The accounts, cashless banking, contracting by venture capital firms,

The current scenario of Indianeconomy cannot be extant until it is supported by an efficient financialsystem. The financial system can be defined as a cluster of markets,institutions, instruments and regulations through which the financialsecurities are traded, interest rates are determined and financial services areproduced and delivered around the world. The financial system is considered asthe most innovative creation of the modern society. Theterm innovation can be defined as the emergence of new ideas that brings achange in the system. These ideas can be in the form of new concepts, solutionsto problems and instruments that can be implemented in order to change andimprove the conditions or situations of a business entity. A business entity oran organization cannot have a sustainable growth without innovation managementfollowed by trust, reputation, knowledge and experience. Financial innovation is the act ofcreating new financial instruments and then wide spreading with new financialtechnologies into the markets.

Financial innovations are classified as productor process variants. Variants of product include new derivations, newsecurities and new forms of pooled ventures or investments but process variantsinclude distribution of securities, transaction processing etc. Financialinnovations are broadly classified into three categories. These are based onwhether they (a) facilitate the transfer of value through time; (b) allow theability to contract on future values; and (c) permit the negotiability ofclaims. Merton’s and Crane et al identifies some functions that are performedby financial innovations. These can be briefed as mutual funds, savingaccounts, cashless banking, contracting by venture capital firms, riskmanagement etc. Financialsystem is the integrated part of our global economic system.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

It analyses anddetermines the cost and flow of funds that are moving in the system for dailytransactions. It acts as a convenient source of movement of funds betweenvarious economic entities like households, small business enterprises,governments and other financial institutions. Manyfinancial innovations have given origin to financial technologies such asautomated teller machines and risk management products, National electronicfunds transfer, mobile banking, etc.

The main aim of this paper is to analyzethe concept of financial innovations along with financial technologies. Thepaper will examine the current scenario of Indian financial system and recentinnovations in financial sector. The paper is also an attempt to show the scopeof financial innovations and technologies in India by 2025.

 Financialinnovations act as a contrivance to finance technological projects whentraditional sources of finance are not available due to high risks ofinvestments. On the other hand the economy is progressing technologically whichresults in complexity of business processes and new types of risk which forcesthe financial system to adopt the changes.    REVIEW OFLITERATURE   Schumpeter(1942) states that large firms prefer to go for innovation due to two mainreasons. First, Research & development projects usually involve hugeexpenses that can only be recovered with exhaustive sales. They enjoy scale andscope economies in the process of innovation and have relatively better accessto external monetary resources. Comparing the two, Scherer and Ross (1990)suggested that smaller firms may be more comfortable to become rapid innovatorsif Research & Development in larger firms is undermined by loss ofmanagerial control and/or a bureaucratic approach to innovation. In a theoretical model developed by Aron and Lazear(1990), new (or start-up) firms are more likely to initiate new researchprograms and introduce new products that may result in higher profits over thelonger term.

Another factor that is differentiating new and existing firms isCannibalization. Unlike new firms, incumbents must consider potential lostrevenues from sales of an existing product if it is a near-substitute for theinnovation. An existing firm might also suffer if the cost of producing thecurrent product is adversely affected by the introduction of a new one, possiblycausing scope diseconomies. Boot and Thakor (1997) use a theoretical model toillustrate that the probability of innovation in the financial sector riseswith specialization (boutique firms) and competition. Bhattacharyya and Nanda(2000) show that higher market share and more developed client relationshipsincrease the incentive of investment banks to innovate.

 Technologicalshocks stimulate innovation: Shocks to technology are thought to provide a  supply-side  explanation for the timing of someinnovations. IT and other inventions and innovations in telecommunications (andmore recently the Internet) has facilitated a number of innovations (not allsuccessful), including new methods of underwriting securities (e.g., Open IPO),new methods of assembling portfolios of stocks (folio FN), new markets forsecurities and new means of executing security transactions. White (2000)articulates this technological view of financial innovation. Newintellectual technologies.  i.

e.,derivative pricing models, are credited with stimulating the growth andpopularization of a variety of new contracts. Many new forms of derivativeswere made possible because business people could have some confidence in themethods of pricing and hedging the risks of these new contracts. Differentforms of innovations such as new risk management systems and measures (such asValue-at-Risk based measures), on-line retirement planning services (likeFinancial Engines), and new valuation techniques (like real options) clearlywere facilitated by both intellectual and information technology innovations.   FINANCIAL TECHNOLOGIES the late 90s, the emergence of New IndustrialPolicy opened door for many financial innovations and technologies. Theseinnovations have proved their significance over time and are an importantaspect of today’s financial environment. Some of the innovations that havechanges the way we do business are discussed below: VentureCapitalVentureCapital is the fund or initial capital provided to businesses at start-up stagefor new ideas to small firms with good growth potential. Venture Capital isconsidered to be a significant source of funding for start-ups that are notable to get sufficient finance from trusted sources.

Since the risk involved infunding venture capital is high, the returns from the investment in start-upscan also be rewarding. One of the most important factors influencing thereturns to the venture capitalists is the growth prospect of the company.Besides getting good returns, venture capitalists also obtain the power toinfluence the decisions of the companies they have invested their money in.

Further, the venture capitalist who is investing his money may not have anybusiness experience associated with the industry. Venture capital can come froma group of wealthy investors, investment banks and other financialinstitutions. Venture Capital is increasingly getting popular among small start-upfirms or companies which cannot raise funds by issuing debt. MicrofinanceMicrofinancetypically refers to a range of financial services including credit, savings,insurance, money transfers, and other financial products provided by differentservice providers, targeted at poor and low-income people. Microfinance is theprovision of financial services to low-income clients, including individualsand groups, who traditionally lack access to banking and related services dueto low earning and growth potential. Micro finance is an effective in reducingpoverty, empowering women and leads to economic growth and development.

Microfinanceplays a very crucial role in empowerment of women. Traditionally, women werenot actively able to participate in the economic activity of householdsespecially those in underdeveloped countries. But microfinance aims to providewomen with the financial services to start business ventures and activelyparticipate in the economic activities. Microfinance has given them confidence,improved their status and increased their involvement in decision-makingprocess, thereby reducing gender inequality. Micro Finance is emerging as apowerful instrument for poverty alleviation in the new economy especially forwomen.            In India, microfinanceindustry is dominated by Self Help Groups (SHGs) that aimed at providing a costeffective mechanism for providing financial services to the individuals andgroups as they lack access to financial services because of low incomes oftheir businesses. NationalElectronic Fund Transfer Accordingto Reserve Bank of India, National Electronic Funds Transfer (NEFT) is anation-wide payment system to facilitate one-to-one funds transfer.

Under NEFT,individuals, firms and corporates can electronically transfer funds from anybank branch to any individual, firm or corporate having an account with anyother bank branch in the country participating in the Scheme. The funds underNEFT can be transferred by individuals, firms or corporates maintainingaccounts with a bank branch. Even individuals not having a bank account candeposit cash at the NEFT-enabled branches with instructions to transfer fundsusing NEFT.

However, such cash remittances will be restricted to a maximum ofRs.50,000/- per transaction. Such walk-in-customers have to furnish fulldetails including complete address, telephone number, etc. NEFT, thus, alsohelp in transfer of funds even without having a bank account. This is a simple,secure, safe, fastest and cost effective way to transfer funds especially forRetail remittances.

 Theadvantages offered by NEFT over other modes of funds transfer are: There is noneed of physical cheque or Demand Draft while transferring money. Since thetransfer of the fund is electronic, there is no need to visit bank fordepositing the paper instruments as in the case of Cheque and Demand Draft. Thechances of fraud in case of NEFT are very low as compared to traditional lodesof money transfer like Cheque and Demand drafts that can be lost or stoleneasily.

NEFT is very cost effective and save you the time also. Creditconfirmation of the money transferred can also be received via SMS or email. Theperson transferring the money can easily transfer the funds from the comfort oftheir homes using internet banking. NEFT makes possible real time transfer offunds possible in a secure manner.  AutomaticTeller Machine Automaticteller machine (ATM), is a computerized telecommunications device that providesBank customers to have access to financial transactions without the need ofvisiting the bank with the help of ATM Machines and plastic cards. ATMs can beused by customers to have access to bank accounts in order to make cashwithdrawals or check account balances. ATMs can be found easily in cities,allowing customers easier access to their accounts.

Using a ATM operated byyour bank is generally free of cost, but using ATM operated by a competing bankmay involve a small fee. Advantagesof Automated Teller Machines (ATMs) ATM provides 24 hours service andconvenience to bank’s customers as you can withdraw cash at any time of day andnight. ATM reduces the workload of bank’s staff and provide service to bank’scustomer without any error. ATM is very beneficial for traveller’s as it makesit possible to carry money in plastic form that is safer and more secure. The travellerscan withdraw cash at ATMs in foreign countries. ATM may give customers newcurrency notes and maintain the privacy in banking transactions as the ATM cardis protected by a PIN. ATMs offer the convenience of multiple locations as theyare scattered all over the country. You can withdraw cash at any bank that ispart of the system to which your ATM card is linked without being part of anylong queues.

     MobileBanking  Mobilebanking is a system that allows oneto conduct a number of financial transactions through a mobile device such as a phone. Mobile Bankingin increasingly getting popular with the increasing use of smartphone and it isbecoming very successful with time. Advantageof Mobile Banking, Mobile Bankinguses the network of service provider and it doesn’t need internet connectionwhich makes it a convenient & cost effective option in developing countries like India where there are less internetconnection. Mobile Banking is can be used 24*7 and it is convenient mode formany users and it is more secured and risk free compared to online or internetBanking.

With the help of Mobile Banking you can avail many services like payingbills, funds, check account balance, review your recent transaction, ATM cardetc. KEY DRIVERS FOR FINANCIAL INNOVATIONS TO BE SUCCESFULIN LONG RUN