Definition of financial innovation

Financial innovation can be defined as the act of creating and then popularising new financial instruments as well as new financial technologies, institutions and markets. It includes institutional, product and process innovation.

Institutional innovations relate to the creation of new types of financial firms (such as specialist credit card firms like MBNA, discount broking firms such as Charles Schwab, internet banks and so on).

Product innovation relates to new products such as derivatives, securitised assets, foreign currency mortgages and so on.

Process innovations relate to new ways of doing financial business including online banking, phone banking and new ways of implementing information technology and so on.

Example

There are a wide range of different types of financial innovations. Recent innovations include: hedge funds, private equity, weather derivatives, retail structured products, exchange traded funds, multi-family offices and Islamic bonds (Sukuk). The shadow banking system has spawned an array of financial innovations including various mortgage-backed securities products and collateralised debt obligations (CDOs). [1]

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