Posts tagged: process of financial innovation

Mapping out the financial innovation Landscape

complexity

Where do most financial innovations occur? What are the processes followed for financial innovation? Who are the stakeholders involved in the financial innovation process? These are some of the questions I have been investigating recently in order to describe and map out the financial innovation landscape. My findings from reviewing the secondary literature seem to show that complexity and reconfiguration are emerging themes in the financial innovation process. It is no shock therefore that financial innovations especially in the 20th and 21st century have mainly been about using already existing instruments, practices and technologies in new ways. The unbundling of risks and characteristics of already existing products to form new combinations has also been another major approach that has contributed thousands of financial innovations to society today.

Financial innovations are not confined to just one quadrant of Francis and Bessant’s 4Ps framework (product, process, position and paradigm) for exploring innovation space.  However it seems most financial innovations are sat at the product and process quadrants. To this end,  organizations seem to use aspects of new product/process development approaches coupled with stage gating techniques when creating financial innovations. With regard to stakeholders, a complex interactive web has been identified to exist. This is because, most stakeholders (individuals, financial institutions, non-financial institutions, technology-related institutions, governments etc.) play multiple roles (e.g. innovators, end-users, intermediaries etc.) at different times and at the same time. In summary it can be said that the financial innovation landscape is poorly characterized as no formal model for financial innovation exists.

What is financial innovation?

mortgage-backed-securities

According to the Oxford Dictionary, the term finance can be used as both a noun and a verb in slightly different ways. While it refers to the monetary resources of a state, organization or person when used as a noun, it can also mean, not only providing funding for a person or an enterprise, but also managing effectively large sums of money when used as a verb.  Despite the slight variations in what the concept of finance means, it is evident that money is a key factor in finance; thus it can be said that the history of finance, spans thousands of years into history, starting from when the concept of money was introduced. To this end, it can be argued that financial innovation has been since the existence of man; and the advance of civilization has played a great role in its development overtime.

Although we mostly tend to think about financial instruments for investments (such as bonds, stocks, options, swaps, futures and other structured financial products) when the term is used, it actually encompasses a lot more to include process management products and services such as point of sale terminals, debit and credit cards, credit scoring, electronic trading and on-line, mobile and telephone banking among others. In general innovation theory, most researchers have highlighted the element of “newness” as key in defining innovation. However, in practical terms, it can be said that nothing is entirely new in itself. Thus experts in financial innovation explain that financial innovation involves not only the creation and popularization of new financial products, processes, markets and institutions, but the unbundling and reassembling of the characteristics and risks of already existing instruments to form different combinations. It is interesting to note that financial innovations are largely incremental but very complex and globalized. Therefore the riskiness of financial innovations do not derive from the creation of radical innovations, but from the development of several incremental improvements to already existing products in a very complex and globalized context.

Surprisingly, research undertaken so far suggest that the financial innovation landscape is poorly characterised and no model of financial innovation exists. This is quite alarming as we cannot attempt to address the negative concerns of financial innovation without understanding the process within which it is developed. Probably, we can take clues from the new products/service development process in financial institutions as a way of developing a model for financial innovation as a whole. To this end, it can be inferred that the financial innovation process has similarities with the traditional stage-gate model, comprising four or five stages (e.g. problem recognition, concept development, market research and assessment, concept testing and implementation). Nevertheless, financial innovation differs slightly as it involves what is known as the “innovation spiral”; a process where one financial innovation begets another. Further, financial innovations normally have a short lead time, with development and commercialization taking place within months and days respectively. These suggest that the financial innovation process is a complex one; and this is probably a justification for why a model of financial innovation, does not seem to exist at the moment.

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