Financial Innovation – Concept, Basics, Functions, Benefits, Drawbacks, Examples & more

Before you learn about financial innovation, you must know that economical design is an unquestionable positive. Since 2007, financial innovation isn’t celebrated much post-financial crisis.

If you are someone who has followed long financial years of the past eight years, then you might be aware of the damaging role of financial innovations. 

If you are looking forward to learning more about economic design, then you are on the right page. 

Financial innovation is all about creating new products or services with regard to the financial sector. These tend to occur with the advancement in financial instruments and payments. 

About Financial Innovation

You can say financial innovation covers the creation of new products, services, and processes in simple terms. 

With time you can see financial innovation not in financial tools but also in payment systems. They are mainly applicable to lending and borrowing of funds. 

You can easily see these changes in risk transfer, technology, equity, and credit generation.

They not only enhance the credit available with the borrowers but also allow banks to generate capital with minimum costs. 

Innovation is the process of not only creating but also implementing new ideas. It is a method under which you need to take useful pictures and convert them into valuable products or services. 

Innovation mainly comes from creativity. You can say it is a prerequisite of design. Creativity is all about having the ability to mix ideas in a unique way or make practical use by associating ideas. 

Even though change and innovation are quite different, but they are closely linked. Often change includes new and unique ideas. The unknown can consist of creating new products. 

If you want to be successful, then you need to know that both innovation and change play a crucial role.

Financial innovations are mainly all about lending and borrowing of funds. You can see that the term is in the limelight in several spheres of the financial system. 

It includes remittances, equity capital, mobile banking, and others. You can say investment crowdfunding is all about raising equity capital. 

The financial innovation mainly removes the beliefs that only okay to do people can invest in early and growth firms. As per their interest, individuals can invest in projects. 

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Basics of Financial Innovation

Ideally, financial innovation is a generic term, and you can break it into various categories on the basis of updates. 

Thanks to the new infrastructure, the new investors can now invest in both early and growth-stage companies or invest in companies they are passionate about. 

Another area where financial innovation is transforming is remittances. Ideally, remittances are funds that expatriates send back to their origin country. 

With the increase in the number of remittances worldwide you can say remittances are a crucial part. 

Lastly, you can say that even mobile innovations are also featuring a lot of designs, mainly for retail clients.

Currently, the majority of banks tend to offer a plethora of apps that allow clients to transfer money, deposit checks, etc., with a click of a button. 

Above all, customers can access the app if they have a secure connection, so the login details are safe. 

Function of Financial Innovations

Financial institutions, instruments, and markets tend to perform a plethora of functions. You can say innovations are only useful if they improve the way these functions are. 

At times, parts may seem to be working out, but they are only temporary. All they do is leave some socially pernicious collateral effects.

Here are some of the major Functions of Financial Innovations –

Payments

One of the most critical fucntion of finance is to offer a means of payment and to store wealth.

As humans, we know money as coins, livestock, and food grains, but now money has a different meaning, which is in the paper. 

Thanks to stunning technological developments, money is mainly transferred electronically that is through automated clearing houses. 

Savings & Earnings

Secondly, the finance function also includes generating money for earning interest and dividends on the investment. The basic plan of financial institutions is to promote saving. 

Saving is socially essential because it funds capital investments to generate more income in the future. Another economic function is to channel savings to assets that are productive. 

Allocate Risks

Another function of finance is to allocate risks to those who don’t want to take risks. Sometimes, people confuse this with finance reduces overall risk. 

You must know that the main agenda of financial innovation is to hedge against risks.

In simple terms, you can say economic design is an act of creating some new instruments and then popularizing the same. 

Besides financial devices and payment systems, we can see financial innovation in payment mechanisms in the economy. 

Creating Financial Services

Some of the essential services that economic systems offer are evaluating, screen, allocating, monitoring, and facilitating transactions. 

With the help of these services, the capital flows to the place of utmost need. It then promotes sustainable growth and development. 

Financial innovation also includes the creation of new securities, markets, and institutions that help in improving the financial services sector.

Accelerating Growth of Financial Industry

Above all, the main aim is to accelerate the growth of the financial industry. 

Some of the advances in financial innovation include innovations in technology, credit and equity generation, and risk transfer. 

Over time, a plethora of designs is in rolling, like the ATMS, mutual funds, debit cards, venture capital funds, etc.

Benefits of Financial Innovation

Post financial innovation experts say there is a lot of well being in the economic layers. It has helped businesses to achieve their goals on a broader note. 

Besides channeling savings into investments, financial innovation also provides exceptional credit availability. It helps in refinancing obligations and also allows for better risk allocation. 

The main agenda of financial innovation matches the supply of risk tools to the demand of investors who have some risk-taking appetite. 

Design mostly takes the main stage when information technology requirements lead to new technological projects. 

The best part about financial innovations is that it also helps with fluctuations in the business cycle.

Even when you don’t have income tools like credit cards and loans, it keep your consumption smooth. The success of innovation mainly depends upon how good the product is to use.

Drawbacks of Financial Innovation

After the world financial crisis of 2007 to 2009, almost all of us know that financial innovations tend to bring in some massive costs. At times, the cost tends to outweigh the benefits. 

Nearly all the households ended up losing their homes when the fall in prices made it next to impossible to refinance the mortgage. 

The majority of the intermediaries can’t measure the risk of new financial products.  Uncertainty comes with financial innovation, then seizes the market for liquidity, which is a drawback.

Recent Financial Innovations

Here are some of the major Financial Innovations –

Paypal

One of the most extensive financial innovation examples of the world is PayPal. The market value of the company is $61.6 billion and is ever-growing.

Additionally, the founders of the biggest payment processor in the world are the main reason for success. The company is an independent firm, which indeed is a fantastic achievement.

Before becoming the payment giant, the company had six iterations. The company offers some discounts to its loyal clients.

It has a market reputation of being too safe above all, the information is encrypted to the point. 

Funding Circle

The company mainly links organizations that aim to lend money to organizations that are in need of it. Alex Tonelli and Sam Hodges are the founders of the company.

Well, when it comes to success, then we can say that there are contradictory reviews.

Is Financial Innovation good?

Yes, we can surely use financial innovation for something good because it overall benefits society. 

For example, the Bandhan bank is promoting a revolution in banking for people in East India. There are a plethora of cases where we can see that innovation tends to be quite useful.

Does Financial Innovation comes with Threats

Thanks to the advent of high-speed trading and technology domination, there is quite possible that we are moving towards a dangerous situation. 

It is mainly because there is a mix of complex financial products and technology.

No doubt, today everything computers do, but there are chances that some things even experts fail to understand. 

We don’t say that financial innovation is terrible; all we say is that you need to have prior understanding.

Financial Innovation – Conclusion

No doubt, we can say financial innovation has led to efficiencies in the market, and that is something to appreciate.  

Under modernization, economical design has a crucial role to play. It promotes the well-being of the economy.

But you also need to know that potential problems are also likely to enhance with technological advancements. 

Above all, financial innovation is all about creating new financial products or services. The changes can be anything, including risk management, risk transfer, updates in technology, etc. 

Some of the recent financial innovations include mobile banking and crowdfunding. Above all, we can say financial designs are a must for a company’s growth and development. 

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