In the aftermath of the 2008 financial crash, the financial services industry was hit by a complex crisis, the consequences of which resulted in the emergence of a new wave of financial innovations that transformed the industry and launched a new boom in the field of financial technology. The crisis created opportunities for new companies to step in and respond to the needs of individuals and small businesses, by providing concessional financing and enhancing flexibility in the financial services system. Since then, the world has witnessed a continuous transformation of financial services, with new innovators giving consumers more choices all the time, with easy access to a wide range of products. By 2019, “alternative” lenders, those new companies providing financial services in place of banks, were making more than half of the loans granted to small businesses in the UK.
Faced with an unprecedented global pandemic, as well as the fallout from the Russo-Ukrainian war, we have once again seen the world of fintech rise to the challenge. These crises shed light on the role that technology can play in all areas of life, especially financial services. Financial innovation has helped individuals and businesses across the board, providing solutions that improve financial well-being and business stability, and support the most vulnerable. As a result, the adoption of financial technology has accelerated.
successive developments
According to a study issued by the Future Center for Research and Advanced Studies, the global system has witnessed developments in the past two decades, technological improvements and financial innovation have led to transformations in the global financial system, and banks at the present time are not in any way similar to banks in the past. The study prepared by researcher d. Medhat Nafeh, that the advantages brought by technological innovation, enable large banks to be more flexible than small banks in generating and managing various financial products, because small banks lack the scale and investment required to meet the challenges of financial innovation, foremost among which is the increase in asymmetric information affecting the assessment of Assets, debts and collateral are down, and transaction costs rise.
The study noted that electronic payments increase the speed and efficiency of the system, while reducing the need to hold deposits for longer periods. This example alone increases pressures for radical changes in banks and financial intermediaries in general, and from a financial point of view, it can be said that the speed in the performance of operations, in turn, leads to lower costs of services, and lower expenses that have an important impact on the financial obligations of institutions, especially banks .
In the past, most payments were made using paper pay, which provided a secure source of financing for commercial banks, as they held these funds for longer periods in checking accounts. Recently, the settlement of expenses through electronic payments has increased significantly, and the technology of electronic transactions, which appeared mainly with ATMs, began to develop and expand rapidly. More recently, the advent of internet and phone banking, or even a combination of the two, has led to increased investment in this type of technology and thus improved efficiency of electronic payments.
The study pointed out that the emergence of financial derivatives markets arose mainly as a result of the new technology. She said that the new technological scenario required speed, diversification and expansion in the markets, which led to the need for risk management and the emergence of financial derivatives.
Facing global crises
The study indicated that the world is currently facing three crises: the consequences of the Corona pandemic, the Russian-Ukrainian war, and climate change, and digital financial solutions and innovations have played an important role in facing these crises.
Europe, and behind it many countries of the world, is also facing an unprecedented inflationary wave for decades, against the background of the disruption of global supply chains affected by the Corona pandemic and the Ukrainian war, which negatively affects the cost of living, and increases the risks of monetary tightening and financial austerity, which leads to an increase in the cost of living. Debt, undermining the financial resilience of individuals, all of which is causing many governments, families and businesses to suffer. In light of these crises, financial technology affects the money supply and the speed of money circulation, and it provides many alternatives to stimulate the movement of trade and services and support the industry by facilitating the movement of capital at a lower cost and time, according to the study.
The study finds that one of the biggest challenges facing the world is the risks of climate change, and managing this type of risk will depend on reconnecting financial systems to direct capital towards the net zero carbon goal (in which new carbon emissions equal those that are eliminated).
Fintech plays a critical role in helping us reach this goal, by engineering sustainable and green financial products and instruments (such as sukuk, green bonds, and carbon credits) in order to mobilize investments to achieve the Sustainable Development Goals set by the World Bank in 2015, which the Energy Agency estimated The international financial commitments required to be fulfilled during the current decade amount to more than one trillion dollars annually.
Financial innovation in a new world
According to the study, the regulatory provisions, laws and rules did not fully immunize the financial markets from the occurrence of new crises, now or in the future, as these crises are inherent in the capitalist system. Hence, it is necessary to recognize the limited capacity of financial regulation and supervision to monitor the financial system in the face of various types of risks. The dynamics of competitive financial services tend to promote the reduction of oversight and encourage the search for new instruments and products that transcend regulatory boundaries. Realizing these limits does not mean that the state ignores its regulatory function in banking and finance, but that this function must constantly evolve in order to create a suitable barrier against market misbehavior in its constant search for high profits.
Mortgage
On the opportunities and risks of financial innovation globally, Alan Greenspan, the former president of the US Federal Reserve, believed that financial innovation was working to distribute the risks to those who are best able to bear them within the financial system. The subprime mortgage crisis proved otherwise, magnifying famed investor Warren Buffett’s labeling of derivatives as “weapons of financial destruction,” as he put it. The economics literature includes both proponents and opponents of financial innovation. Proponents argue that new tools and technologies lower the costs of financial operations, make markets more efficient, help solve social problems, and contribute to economic growth.
As for the skeptics, they highlight the issue of high costs, as the Canadian economist “Galbraith” emphasized the great role of debt in his saying: “Financial innovation includes, in one way or another, the creation of debt secured by greater or less solvency by real assets. or another outside the acceptable size range, seriously, compared to the available means of payment.
The study concluded that in the presence of an increasing burden of legislation and regulatory decisions, it is likely that financial innovation will provide new formulas to bypass the established rules, just as it did after the emergence of the “Basel 1” rules for regulating global banks in the early nineties of the last century.
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