Ideation Centre at SAP Canada

Banking on Blockchain
and Fintech Innovation
An SAP Point of View
March 2017
THE STATE OF BANKING IN CANADA

In 2015, the World Economic Forum ranked Canadian banks as the soundest
in the world for the eighth consecutive year. In Q3 2016, the five biggest Canadian
banks delivered just shy of CAD $10 billion in profit.1
However, a recent PWC study found that the Despite these challenges, banks in Canada are to as ‘distributed ledger technology’ when used
average efficiency ratio of Canadian banks was strong and well positioned in the market. However, by financial institutions, but this paper will use
58.4% in 2015, up from 57.9% in 20142. This they also now find themselves in a digital economy the term blockchain) can be an engine powering
insignificant increase seems sluggish considering in which they must be ready to adapt and new features that fuel this disruption. It is not
the potential of today’s digital technology to transform to remain relevant and continue unthinkable that banks failing to innovate
improve productivity dramatically. It is also worth growing. They must become efficient enough and adapt adequately to the digital economy
noting that the Big Six banks in Canada saw to keep pace with the rapid innovation that could face reduced market shares and lose their
operating costs increases by CAD $4.8 billion today’s consumers demand. grasp on elements of the market.
(6.9%) in 2015, further making the case for
focusing on improving efficiency and automation. Most major Canadian banks have very similar
approaches to onboarding new customers and
Some have argued that, given its generous assessing the risk for lending products. Some
margins, it was reasonable to expect a phase Canadians are critical of this generic banking
of industrialization in the financial services experience. With this in mind, it is fair to say banks
industry, but that has not materialized. have been ranked amongst the public’s most
wanted for disruption and ‘Uberization’.
This is in part because systems have evolved as
bespoke, almost artisan, point solutions. The Consumers and especially millennials have shown
complexity has undermined operational efficiency that they have little loyalty and can easily switch
of these legacy systems and a growing focus if baited with innovation. This can be the wrench
on keeping up with the changing digital and that loosens the banks’ firm grip on the economy
regulatory landscapes. and levels the playing field. Technologies such as
blockchain (perhaps more appropriately referred

2
CONSUMERS FRUSTRATED WITH SLOW AND DIFFICULT
BANKING PROCESSES

One aspect of banking that today’s consumers are not happy with is the waiting times
and relative difficulty of making global bank transfers and payments. Currently, when
a customer wants to wire money to another bank, a tedious, costly and time-consuming
process that may even require a visit to a bank branch ensues. They can then be made
to wait up to 7 days for funds to arrive in their account
Consumers have become used to the concept importantly, the way that risk of fraud is shared “Until 2009, all ACH transactions were settled one
of global information flows on the internet, and among the sending and receiving banks. or two days after they are initiated. In 2009, the
now expect global money flows too. Asking Federal Reserve created an optional same day
customers to wait days to achieve something “Interbank wire transfers are routinely same day settlement method, but adoption appears limited.
that now seems like it should happen in real transactions even for transactions of >$1 billion.
time has become unreasonable. However, once a wire transfer is sent, the money “Fraud is a major issue for ACH transactions.
is gone. This creates significant risks for banks, A key reason is that ACH transactions can be
Today, bank payments are handled in a “fire and which have a complex set of procedures to reversed. When an ACH debit is initiated, the
forget” fashion. The payment is sent and the next manage risk for wire transfers and charge sending bank has no idea if there is enough money
day, if there is an exception, or the funds do not a high fee to pay for that effort (often $10-30 in the account, or even if such an account exists.
clear, or if there is a problem, an exception report per transaction). Instead, the bank that receives an ACH request
is created. That is sent back, and there is has the option to reject the transaction for
considerable manual back and forth activity “Most online funds transfer services are processed various reasons (e.g. insufficient funds,
on the payments conversation. through an ACH [Automated Clearing House, customer disputes).”
an electronic network for financial transactions in
According to Gus Fuldner, Head of Insurance at the US] network. ACH networks were created as
Uber3 (using the US as an example), “The time an electronic alternative to checks in the 1970s,
required to transfer funds between two banks and in many ways retain some features of paper
is a function of the conventions of the system check processing.
used to transfer the funds and, even more

3
RISE OF THE FINTECHS IN CANADA

Today’s consumers expect more, are impatient, and according to advisory firm EY,
two in 10 Canadians are now interested in switching to ‘FinTech’ solutions4 (software that provides
financial services, typically created by startups to disrupt incumbent financial systems).

With the rise of fintechs, a Pandora’s Box has been FinTechs also need to be cognizant of tight and Banks have an opportunity to be pillars of trust and
opened in such a way that it is not realistic for sometimes ambiguous regulation. Uber danced security by providing some of the underpinning
banks to expect to achieve a continuation of the around regulation of the taxi industry, but financial capabilities for the industry. Bank brands can also
status quo. Once consumers get a taste of a new, services regulation is a very different beast. There be the umbrella under which emerging fintech
streamlined process they do not look back. Banks are Criminal Code laws that FinTechs cannot just services are consumed.
should instead be thinking about how they engineer ignore – such as anti-money laundering legislation
their systems to keep FinTechs independent and – and areas like corporate finance and securities In Canada, this collaboration between banks and
agile, while still having them serve as a working part where certain transactions require licensing. fintechs could play a part in jumpstarting the
of their own ecosystem. growth and diversification of the Canadian
Banks and insurance companies have teams of economy. Working together, they can make Canada
On the other side, FinTechs are beginning to realize people with expertise in interpreting regulations. a global hub for financial services innovation.
customer acquisition in Canada is challenging and Startup firms often need more specific answers to
usually expensive. Canadian banks have a very regulatory questions and do not have the resources
strong brand, which FinTechs are envious of, to make these interpretations, especially given
especially when it comes to introducing new the amount of change and lack of precedent
financial services products and concepts to the associated with many of their solutions.
conservative Canadian market. This means they
too like the idea of collaborating with banks.

4
WHAT IS BLOCKCHAIN AND WHY DOES IT MATTER
FOR FINANCIAL SERVICES?
One of the most exciting and important innovations to come out of the fintech space
is the blockchain – and in this area Canada’s financial services industry is showing
early signs that it could be a showcase for the world.
Blockchains are fully decentralized global ledgers
that record digital currency transactions, created
as the open source ledger for tracking Bitcoin
transactions.In this context, anyone can access
and use the blockchain. Once a transaction has
been recorded on the blockchain, it cannot
be edited or deleted, and everyone can see it.
This inherent openness essentially makes it
incorruptible and makes it clear which coins are
moving from one person to another.
Blockchains can be broadly be broken into three
categories: public, private and consortium. Public
blockchains, including Bitcoin and Ethereum, are
accessible by anyone with a computer and access
to the internet. Private blockchains are
centralized to an organization, and made
as accessible as that organization sees fit.
Consortium blockchains can be considered
partially decentralized.
The disruptive concept of a shared, immutable
ledger was dropped anonymously in an online
forum in 2009. Since then, it has slowly,
steadily gained ground to become a major
industry phenomenon.
The concept and technology behind the
blockchain has banks wondering if their very
purpose will become redundant in a world where
all transactions are made directly and with
no need for intermediaries.
While on one hand this does present a direct
threat to banks, it could also be their big ticket
to reinvention and renewed relevance. Whether
or not this happens will depend on the application
or use case, and how it is deployed in a digital
business network.
Those jumping on board with the blockchain are
exploring how it can help automate and streamline
their processes. Think loans, investing, cross-
border transactions, loyalty programs, and you
start to get an idea of the extraordinary potential
of the technology in stripping out much of the
administration associated with banking services.
HOW BITCOIN TECHNOLOGY COULD
CHANGE BANKING IN CANADA5
Toronto Star, Jan 27, 2016
“I do think blockchain is a massive opportunity,”
Linda Mantia, executive vice-president of digital,
payments and cards at Royal Bank, said during
a panel discussion on financial disruption in
Toronto. “The banks are playing a huge role
in shaping what’s going to happen with
blockchain,” she added.
Blockchain technology is still in its infancy and
widespread adoption by the world’s financial
services institution would be necessary to replace
the status quo, according to Matthew Spoke,
strategy and execution lead at Rubix, a blockchain
software platform launched by professional
services firm Deloitte.
For the time being, banks are studying ways
that the technology could help them streamline
their own internal processes — something that
could reduce headaches for clients and amount
to massive cost savings for the institutions.
5
BLOCKCHAIN USE CASE: LENDING
One aspect of banking in which blockchain holds strong appeal is lending.
A contract-intensive area of the financial services portfolio, lending carries significant
risk and limited trust across the value chain.
Loans have an extensive lifecycle: advisory,
product selection, adjudication and pricing,
funding and fulfillment, servicing, and securitization
or asset management. Customer information
gathering during origination is process-intensive
on the front end, needing to be validated and
confirmed to comply with internal and external
KYC (know your customer) regulations. While
tackling this, banks must remember that
customer experience is a key sales factor.
As a concept, blockchain seems to have several
characteristics that could form a solution to the
increasingly intrusive complexity affecting the
business of lending. Firstly, its inherent
transparency as an open ledger makes all
transactions irrefutable and open to incorruptible
analysis. Furthermore, in what seems like a
strange combination with transparency, blockchain
also offers privacy to lenders and borrowers by
keeping parties involved unnamed. Involved
parties are of course privy to the relevant facts
and changes to key information is clear.
Moving to a single and shared view of the truth will In a world where lending and borrowing happens
allow each party in the value chain to speed up on the blockchain, time and resource-taxing
servicing processes like payment, saving money business rules and processes are taken care of
and time. This approach could also be used in the by algorithms. Reconciliation no longer exists,
front-end processes to bring in third-party identity because all the data is true, and the need for trust
providers and other information providers, who is virtually eliminated. Trust is in the algorithm.
can help with fraud prevention and other KYC- The integrity of the assets behind the security
related processes while making the process easier is no longer in question, as key facts and changes
for customers and sales associates. are transparent.
There is no central trust authority in the
blockchain itself. Instead, transactions link to
create a form of referential integrity that ensures
parts of the chain are not replaced or substituted
unknowingly. This, along with the prohibitive cost
and effort involved in even attempting to falsify
activities on the blockchain, gives it a level of
stability and reliability that paves the way for
a revolution in the lending industry.
6
ATB FINANCIAL BRINGS BLOCKCHAIN TO LIFE

In June 2016, ATB Financial, the largest Alberta-based financial institution, collaborated
with SAP, financial technology start-up Ripple and ReiseBank AG in Germany to send
the first real international blockchain payment from Canada to Germany6.

ATB successfully transferred CA$1,000 (EUR 667) “Although we are very much still in the early stages
to ReiseBank using a network built on SAP
technology and Ripple’s pioneering network of
enterprise blockchain solutions. The payment,
which would typically have taken between two
to six business days to process because
of requirements such as settling with the
counterparty bank and reconciling accounts,
was completed in 20 seconds.
Working with a team at ATB Financial, SAP and
Ripple designed and built a proof-of-concept
prototype based on the technology in nine
working days. It demonstrated how banks could
improve the efficiency of cross-border payments
to enhance their global networks and be
of blockchain adoption, it was highly encouraging
to see in a true demonstration the potential it has
in transforming cross-border payments, making
them almost instantaneous and reducing
potential errors. Using SAP HANA Cloud Platform,
we are able to experiment and be nimble with
emerging innovations like blockchain. The next
stage for us, working with SAP and Ripple, will be
to understand how the front-end experience
should work for the benefit of our customers”.
Curtis Stange, chief strategy and
operations officer, ATB Financial
WHAT WAS SPECIAL ABOUT
ATB’S PAYMENT?7
Pymnts.com article With Blockchain, It’s Time
For Less Talking, More Doing, July 18, 2016
“First off, there are implications of a successful,
near-instant global payment completed via
blockchain for corporate payments, because
the transaction completed did not solely
involve the movement of money. It included
the movement of information, too.
It’s not what you see in the glass, but it’s
what’s behind that payment — all of the other
activities that were also done in 20 seconds,
from settlement to reconciliation and the other
things that typically take three to seven days.

competitive on the world stage. Corporations have higher demands than

consumers when it comes to payments, including
the need for information to be sent along
with that payment regarding things like
transaction type or data from associated
invoices in order for them to complete their
own settlement and reconciliation.”

7
UNDER THE HOOD: HOW DID ATB FINANCIAL MAKE
ITS BLOCKCHAIN PAYMENT?
ATB Financial’s technology prototype connected SAP HANA Cloud Platform, the open
platform as a service from SAP, and the SAP Payment Engine, which centralizes payment
processing of all kinds in one solution, with Ripple’s blockchain. For the demonstration,
SAP provided a mobile user interface through which the payment was executed.
Descriptions of the prototype’s components can be found below.

SAP HANA Cloud Platform
SAP HANA Cloud Platform is an open platform-as-
a-service that provides unique in-memory
database and application services.
It is the cloud platform that enables your business
to rapidly develop new applications or extend
existing ones. Enabling anyone to extend SAP
applications in minutes, all in the cloud.
SAP Payment Engine
SAP Payment Engine (PE) is a single-payment
operations platform that can connect to multiple
internal and external payment channels. You use
this component to verify, sort, and clear payment
transactions of all kinds, whether they are
domestic or international (FX). Its transparent,
flexible, and automated workflow can be
controlled by expert users.
Payment Engine provides high straight-through
processing rates, batch processing, and real-time
processing, as well as 24x7 reporting. It handles
low-value, non-time-critical payments as well
as high-value, time-critical payments and also
allows financial institutions to offer value-added
real-time services with no interruption from end-
of-day processes.
In SAP’s blockchain project with ATB Financial,
it was quickly realized that the investment the
company had made in SAP Payment Engine
provided the flexibility to design payments rules
for distributed ledger payments along traditional
payments flows. Having this centralized platform
is key to being ready for the changes coming in
settlement and payments as distributed ledger
approaches are adopted.
Ripple (blockchain provider)
Ripple is a real-time gross settlement system,
currency exchange and remittance network. Also
called the Ripple Transaction Protocol (RTXP)
or Ripple protocol, it is built upon a distributed
open source Internet protocol, consensus ledger
and native currency called XRP (ripples).
Released in 2012, Ripple enables “secure, instant
and nearly free global financial transactions
of any size with no chargebacks.” It supports
tokens representing fiat currency, cryptocurrency,
commodity or any other unit of value such
as frequent flier miles or mobile minutes.
At its core, Ripple is based on a shared, public
database or ledger (blockchain), which uses
a consensus process that allows for payments,
exchanges and remittance in a distributed process

8
WHAT DOES THE FUTURE HOLD FOR BLOCKCHAIN?
Where the internet gave us a decentralized network of information, blockchains can
bring us a decentralized network of value. Because of how blockchains work, specifically
how they make trust a non-issue, they in theory resolve the trust issues that have plagued
and therefore practically shaped virtually every aspect of society since its dawn.
They also provide a potential solution to many of the internet’s shortcomings.
The intention of using the blockchain in the The areas of payments and funds movement have
financial sector is to transfer trust from provided us many of the early blockchain use
the human intermediary to a mathematical cases. Since 2009, the consideration for where THE BANKS ARE POISED TO MEET
algorithm that cannot be faked. This means we blockchain can be applied has moved into more THEIR SCARIEST COMPETITION YET:
BLOCKCHAIN
could totally redesign the human-led financial sophisticated scenarios and beyond traditional
CBC, Nov 18, 2016
system we created in our attempts to distribute financial services: structured finance, fixed
Make no mistake: blockchain is an earthquake;
value in a trustworthy way. Creating a transparent income settlement, bond trading, land titles,
it threatens the legacy position of banks as sole
and incorruptible ledger is a first step toward medical records, shared ownership and countless
gatekeepers of the safe, accurate and verified
bringing transparency into global markets others. Any system in which value is exchanged financial transaction. They know this. Earlier this
and value exchange. or ownership is established could be shaken year, the Bank of Canada and 90 other global
up by blockchain technology. financial institutions presented their blockchain
The transparent ledger concept is powerful, as and digital currency research at an IMF/World
is that of peer-to-peer validation. Distributing The internet disintermediated information Bank Conference hosted by the U.S. Federal
Reserve. Most of Canada’s big banks are also
the facts out in the open with all parties having by giving everyone a voice, blockchains
members of the R3 Consortium, a group working
a copy of the ledger also means that each party disintermediate value is by untangling it from
to develop global blockchain standards.
is an information peer. Money is digital, and it has the problem of trust. This technology can break
The world of banking (and many others) are
been for some time – but now money and value down ‘value fences’ similar to how the internet
facing reconfiguration of business models
interaction can be truly digital and transparent broke down ‘information fences’. This could
that have reliably delivered vast wealth. But
and this is different. be profound if we don’t mess it up. in challenge lies opportunity: could Toronto
or Ottawa be the Florence of the future?
As business consultant Greg Satell likes
to say: “Successful companies don’t adapt –
they prepare.”

9
HOW CAN YOUR BUSINESS GET STARTED ON BLOCKCHAIN INNOVATION?
Knowing where to start right now with blockchain is a challenge. In some ways it remains ‘early
adopter’ technology, but in other ways it is already late. It is early to expect production-grade
solutions from the blockchain technology providers, but it is late to be learning and understanding
what this technology is and how it might change your business’ operating model.

Large financial institutions can collaborate with
established technology partners to create a ‘safe
innovation layer’ to connect them via the cloud
to the blockchain. This ‘sandbox’ concept, as
outlined by fintech innovator Kosta Peric8,
explains how organizations need a sandbox to play
in to fully understand new solutions, as the ‘castle’
of enterprise is largely designed to protect itself
from radical new ideas and concepts. Cloud
platforms can have one foot in the sandbox and
one in the castle, serving as the bridge between
these two worlds.
That said, most industries and organizations
would not switch over completely to a new
concept of doing business overnight. These first
steps consist of understanding how to align
current portfolios to work with the blockchain
and facilitate disruption.
For the near future, blockchain will co-exist with
other approaches. Payments is a good example of
this. Blockchain will be a significant force but will
not completely replace checks or cash. Blockchain
adds to the conversation.
For example, if you work in an insurance company,
you could be imagining how blockchain might
change the relationships between the people in
your industry – it is disruptive and something to
be concerned about. Some companies have been
conducting R&D isolated from the rest of the
business. As a provider of enterprise platforms
and traditional ledgers, customers are asking SAP
for help connecting the dots between the labs and
enterprise systems today so they can turn the
blockchain concept into business results.
Reimagining a blockchain-enabled business
environment also leads to new ideas on business
operating models and digital disruption. Hands on
proof of concept collaborations and prototyping
are key to help envision and action these new
operating models.
It’s important to have initiatives supporting broad
go to market strategies and sales activities for
established products and solutions, but it’s just
as important to foster small, almost rogue teams
of innovators that think and act differently.
The key is to stay customer-focused and pursue
the ultimate business value for the end customer,
and to keep this in mind during the innovation
engagement. It’s early days from a blockchain
provider perspective. The market has not matured,
and we do not know who’s going to win the race
or even what the race is about yet. In the
meantime, decision makers need to think about
how they get ready for blockchain and start
preparing now for disruption in their own business
and entire industry. Given SAP’s platform strategy,
we are well positioned to help prepare customers
to use blockchain technology for business and
industry advantage.

10
REFERENCES

1. Canada’s Big Five banks made $9.89 billion in combined third-quarter profits https://www.
thestar.com/business/2016/08/30/canadas-big-five-banks-made-9b-in-combined-third-
quarter-profits.html
2. Canadian Banks 2016 http://www.pwc.com/ca/en/industries/banking-capital-markets/
publications/canadian-banks.html
3. Why does it take several ‘business days’ to electronically transfer funds between two banks in the
US?https://www.quora.com/Why-does-it-take-several-business-days-to-electronically-transfer-funds-
between-two-banks-in-the-US
4. 2016 Consumer Banking Survey http://www.ey.com/gl/en/industries/financial-services/
banking---capital-markets/ey-global-consumer-banking-survey-2016
5. How Bitcoin technology could change banking in Canada https://www.thestar.com/
business/2016/01/27/canadian-banks-experiment-with-bitcoin-technology.html
6. ATB Financial Sends One of the World’s First Real-Time Payments From Canada to Germany Using
BlockchainTechnologySupportedbySAPhttp://news.sap.com/atb-financial-sends-one-of-the-worlds-first-
real-time-payments-from-canada-to-germany-using-blockchain-technology-supported-by-
sap/
7. With Blockchain, It’s Time For Less Talking, More Doing http://www.pymnts.com/news/b2b-
payments/2016/sap-blockchain-cross-border-payments-banking-fintech-disruption-
atb-financial-ripple/
8. Kosta Peric’s Mission to Reach the Unreachable https://ripple.com/insights/
kosta-perics-mission-to-reach-the-unreachable/

11
AUTHOR
Kris Hansen
Kris Hansen is senior principal, Financial Services for SAP Canada. He is focused on understanding
the financial services industry and identifying new and interesting digital opportunities that create
disruptive business value.

12
Ideation Centre at SAP Canada

The SAP Canada Ideation Centre’s mission The SAP Ideation Centre:
is to help Canadian leaders of business, Lance Bialas – Cities, Kris Hansen –
academia, government and non-government Defense, Healthcare and Financial Services,
organizations develop a deeper understanding Government SAP Canada Innovation
of the digital forces driving the economy Ideation Center Director
today. Ideation Centre members strive to bring
forward made-in-Canada fact-based arguments Behrad Bayanpour – Matt Smith –
that challenge decision makers to think about High Tech. and Advanced Oil and Gas
the potential of organizational shifts that were Manufacturing
not possible in the past.
Kristen Cornell – Catherine Tough –
The Ideation Centre is fueled by thought Financial Services, Finance, Utilities
leaders from the Industry Value Engineering Risk and Compliance
team at SAP Canada. This diverse team of
industry and value advisors helps organizations Fotini Costopoulos –
of all sizes and industries take advantage of Retail and Consumer
technological innovations to create incremental Packaged Goods
economic value by adopting new business
models and optimizing business processes,
from the back office to the boardroom, farm
to storefront, mine to operating room. Sam Masri
National Vice President
Head of SAP Canada Industry Value Engineering
sam.masri@sap.com