Financial Innovation

Introduction

Financial innovation means development of new financial instruments, services and markets using new and innovative technology. It is an inclusion of new financial applications and instruments with help of technology in the market. It is the process of creating new products, processes, application software, or services related to the finance and investment  sector.

This also includes technology updation, risk management and mitigation, credit and equity generation, and many other financial and market innovations.

It started with the development in technology and improvements in financial market operations. With this improving state of financial factors and technology, financial innovation is a necessary process for countries across the globe.

We have transformed the way we transact with money and participate in different financial activities. We now see savings, investments, lending, borrowing, payments, remittance, purchase etc. in a whole different way. Financial innovation has not only impacted the financial sector, it has changed the way we participate in day-to-day activities.

Importance of Financial Innovation

  1. Financial innovation makes financial products and services accessible. ATMs revolutionized the way we use banking facilities. Similarly, UPIs are changing the way we use different services. Financial innovation has integrated the whole financing and investment function and facilitated the customers.
  2. Innovation in the financial domain has made the institutions and market participants more effective towards providing services to customers. Innovation has made services more personal and niche.
  3. Financial innovation enhances the sustainability of financial institutions. Innovation is the need of the situation hence, inclusion is the only way.
  4. Innovation liberates economic activities. Financial innovation promotes the use of financial services and products by making them simpler, accessible, affordable and timely. For instance, Payment using UPI is much more favorable than using a debit or credit card. Also, you can buy and pay for anything just from your cell phone. It provides consumers much more freedom.
  5. Financial innovations can spur growth and competition in the financial market and provide new and better opportunities and options for customers.
  6. Such innovations make payments more convenient due to the fact that customers and users are no longer forced to use the traditional  payment methods such as via cash and card, making transactions safer and easier.



Types of Financial innovation

Financial innovation is a basic term with no proper categorization. It can be categorized into following types:

  1. Financial System Innovation
  2. Process Innovation
  3. Product Innovation

Financial System Innovation

This means innovation of the financial system as a whole. This innovation leads to the establishment of new types of financial practice. This may require change in legal and supervisory framework and structure. For instance: Cryptocurrency and BlockChain Technology are financial system innovations.

Process Innovation

This includes development and adaptation to new age processes which lead to effective and efficient financial operation. This is common in financial innovation. All the office automation and use of technology to provide the effective and efficient services comes under process innovation. For instance, Application of Token System, biometric verification and online application and authorization etc. are factors of process innovation.

Product Innovation

Product innovation includes the introduction of new products in the financial ecosystem. Development or inclusion of a new financial system with technological assistance depends on regular innovation and response of market and market participants  to that innovation. Credit and Debit cards, UPI and mobile banking, Application based systems are product innovations.

 References

CRYPTOCURRENCY

BLOCKCHAIN TECHNOLOGY

WHAT IS NON-FUNGIBLE TOKEN (NFT)?

PAYMENT BANKS

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