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Why data and digitization will be the foundation of the future of finance

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COVID-19 has led to the rapid digitalization of the financial services industry, but more needs to be done to make the sector sustainable, says Dr. Stefan Sigrist.

Why data and digitization will be the foundation of the future of finance

Data and algorithms are at the heart of the financial industry of tomorrow. However, digitalization is not an end in itself. Linking economic and social progress is the foundation for long-term innovation. A prerequisite for this is a differentiated understanding of the opportunities and limitations of digital solutions and overarching partnerships that position financial service providers as guides for innovation in the 21st century.

The diagnosis is clear. After the corona crisis, the world has irrevocably entered the digital age. Even in the financial industry, it has become clear to the latest doubters that data, algorithms, and virtual communication provide an indispensable foundation for business models and customer interactions in the 21st century. The pandemic primarily triggered a digitalization push with various enforcement measures that brought existing solutions for decentralized exchange, automated investment advice or contactless payments to the mainstream market. A process that under normal circumstances would probably take several years in relation to the cultural background of work, counseling or trade, became a harsh reality within a few months.

Thus, the crisis was and remains a stress test for the healthcare system, economy, society - and for the financial industry, relentlessly revealing future opportunities, but also limitations. In this light, much can be said for understanding the crisis as a grand global pilot project that offers promising participants the opportunity to learn.

The obvious takeaway is that the digitalization of the financial industry in the early 2020s was not on the brink of the widely announced disruption of blockchain-based solutions or AI-powered applications, but rather at the start of a much longer and more pervasive transformation. which is not primarily characterized by bits, bytes and bitcoins. Takeaway for the financial industry:

By itself, (digital) technology is not a strategy. It is just a means to an end. As a result, it is becoming clearer than ever that long-term solutions must be based on future user needs. Specifically: just because it is possible to publish the number of cases daily or hourly, this does not mean that citizens can better assess risks or make long-term decisions. Likewise, the ability to send financial market data to private clients or small investors in real time on a smartphone does little to increase profitability or provide an overview. Moreover, especially when it comes to difficult issues, direct contact between people is key - whether it is clarifying delicate diagnoses or planning long-term finances. Moreover, it has been shown - and this understanding is also relevant for financial service providers - that not only individual needs are important, but also the needs of society. As useful as the theoretical benefits of contact tracing are, it is of little practical value if the public does not trust the sharing of their data. Carried over to the world of finance, it is also clear that without the trust of the general public, neither cryptocurrencies from Bitcoin to Libra nor algorithm-based investment advice will be successful in the long run. With new tokenization opportunities or NFTs as the future asset class, this requirement becomes even more important - including the still little-known ecological footprint of the exponential increase in the number of required data centers.

From this perspective, there are three areas of action for future-oriented and sustainable financial service providers:

  1. Building Systematic Early Recognition: Given the high dynamics of change, it becomes imperative for companies - but also for the regulator - to deal with new technical capabilities in a forward-looking manner and translate associated opportunities and challenges into business , but, above all, also to the framework social conditions. The consequence of this is an increased ability to look to the future, which is characterized not by a constant pursuit of the latest trends and hype, but by greater stability and long-term thinking.
  2. Aligning with the future needs of users and society: The essence of sustainability lies not only in restoring the status quo, but also in aligning with future market needs. However, this also requires defining what this core will be like in the future. Simple optimization of the financial problems of individuals or organizations is unlikely to be sufficient. Insurance companies, like banks, have traditionally played a central role in economic and social progress, financing large-scale projects in the context of the first or second industrial revolutions, such as the construction of railway networks.
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