Does Financial Innovation Benefit theSociety?
We live in a world where an invention is revered. We have a tendency to worship firms who have created items that might be called creative. The capitalistic system’s basic idea is that innovation is advantageous. It is an invention that produces greater value, and the capitalistic system stimulates innovation since it permits the innovator to enjoy the greatest rewards.
When the term “financial” is placed in front of the word “innovation,” however, people’s perceptions tend to shift quickly. This is because the general people do not feel that financial innovation benefits them. Perhaps it will assist a few investment bankers in receiving larger bonuses. The lives of ordinary people, on the other hand, have not improved as a result of financial innovation. We’ll take a look at a few examples of financial innovation in this post. Then we’ll try to figure out if this invention has benefited society as a whole.
Examples of Financial Innovation
There are many different types of financial innovation. Personal banking, corporate banking, and capital markets have all seen advancements. The following are some examples:
- Automated Teller Machine (ATM)
- Credit Cards
- Electronic Banking
- SWIFT Messaging System
- Credit Default Swaps
- Collateralized Debt Obligations
- Securitization etc.
If the following list of financial innovations is thoroughly examined, all financial inventions may be split into two categories: technical and non-technical. These technical advancements unquestionably improve the planet. People, for example, spend less time at banks as a result of e-banking. As a consequence, people may either use this time to generate more money or to engage in recreational activities.
Non-technical advances, on the other hand, require additional scrutiny. Some of these advancements are beneficial to society. Many of them, though, aren’t as useful. This article has provided some of the most used measures for classifying financial innovations.
What Is a Good FinancialInnovation?
Excessive risk-taking is not supported by excellent financial innovation. Financial innovation is only beneficial if it allows for risk dispersal. The technology must be created not be utilized for any kind of risk-taking. Take the situation of credit default swaps, for example. If you already have a bond, these products serve as insurance. As a result, if you own firm A bonds and purchase credit default swaps, you are purchasing insurance. Credit default swaps, on the other hand, can be acquired without any stake in the underlying.
In such instances, if firm A defaults on its loan, the investor will gain. This is where insurance becomes a game of chance. As a result, credit default swaps would be a useful financial innovation if the risk of their being misused was greatly decreased.
It’s crucial to remember that credit has an impact on the actual economy. If all credit is directed to one industry, that sector will experience a boom, while the other sectors will experience a crash. It is the financial sector’s responsibility to guarantee that resources are dispersed proportionally throughout the various sectors of the economy. Financial innovation, on the other hand, frequently has the opposite effect. It causes resource shortages in one or a few areas of the economy.
Take, for example, securitization. Banks can sell their previous debts to investors through securitization. They will then get the funds and will be able to begin issuing new loans. Securitization has the disadvantage of allowing excessive capital to be injected into one area of the economy. As a result, the real estate industry has gotten a lot of money while the rest of the economy is suffering. This is why it’s crucial to consider financial advances from this perspective as well. If an ostensibly innovative concept results in an uneven distribution of income in favor of particular sectors, it isn’t actually an innovation.
Finally, it is critical to ensure that so-called financial innovation does not promote a debt-based culture. The widespread use of credit cards might be used as an example. Before the widespread usage of credit cards, the household sector was not too indebted. This so-called innovation, on the other hand, gives credit to young individuals just starting out in their professions. This credit is frequently used carelessly. Of course, the borrower is responsible for proper usage. Credit card issuers, on the other hand, are notorious for generating appealing incentives that encourage illogical and excessive spending. Financial innovation must also be examined from this perspective. It would be inaccurate to call a product innovative if it encourages excessive expenditure.
To summarize, it is critical to understand the distinction between financial and general innovation. It’s not the same as inventing the internet to come up with credit default swaps. This is due to the danger of credit default swaps being misappropriated. As a result, individuals in charge of financial regulation must stay firm. It is sometimes claimed that these regulators suffocate financial innovation. However, as this article has shown, not all financial innovation improves the lives of those who use it.