What Is Financial Innovation

Financial innovation refers to the process of creating new financial or investment products, services, or processes. These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations

Understanding Financial Innovation

Financial innovation is a general term and can be broken down into specific categories based on updates to various spheres of the financial system. While the following is not an exhaustive list, major financial innovations have come in the raising of equity capital, remittances, and mobile banking.

Investment crowd funding has begun to open up and make the process of raising equity capital more democratic. While investing in early and growth-stage companies used to be reserved for a privileged few (generally institutional investors), new infrastructure has allowed individual retail investors to invest in projects they are passionate about and/or have other connections to for a small sum. Individuals receive shares of the new company commensurate with the amount they have invested.

Two popular platforms for equity crowd funding are Seed Invest and Funders Club. In addition, micro-lending platforms such as Lending Club and Prosper allow for crowd funded debt financing. In this asset class, instead of owning part of the company, individuals become creditors and receive regular interest payments until the loan is eventually paid back in full.