Innovative Forms of Financial Institutions & Transactions - Paper #2 (Research Paper Sample)

INNOVATIVE FORMS OF FINANCIAL INSTITUTIONS AND FINANCIAL TRANSACTIONS
Martin Gaitho Mwangi
Sample essay
March 3, 2016
The expression necessity is the mother of invention rings true for both product and service providers. It is from the necessity of survival that innovation forms the core competitive advantage of any business over its competitors. As such each business needs to prioritize on its success by narrowing down its innovativeness to the sector it operates in. Financial institutions deal in financial transactions namely investments, loans and deposits. Hence, the financial sector requires for innovation that affects both the institutions themselves as well as transactions that the institution offers. Institutional innovation encompasses the creation of new types of financial firms while transaction innovation employs the innovation of both processes and products within the sector. This paper addresses the innovative forms of financial institutions and financial transactions as pertains to institutions, processes and products.
Each financial institution has its mandate pegged on the product it offers in the market. By looking at the different types of financial institutions one is able to see how the creation of new types of firms is a result of innovation. By providing insurance, banking, brokerage and real estate as well as asset management, institutional innovation has played a vital role in the creation of new firms. This innovation is a result of both the expansive and complex nature of financial services as well as the changing preferences in the firm’s clientele. A case on point on the newest type of firm as a result of institutional innovation is the setup of internet banks. These include PayPal and Pioneer among others that are coming up. These firms have been created as a means of meeting the old markets but in a new set-up. Other examples of new firms that have come up include specialist credit firms, discount broking firms and specialist borderless money transfer firms.
A look at the history of products offers an insight on the first aspect of innovative forms of financial transactions, product innovation. After the Second World War, a system of fixed exchange rates was created, The Bretton Woods System which had limitations in the inter-border flow of capital. As a means to solve the deficit, a new form of innovation was created by Richard Nixon in 1971. This innovation, created out of the necessity for international trade, introduced floating currencies. Floating currencies employed the supply and demand for specific currencies in comparison to other currencies thus allowing for trade to decrease the aforementioned trade deficits. With this enactment of floating currencies came a new risk where there was need to hedge the exchange risk hence, the creation of the financial futures as a financial institution.
Another outcome of floating currencies led to the abolition of the strict controls that were unnecessary thus allowing for more institutions to conduct business across borders. As financial business became expansive, more innovations such as option pricing, bond trading, securitization, and other derivative trading came into existence. Innovation of financial transactions in product expansion has and is continuing to grow. Current trends show that hedge funds, private equity, weather derivatives and Islamic bonds as products that financial institutions have taken up. It is this innovative form in product portfolio that can be attributed to the success of any financial institution. If, the institutions had held on to their traditional products, most of them would have closed down due to the different needs that have and are occurring amongst the institutional customers.
The final innovative form of financial transactions involves process innovation. This refers to the development of new ways in which the financial institutions can carry out their business. Before the internet era, most institutions operated under a face to face situation. A customer had to present himself or herself to the institution for any kind of transaction to be effected. The internet era forced financial institutions to innovate a new way of doing business, internet banking. Internet banking does not require for one to physically visit an institution. One only needs access to a web enabled device and the log in details for transactions to be effected in real time. A recent process innovation is that of mobile banking. This requires for one to have a phone and the necessar...