Chris Farrell hits the nail on the head noting how there is a rather reactionary world view that adding “financial” to “innovation” is viewed (erroneously) by many as an oxymoron.
No doubt some products were steps too far but to deny, for instance, derivatives is to preclude fixed mortgage agreements which have so benefitted European house buyers in recent years. Likewise where would travel be without that splendid innovation, the credit card, or the debit card?
Financial innovation works – SIBs and DIBs are a great example of that…and here’s the article, happy reading:
‘Social Finance’: Doing Good By Doing Well
Chris Farrell – Businessweek
Americans celebrate innovation, a term that the dictionary says stems from the Latin verb innovare—to “make new.” We all sense that a wave of innovations—mobile internet, robots, artificial intelligence, driverless cars—will transform the way we live and work. Innovators are admired for their game-changing insights that upend old ways of doing business, and create economic opportunities.
Add the word “financial” to “innovation” and the love fest stops cold. Financial innovation is now considered something of an oxymoron, which is hardly surprising in view of the widespread wealth-and-job destruction of recent years, when credit-based derivatives and similarly engineered securities went catastrophically bad. What financiers call innovations are often nothing more than cleverly designed products for making old-fashioned, leveraged bets.
That said, the commonplace dismissal of financial innovation goes too far. A number of products in today’s financial ecosystem deserve the innovation accolade. Among them are Charles Schwab and discount brokerage, Vanguard and stock equity-index mutual funds, Grameen Bank and microlending in developing nations, PayPal and online payment services, and Kickstarter for funding home-grown ideas. Innovations such as these offer society a real return.
“Social finance” has a good chance of joining this list. In essence, these are fledgling financings that aim to tap global capital markets to help fund nonprofit programs dealing with some of society’s most intractable problems, from reducing chronic homelessness to therapeutic services for incarcerated youth. The big, tantalizing idea is that social finance could become a force for greater efficiency and effectiveness in tackling the roots of poverty.