much larger and their effect on the system's capital consumption is consistent with their volume and risk.

Summarizing; the combined effect of weak growth due to energy shortages, accompanied by the scarcity of other critical resources, and the overconsumption of capital due to excess debt, threatens to destabilize, sooner rather than later, the financial system.

Some concerning signs have appeared this week, triggering margin calls, increasing counterparty risk and market volatility.

For many economists, this environment is structural; energy shortages will be present for a long period of time, and financial difficulties caused by excess debt, combined with weak growth and reduced liquidity, will translate into an increasing number of defaults, delinquencies and insolvencies.

We are facing a very serious capital scarcity crisis and we are not ready for it.

Capital is the most important resource in the financial system (actually in the economic system) and in an environment of scarcity, there is no higher priority than optimizing it.

Capital optimization has always been at the core of SAP's value proposition. The subsidiaries of the groups of companies, and the networks of groups of companies integrate their business processes, sharing information in order to reduce the costs of supply, production, storage and distribution, while maximizing the level of service.

Over the past 30 years, SAP's products and services offering have transformed the supply and distribution chains of the real economy, and it is now in the position to multiply these benefits, with the deployment of new Geolocation, Artificial Intelligence and IoT technologies.

But the financial system has remained detached from this transformation, greatly limiting its ability to optimize capital.

I personally discovered this in 2012 and started working on finding a solution.

The solution had to follow the guidelines that had enabled SAP to transform the real economy; technical integration and process integration.

Technical integration means that we have to express the banking processes with SAP technology, because in this way technological compatibility reduces the operational costs associated with the integration of processes.

The integration of processes supposes a greater challenge, because it implies modeling the processes of the real economy in terms of generation and consumption of liquidity and solvency. I will give you an example.

Let's evaluate the distribution process of a perishable product. Efficient shelf-life management reduces obsolescence costs and service level. This improvement in the process affects the efficiency and profitability of the company and we can already see intuitively that it tends to improve its solvency.

But for the improvements to be effective, we have to move from intuition to a systematic process of measuring the impact of efficient shelf-life management of perishable products on the company's solvency.

The solution is to express in terms of generation and consumption of solvency and liquidity, the business processes of companies managed with SAP (supply, production, sales, distribution, etc.). Saying it is easy, but doing it has required a significant effort.

Once the balance of generation and consumption of solvency and liquidity of a process is measured and recorded, we determine the needs or excesses of solvency and liquidity of the process, covering the gap or surplus through the proactive offer of financial services.

To a certain extent, it is similar to the collaborative processes in logistics replenishment, but replacing material stocks with solvency and liquidity (financial instruments).

We are confident that this value proposition creates a significant competitive advantage in today's capital-scarce environment. And the advantage will increase while the environment worsens, as unfortunately it will happen.

We are working on presenting our system to the market and looking for business partners and investors. If you are interested, do not hesitate to contact me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Metaverse and Capital Optimization with SAP Banking

Dear,

Recent events have made the word metaverse very popular. The massification of new technologies such as Virtual Reality, combined with the changes in purchasing, communication, education, medicine and socialization habits that the COVID-19 pandemic has brought, has opened a new paradigm in the interaction between humans, and between them and physical and digital realities.

Although I see the potential of the technology, I am skeptical of some of its manifestations. In the same way that the early years of the Internet brought multiple search engines and over time Google won the race, due to its ability to integrate the search for internal and external information (relevance) through multiple channels, the determining factor in the success of the metaverse will be the ability to integrate services and interests across multiple channels.

Integration and omnichannel architecture are two SAP strong assets.

Integration between partners is part of the essence of SAP since the foundation of the company

SAP has also been in the development of the omnichannel architecture from the beginning with SAP Customer Relationship Management, SAP Hybris and SAP Customer Activity Repository applications bundle as some of its brightest manifestations.

SAP CRM provides a customer-centric vision of the customer, SAP Hybris an omnichannel interaction with him and SAP CAR manages the materials availability under the different channels considering the constraints of each of them. 

SAP integrated architecture facilitates the holistic analysis of the market, including the actions of potential competitors in multiple channels, collaboration with vendors, clients, distribution channels and service providers.

The client experience can start in an online mobility channel, become deeper in the metaverse and receive the product in the physical channel and return to the metaverse for post-sales services, or any potential combination of them.

Each channel has its own potentialities and limitations; the online channel is faster and more formalized but with a less sensitive experience than the physical one, with the metaverse closing the gap between them.

Delivering the product and service also presents different restrictions, which are also different depending on the client and his situation. A customer with a daily routine picks up the product at his hotel, another at a point of sale in the retail channel and another at his residential address.

SAP SCM is prepared to be deployed in this multi-channel logistics and the integration with the other areas of SAP will support it.

But even more, inI have no doubt that SAP is leading this transformation, even the strongest ecommerce corporations like Amazon, have to integrate their processes with vendors managed with SAP technology, and information sharing will be the basis for a satisfactory client experience and cost reduction.

But I do not see a clear strategy for solvency and liquidity optimization in the current omnichannel proposals.

There are multiple opportunities for capital optimization in an omnichannel architecture, and new developments like Virtual Reality and the metaverse multiply them.

The more interactions we have in any channel, either physical or virtual, the more data we share that can be used to determine our solvency and risk profiles. There are multiple applications of Big Data and Artificial Intelligence supporting this kind of analysis. 

But there are also less known opportunities for capital and liquidity optimization, let’s look at some of them.

For instance, the channel through which we deliver a product or service has different costs (transport, storage, shipping, etc.) and different delivery times. These differences generate different liquidity needs that can be analyzed and optimized, based on the integration of the goods delivery processes, and the financial processes that cover their liquidity needs.

More complex scenarios come with greater capital optimization opportunities. The cost of stock obsolescence depends on its turnover, shelf life, safety stock, etc. These indicators depend on the constraints of each channel and the organization's ability to manage them efficiently. Different channels have different costs and risks, and therefore different balances of generation and consumption of capital and liquidity.

Transferring these different cost and risk structures to the final price are management decisions, but in any case they must be measured, especially in an environment of scarcity of capital, such as the one we are heading for.

Integrating these omnichannel processes for the delivery of products and services with SAP Banking's financing and capitalization processes, opens up the opportunity to adjust financial instruments to the need and surplus of liquidity and capital. 

Even more, accurate measurement of capital and liquidity consumption, thanks to the advantage of sharing information offered by process integration, supports the prioritization of the channels that present a better balance of generation and consumption of capital and liquidity. This can be a physical channel, a virtual one or a mix of them, including the metaverse.

We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitatBut even more, inBut even more, ine in contacting me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Cryptocurrencies, SAP Banking and Capital Optimization

Dear,

In the last few days there has been a significant drop in the value of the main cryptocurrencies.

In my opinion, with some volatility that will make the prices go up and down, this is an unavoidable long-term trend.

Blockchain promises great advantages but also disadvantages, and most of the current cryptocurrency use cases do not seem to come close to addressing them in a satisfactory way.

The basic rule of thumb for determining the sustainability of a service is that the value it provides outweighs the cost it entails.

Do the current and proposed use cases of the current cryptocurrencies fulfill this rule?

Let's look at its use as a payment system; Using bitcoins as a payment tool means acquiring bitcoins (buying or mining). But if we look at the volatility of the currency, the risk of having losses before executing the payment is very high.

On the other hand, confirming a transaction on the blockchain requires the time and computational effort of the consensus mechanism. For example, confirming a payment in bitcoin takes approximately 10 minutes.

Is this a realistic alternative to using centralized payment methods such as paypal, mastercard or visa?

There are alternatives like Lightning Network which significantly improves the time required to register a transaction but it also has other limitations. For instance;  as it is based in bidirectional payment channels between two nodes, there is a possibility of fraud if one of the nodes drops the channel. For fixing this, designers have included the concept of Watchtower, which requires additional computational effort.

In any case, we should not confuse a decentralized technology with a decentralized market. A decentralized market has mechanisms that favor the balance of trading power of economic agents. Currently, the main cryptocurrency exchange platform is bigger than all the others combined, it is a clear example of centralization of market trading power.

I admit that there are other business cases, more complex than a simple-payment transaction where blockchain potentially could add more value, let's look at one of them.

In a mortgage loan, the cash-flow structure can be complex and also includes the relationship with a real estate collateral. In this case, both the value of the transaction and its complexity could justify the computational effort and response time of the blockchain.

What advantages does blockchain have compared to the current model?

With blockchain, the two counterparties have the guarantee that no one will modify the record of what has been agreed.

But it does not improve in any way the solvency analysis of the debtor, the accurate valuation of the collateral, or any of the elements that represent a risk for the creditor. Nor am I able to imagine the relevant advantages for the debtor in using blockchain, but I invite you to propose some in the area of responses to this article.

Some experts have proposed that blockchain meant the deployment of peer to peer lending, as something very disruptive in which blockchain has a lot to contribute.

Peer to Peer lending does not mean that one person lends directly to another, due to the difficulty in matching maturities, amounts and risk. Peer to Peer lending means that multiple people combine their investments to finance the needs of others, similar to the securitization of the loans of a bank.

The fundamental problem in this process is transparency. Currently, the valuations of the loans are based on obsolete technologies, with a very limited capacity of tracking the value of loans and the remuneration of investors.

These processes are supported by legacy technologies, developed individually in each bank, without a comprehensive vision of the processes. Developing these processes on blockchain technology, does not guarantee the integration of processes or the transparency of the information.

On the other hand, SAP Banking has been developed on an integrated architecture, which has been SAP's value proposition in all its products for 50 years. This value proposition assures transparency and reconciliation which is the basis of Capital Optimization.

This transparency is also the driver to match accurately the capital requirements of the borrowers and the investment opportunities of the lenders in Peer to Peer lending, or any other business case.

The challenge is how to migrate the current processes of traditional banks to the integrated systems of SAP Banking. We've been trying for years, but the complexity of business processes, the size, and the technology of traditional banks make it difficult. There have been some successes but less than we all would like, so the transformation of the financial system is still pending.

An alternative are some neobanks built 100% in SAP technology.  These neobanks are capable of redesigning and automating processes, and they also enjoy the integration and traceability provided by SAP banking, giving them a significant competitive advantage.

Additionally, these neobanks can notarize transactions in a distributed ledger like blockchain achieving some level of decentralization.

But the final step in the evolution is a system built in SAP Banking technology capable of evaluating the capital requirements and investment opportunities of its Business Partners, proposing proactively financial instruments for covering them, and with a price adjusted to the risk of transaction.

Of course, the transactions, quotations, prices, amounts, capital consumed, etc can be registered in a blockchain.

We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitate in contacting me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com

Synchronized Finance and Capital Optimization with SAP Banking.

 Dear,

Global debt and weak economic growth, as a consequence of the depletion of fossil energy sources and other critical resources, will make the new structural environment of capital scarcity visible in a few months.

In an environment of capital scarcity there is no higher priority than optimizing it, and that need to optimize capital will bring about the redesign of banking business processes.

The consumption of capital is a direct consequence of risk (market risk and counterparty risk) and optimizing capital is nothing more than a synonym for reducing risk.

Risk is reduced by sharing and integrating relevant information through business processes. SAP founders understood this, and the ability of SAP systems to do so has made them the market leader over the last 30 years.

For example, the comparative analysis of the sales forecast and the actual sales provides the basic information to determine the Safety Stock, and with an accurate estimation of the Safety Stock level, companies hedge against the risk of losing sales. If the organization improves its forecast using multivariate statistical analysis techniques, with data collected from external sources of information, or by implementing consensus forecast processes with its main customers, it reduces its risk of losing sales.

Technically, these hedging techniques reduce the cost of capital (opportunity cost due to lost sales, reputational cost or obsolescence costs of the inventory), as a non-payment insurance reduces the cost of capital due to credit risk. Furthermore, the cost of implementing and incentivizing the use of these processes is analogous to the cost of the insurance premium. But even more, the risk of suboptimal implementations of these processes is analogous to the risk of wrongly choosing financial instruments and their suppliers.

But the real economy business process improvement, provided by SAP best practices over the past 30 years, has not been accompanied by a similar improvement in the solvency and liquidity allocation processes.

Pressure for cost reduction and service level competition has brought a new paradigm that seeks the synchronization of logistics processes, among the multiple agents of the value chain. Vendors collaborate with manufacturers, retailers, logistics providers, sharing information through the value chain for synchronizing demand and supply times and quantities, considering all the constraints of the value chain.

Banks have remained outside of these collaboration networks, not because of a lack of incentive, but because of their inability. They simply lack the know-how, technology and processes to do it. This is a great weakness but also an opportunity for the players capable to implement the new paradigm in Financial Services as it is a key driver in Capital Optimization.

All business processes consume and generate capital and liquidity, although they do so after a period of maturity of the process. And it is precisely for this reason that they require the financial system to cover capital and liquidity needs in periods of shortage and investment opportunities in periods of surplus.

Capital and Liquidity synchronization requires measuring the capital and liquidity position of the companies at different temporary horizons, and allocating capital and liquidity (financial instruments) according to their distribution in the business processes through different time horizons.

To do this, we must start by expressing the events of the real economy in terms of generation and consumption of solvency and liquidity, so that, when integrating them into business processes, measure the shortage or surplus of capital and liquidity of the process in each time horizon . Adding the capital and liquidity position of all the processes in the different time horizons, we will know the shortage or surplus of capital and liquidity of the organization in each time horizon.

Finally, by adding the processes of other subsidiaries of the group and even partners and suppliers, we will be measuring the shortage or surplus of capital and liquidity of all of them, opening the gate to collaboration scenarios, in which some processes provide capital and liquidity or opportunities for investment to other processes on the same network.

Making an analogy, it is something similar to the Vendor Managed Inventory Collaboration processes (typical of logistics), but exchanging financial instruments (loans, deposits and derivatives) instead of stock replenishments.

We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitate in contacting me at ferran.frances@capitency.com

Looking forward to reading your opinions.

Kindest Regards,

Ferran Frances.

www.capitency.com

Join the SAP Banking Group at: https://www.linkedin.com/groups/92860

Visit my SAP Banking Blog at: http://sapbank.blogspot.com/

Let's connect on Twitter: @FerranFrancesGi

Ferran.frances@capitency.com