Financial Innovations In Modern Financial System – Analytical Basics And Practical Aspects

Last century was full of innovations: new technologies, new products, new services and a plethora of new industries emerged. Yet the call for innovation in business, especially in financial services, has never been more intense. For all its alleged importance as a driver of the financial crisis, we know remarkably little about financial innovation, its importance, and its systematic implications. Therefore, the primary goal of this paper is a theoretical and empirical review of financial innovations and their role and importance in the modern financial system. Innovation in the financial sector is promoted by factors such as technological dynamism and globalization, amongst others. The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. The paper applies a compilation method to review existing theoretical and empirical research on the characteristics of financial innovation. The descriptive method, as a process of simply describing or reading facts, will be linked to explanations of the more important features of the facts described, their laws, and causal relationships. The main finding is that financial innovation is broadly beneficial and is needed to address many of society’s challenges; on the other hand, adverse outcomes associated with financial innovation are too serious to ignore. The importance of theoretical-empirical analysis is reflected in the fact that there are still no historical metrics in the world that would finally determine the impact of financial innovations at the global level, as well as an attempt to shed light on a wide range of challenges that must be addressed for society to continue to benefit from financial innovations in the sense of social and economic development. The analysis also highlights the need to build a more resilient financial system that is less prone to innovation with unintended negative consequences, as well as to encourage dialogue among stakeholders – financial sector, business, regulators, industry, consumers, and non-financial institutions.