Financial Innovation: Is it Good or Bad

The process of developing new financial products, services, or procedures is known as financial innovation. The development of financial instruments, technology, and payment systems have all contributed to financial innovation. The financial services sector has seen a transformation because of digital technology, which has also altered how we save, borrow, invest, and make purchases. Large banks are still making investments in mobile banking, but FinTech firms assist small businesses with online payments, and investment brokers work to democratize finance and investing. Consumers, borrowers, and businesses now have access to more financial providers because of these developments.

Financial innovation types

The word "financial innovation" is vague and lacks a clear definition. It can be divided into the following categories:

1.Financial System Innovation

This entails innovation throughout the entire financial system. New forms of financial practice are established as a result of this innovation. A modification in the framework and structure of the law and supervision may be necessary. For instance, advances in the banking industry include cryptocurrency and blockchain technology.

2.Product Innovation

The introduction of new products into the financial ecosystem is considered a form of product innovation. The creation or adoption of a new financial system with the aid of technology depends on ongoing innovation and the market's and its players' reactions to such innovation. Product advancements include credit and debit cards, UPI and mobile banking, and application-based solutions.

3.Process Innovation

This comprises the creation of an adjustment to modern processes that result in successful and efficient financial operations. This happens frequently in financial innovation. Process innovation encompasses all forms of office automation and the use of technology to deliver services that are both effective and efficient. Process innovation considerations include things like the use of the token system, biometric verification, and online application and authorization, among others.

Recent Financial Innovations

1.PayPal

With 361 million active users as of right now, PayPal is one of the biggest examples of financial innovation in the world. The fact that PayPal's founders filled a market need was a major factor in the company's success in growing to become the largest online payment processor. Particularly during the COVID-19 pandemic was this obvious.

2.Funding Circle

Funding Circle is a platform that links groups with money to lend to companies looking for creditworthy financing. Funding Circle is currently one of many lending platforms that provide this service, which is based on peer-to-peer lending, also referred to as social lending.

Financial innovation has both positive and negative effects

1.The negative

So, what's the issue if the risk is included and credit events like defaults are hedged against, one would easily ask?

The gist of the answer is that innovation is good as long as it is steady in its direction and control. The outcome, or result, of innovation once it takes on a life of its own, is that it frequently results in a situation where neither its inventors nor its users comprehend what exactly they are all about. However, that does not imply that it is intrinsically incorrect. Retail investors now have more control over their funds, portfolios, and assets due to financial innovations from the last few decades.

2.The Positive

Therefore, even if we do not advocate for a halt to financial innovation, we do support it when it serves society and avoids becoming so intricate and complex that only a small number of financial experts can fully comprehend it. Indeed, there are many instances of financial innovation that are pursued to enhance the lives of the poor rather than just as a means of maximizing profits.