Rethinking Financial Innovation
Financial innovation has come under significant scrutiny over the past years, and nobody can argue that certain financial innovations went badly wrong in the run up to the recent crisis. Nevertheless, "positive innovation" continues to be needed to address the challenges society will be facing in the future, finds Rethinking Financial Innovation, Reducing Negative Outcomes While Retaining the Benefits, a report by the World Economic Forum, written in collaboration with Oliver Wyman. The report explores the topic of innovation in the financial services industry and its effect on the wider economy.
The four key areas where ‘positive innovation’ can provide opportunity are: financing and growing the private economy; promoting inclusiveness; increasing efficiency, access and the customer experience; and rebalancing risk across sectors of the economy. Nevertheless, innovation, almost by definition, introduces uncertainty which gives rise to unintentional negative outcomes. Given the financial sector's relationship to the rest of the economy, it is vital that the likelihood of negative outcomes with widespread consequences is reduced. Yet, the dynamics of the sector and of innovations themselves make it impossible to reliably predict negative outcomes for individual innovations. However, enhancements to existing governance procedures, by adapting existing risk management mechanisms and other processes, can increase sensitivity to the specific contribution of innovation to uncertainty and risk. The report concludes with recommendations to financial institutions and regulators in order to minimize their exposure to uncertainty and risk.