What is the theory of financial innovation?
According to the theory, the demand for a financial innovation arises when the costs of the portfolio management begin to exceed the gains on those assets. The disappearing benefits trigger a search for alternative solutions in the capital market in order to downsize those costs or increase the income.
Financial innovation refers to the process of creating new financial or investment products, services, or processes. These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations.
In 1975, William Silber proposed a general theory of financial innovation that is based mainly on the hypothesis that new financial instruments or practices are developed to lessen the financial constraints imposed on banks (Silber, 1975).
Is first defined in 1988, a general theory of innovation according to which systems do not develop randomly. All systems and their evolutionary cycle, regardless of the nature of the system, evolve and govern the laws of nature, independent of human will.
Lender–savers and borrower–spenders are at the two ends of the financial system. Options for lender–savers (those with surplus funds) concern asset allocation; options for borrower–spenders (those in need of funds) involve how to obtain surplus funds from lender–savers.
The shadow banking system has spawned an array of financial innovations including mortgage-backed securities products and collateralized debt obligations (CDOs). There are 3 categories of innovation: institutional, product, and process.
Financial innovation improves institutions' ability to sustain themselves and reach out to the underprivileged. As a result, the development of financial markets and the IT sector are closely interconnected. Specifically, they share a positive correlation.
The index of financial innovation ability can be measured by the loan balance of financial institutions (FLB). The balance of various deposits and loans of financial institutions refers to the number of deposits and loans of financial institutions at a certain point in time.
The diffusion of innovation theory explains the rate at which consumers will adopt a new product or service. Therefore, the theory helps marketers understand how trends occur, and helps companies in assessing the likelihood of success or failure of their new introduction.
(Allen & Gale, 1994) Numerous research has been carried out, the majority of which have concluded that innovations in the financial sector positively influence economic growth (Bara et al., 2016; Wu et al., 2020). However, few notable cases also point to its adverse effect (Lee et al., 2020).
What are the 4 theories of innovation?
There are as many ways of solving a problem as there are problems in business, but innovation tends to fall into four different categories. These were outlined by business expert Greg Satell in his book, Mapping Innovation as sustaining innovation, breakthrough innovation, disruptive innovation, and basic research.
Schumpeter now described that economic growth and technical progress is achieved by the enlargement of firms and the destruction of competition, not through the “invisible hand” of free competition. His theory was that large companies compete not strictly in price but in achieving successful innovations.
Joseph Alois Schumpeter Theory: According to Joseph A. Schumpeter, the effective function of an entrepreneur is to start innovation in venture. This theory is also called innovation theory or dynamic theory.
- Utility Theory.
- Pricing Kernel and Stochastic Discount Factor.
- Risk Measures.
- Consumption and Portfolio Selection.
- Optimum Demand and Mutual Fund Theorem.
- Mean–Variance Frontier.
- Solving Black–Scholes with Fourier Transform.
- Capital Structure Theory.
There are five main principles of accounting. They include the accrual principle, the historic cost principle, matching principle, conservatism principle, and the principle of substance over form. Following these principles allows for better accounting practices and accurate financial statements.
Innovations in information technology have led to the development and emergence of digital banking, cryptocurrencies, blockchain technology, and various forms of electronic payments, creating new possibilities in the financial landscape. Lastly, regulatory decisions often trigger financial innovations.
Financial innovation refers to the development and application of new financial products, services, technologies, and processes in the financial sector. It can include innovations in payment systems, lending practices, investment vehicles, risk management tools, and more.
Blockchain is one of the most innovative Emerging Technologies in the Financial Services Industry. This term is mostly used in the context of cryptocurrency. Companies can use blockchain technology to protect data, verify and identity, record transactions, sign contracts, and improve traceability.
As an example, due to e-banking, people spend lesser time within the banks. As a result, they will use this time to either earn more money or for leisure activities. On the opposite hand, non-technical innovations have to be scrutinized more. a number of these innovations do benefit society.
Fintech refers to technology-enabled innovation in financial services. This technological sea change is transforming the financial sector and the wider economy, affecting all aspects of our work - from payments to monetary policy to financial regulation.
What is digital financial innovation?
Digital finance is the term used to describe the impact of new technologies on the financial services industry. It includes a variety of products, applications, processes and business models that have transformed the traditional way of providing banking and financial services.
Financial innovation contributes to economic growth by enabling capital mobilization, effective financial intermediation, capital formation, and generally improved effectiveness in financial institutions.
Financial innovation in derivatives and securitization, fuelled by a lax monetary policy, created a bubble in the housing and credit-supply markets which burst when the subprime mortgage crisis hit in 2007.
What Are the Steps In the Diffusion of Innovations? Diffusion happens through a five-step process of decision-making. The five steps are awareness, interest, evaluation, trial, and adoption. Rogers renamed these knowledge, persuasion, decision, implementation, and confirmation in later editions of his book.
1) Understand industries that are sensitive to disruption
The first step to understand the need to innovate disruptively is to understand how sensitive the industry is to disruption.
