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

The current scenario of Indian
economy cannot be extant until it is supported by an efficient financial
system. The financial system can be defined as a cluster of markets,
institutions, instruments and regulations through which the financial
securities are traded, interest rates are determined and financial services are
produced and delivered around the world. The financial system is considered as
the most innovative creation of the modern society.

 

The
term innovation can be defined as the emergence of new ideas that brings a
change in the system. These ideas can be in the form of new concepts, solutions
to problems and instruments that can be implemented in order to change and
improve the conditions or situations of a business entity. A business entity or
an organization cannot have a sustainable growth without innovation management
followed by trust, reputation, knowledge and experience.

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Financial innovation is the act of
creating new financial instruments and then wide spreading with new financial
technologies into the markets. Financial innovations are classified as product
or process variants. Variants of product include new derivations, new
securities and new forms of pooled ventures or investments but process variants
include distribution of securities, transaction processing etc.

 

Financial
innovations are broadly classified into three categories. These are based on
whether they (a) facilitate the transfer of value through time; (b) allow the
ability to contract on future values; and (c) permit the negotiability of
claims. Merton’s and Crane et al identifies some functions that are performed
by financial innovations. These can be briefed as mutual funds, saving
accounts, cashless banking, contracting by venture capital firms, risk
management etc.

 

Financial
system is the integrated part of our global economic system. It analyses and
determines the cost and flow of funds that are moving in the system for daily
transactions. It acts as a convenient source of movement of funds between
various economic entities like households, small business enterprises,
governments and other financial institutions.

 

Many
financial innovations have given origin to financial technologies such as
automated teller machines and risk management products, National electronic
funds transfer, mobile banking, etc. The main aim of this paper is to analyze
the concept of financial innovations along with financial technologies. The
paper will examine the current scenario of Indian financial system and recent
innovations in financial sector. The paper is also an attempt to show the scope
of financial innovations and technologies in India by 2025.

 

Financial
innovations act as a contrivance to finance technological projects when
traditional sources of finance are not available due to high risks of
investments. On the other hand the economy is progressing technologically which
results in complexity of business processes and new types of risk which forces
the financial system to adopt the changes.

 

 

 

 REVIEW OF
LITERATURE

 

 

Schumpeter
(1942) states that large firms prefer to go for innovation due to two main
reasons. First, Research & development projects usually involve huge
expenses that can only be recovered with exhaustive sales. They enjoy scale and
scope economies in the process of innovation and have relatively better access
to external monetary resources. Comparing the two, Scherer and Ross (1990)
suggested that smaller firms may be more comfortable to become rapid innovators
if Research & Development in larger firms is undermined by loss of
managerial 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 research
programs and introduce new products that may result in higher profits over the
longer term. Another factor that is differentiating new and existing firms is
Cannibalization. Unlike new firms, incumbents must consider potential lost
revenues from sales of an existing product if it is a near-substitute for the
innovation. An existing firm might also suffer if the cost of producing the
current product is adversely affected by the introduction of a new one, possibly
causing scope diseconomies.

 

Boot and Thakor (1997) use a theoretical model to
illustrate that the probability of innovation in the financial sector rises
with specialization (boutique firms) and competition. Bhattacharyya and Nanda
(2000) show that higher market share and more developed client relationships
increase the incentive of investment banks to innovate.

 

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

 

New
intellectual technologies.  i.e.,
derivative pricing models, are credited with stimulating the growth and
popularization of a variety of new contracts. Many new forms of derivatives
were made possible because business people could have some confidence in the
methods of pricing and hedging the risks of these new contracts. Different
forms of innovations such as new risk management systems and measures (such as
Value-at-Risk based measures), on-line retirement planning services (like
Financial Engines), and new valuation techniques (like real options) clearly
were facilitated by both intellectual and information technology innovations.

 

 

 

FINANCIAL TECHNOLOGIES &
INNOVATIONS

 

 

In the late 90s, the emergence of New Industrial
Policy opened door for many financial innovations and technologies. These
innovations have proved their significance over time and are an important
aspect of today’s financial environment. Some of the innovations that have
changes the way we do business are discussed below:

 

Venture
Capital

Venture
Capital is the fund or initial capital provided to businesses at start-up stage
for new ideas to small firms with good growth potential. Venture Capital is
considered to be a significant source of funding for start-ups that are not
able to get sufficient finance from trusted sources. Since the risk involved in
funding venture capital is high, the returns from the investment in start-ups
can also be rewarding. One of the most important factors influencing the
returns to the venture capitalists is the growth prospect of the company.
Besides getting good returns, venture capitalists also obtain the power to
influence the decisions of the companies they have invested their money in.
Further, the venture capitalist who is investing his money may not have any
business experience associated with the industry. Venture capital can come from
a group of wealthy investors, investment banks and other financial
institutions. Venture Capital is increasingly getting popular among small start-up
firms or companies which cannot raise funds by issuing debt.

 

Microfinance

Microfinance
typically refers to a range of financial services including credit, savings,
insurance, money transfers, and other financial products provided by different
service providers, targeted at poor and low-income people. Microfinance is the
provision of financial services to low-income clients, including individuals
and groups, who traditionally lack access to banking and related services due
to low earning and growth potential. Micro finance is an effective in reducing
poverty, empowering women and leads to economic growth and development. Microfinance
plays a very crucial role in empowerment of women. Traditionally, women were
not actively able to participate in the economic activity of households
especially those in underdeveloped countries. But microfinance aims to provide
women with the financial services to start business ventures and actively
participate in the economic activities. Microfinance has given them confidence,
improved their status and increased their involvement in decision-making
process, thereby reducing gender inequality. Micro Finance is emerging as a
powerful instrument for poverty alleviation in the new economy especially for
women.            In India, microfinance
industry is dominated by Self Help Groups (SHGs) that aimed at providing a cost
effective mechanism for providing financial services to the individuals and
groups as they lack access to financial services because of low incomes of
their businesses.

 

National
Electronic Fund Transfer

 

According
to Reserve Bank of India, National Electronic Funds Transfer (NEFT) is a
nation-wide payment system to facilitate one-to-one funds transfer. Under NEFT,
individuals, firms and corporates can electronically transfer funds from any
bank branch to any individual, firm or corporate having an account with any
other bank branch in the country participating in the Scheme. The funds under
NEFT can be transferred by individuals, firms or corporates maintaining
accounts with a bank branch. Even individuals not having a bank account can
deposit cash at the NEFT-enabled branches with instructions to transfer funds
using NEFT. However, such cash remittances will be restricted to a maximum of
Rs.50,000/- per transaction. Such walk-in-customers have to furnish full
details including complete address, telephone number, etc. NEFT, thus, also
help 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 for
Retail remittances.

 

The
advantages offered by NEFT over other modes of funds transfer are: There is no
need of physical cheque or Demand Draft while transferring money. Since the
transfer of the fund is electronic, there is no need to visit bank for
depositing the paper instruments as in the case of Cheque and Demand Draft. The
chances of fraud in case of NEFT are very low as compared to traditional lodes
of money transfer like Cheque and Demand drafts that can be lost or stolen
easily. NEFT is very cost effective and save you the time also. Credit
confirmation of the money transferred can also be received via SMS or email. The
person transferring the money can easily transfer the funds from the comfort of
their homes using internet banking. NEFT makes possible real time transfer of
funds possible in a secure manner.

 

 

Automatic
Teller Machine

 

Automatic
teller machine (ATM), is a computerized telecommunications device that provides
Bank customers to have access to financial transactions without the need of
visiting the bank with the help of ATM Machines and plastic cards. ATMs can be
used by customers to have access to bank accounts in order to make cash
withdrawals or check account balances. ATMs can be found easily in cities,
allowing customers easier access to their accounts. Using a ATM operated by
your bank is generally free of cost, but using ATM operated by a competing bank
may involve a small fee.

 

Advantages
of Automated Teller Machines (ATMs) ATM provides 24 hours service and
convenience to bank’s customers as you can withdraw cash at any time of day and
night. ATM reduces the workload of bank’s staff and provide service to bank’s
customer without any error. ATM is very beneficial for traveller’s as it makes
it possible to carry money in plastic form that is safer and more secure. The travellers
can withdraw cash at ATMs in foreign countries. ATM may give customers new
currency notes and maintain the privacy in banking transactions as the ATM card
is protected by a PIN. ATMs offer the convenience of multiple locations as they
are scattered all over the country. You can withdraw cash at any bank that is
part of the system to which your ATM card is linked without being part of any
long queues.

 

 

 

 

 

Mobile
Banking

 

 

Mobile
banking is a system that allows one
to conduct a number of financial transactions through a mobile device such as a phone. Mobile Banking
in increasingly getting popular with the increasing use of smartphone and it is
becoming very successful with time.

 

Advantage
of Mobile Banking, Mobile Banking
uses the network of service provider and it doesn’t need internet connection
which makes it a convenient & cost effective option in developing countries like India where there are less internet
connection. Mobile Banking is can be used 24*7 and it is convenient mode for
many users and it is more secured and risk free compared to online or internet
Banking.With the help of Mobile Banking you can avail many services like paying
bills, funds, check account balance, review your recent transaction, ATM card
etc.

 

KEY DRIVERS FOR FINANCIAL INNOVATIONS TO BE SUCCESFUL
IN LONG RUN