Financial Innovation: Theories, Models, and Future

Financial Innovation: Theories, Models, and Future

Murat Akkaya (T. C. İstanbul Arel University, Turkey)
DOI: 10.4018/978-1-5225-7180-3.ch007
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Financial innovation offers cheaper and available services to financial system and it increases quality of service and products in a long run. The functions of financial innovation are decrease in the cost of payments and increase in the speed of determination of fraud, mechanism for the pooling of funds, management of uncertainty and controlling of risk, manages agency costs, and enhancement of liquidity. Technology contributes to the design and pricing of new instruments and facilitates the identification, measurement, and monitoring of risks in portfolios containing complex instruments. Innovation research has shown that the increase in countries' innovation performance plays a key role in economic and social development, prosperity, and development. Financial innovation is the most important driving force for the transition to the information economy. Globalization and global competition require innovation. Hence, the future is mobile and should be innovative.
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Innovation is one of the most recent words used in science and technology in recent years. Innovation is derived from the Latin “innovare” that means “to do something new and different”. Innovation means “renewing science and technology to provide economic and social benefit”.

The innovation derived from Latin word 'innovatus', means “the introduction of new methods in the social, cultural and administrative environment”. The Webster dictionary defines innovation as a 'new and different result'. In this context, innovation can be defined as new ideas, new applications, new solutions and new technologies for a business (Jenssen & Jorgensen, 2004: 63).

Innovation as a new and contemporary concept, is emphasized in terms of dictionary, as well as innovation itself; refers to an economic and social process depending on differentiation and change. Innovation is first described by economist and policy scientist Joseph Schumpeter as the “driving force of development”. Schumpeter describes innovation as having a new organization to have a new product of a product or an existing product that the customer does not already know, the introduction of a new production method, the opening of a new market, introduction of raw materials or semi-finished products. (Elçi et al., 2008: 25-26).

According to the OECD literature, innovation means 'transforming an idea into a marketable product or service, a new or improved manufacturing or distribution method, or a new method of social service'. Innovation is both a process and a consequence (Oslo Manual, 2005).

In a rapidly changing competitive environment, companies need to constantly change and renew their products, services and production methods to enable businesses to survive and to retain their assets. This replacement and renewal process is defined as “innovation”.

Today, enterprises are at the center of the innovation process. The productivity and competitive structures of the enterprises are determined by their business competencies and their technological expertise. Firms that are the source of economic growth in the market are developing new technologies. Technological innovations lay the groundwork for new technological developments within these enterprises. In this context, reasons forcing firms to innovate in a changing competitive environment are listed below (Dulupçu et al., 2007: 8):

Key Terms in this Chapter

Bitcoin: Bitcoin is a virtual currency created by cryptography.

R&D: It means research and development.

ATM: It means automated teller machine that is an electronic device by which customers can perform their banking operations without going to the branches.

Innovation: Innovation means transforming an idea into a marketable product or service, a new or improved manufacturing or distribution method, or a new method of social service.

Financial Innovation: Financial innovations are developments in the national and international financial markets that improve the operational effectiveness of the financial system by reducing transaction risk and/or transaction costs on primary and secondary markets where financial instruments are involved.

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