News Column

Banking innovation- a blessing or a curse

June 15, 2014

Malik Ahmad Mehmood Khokhar

“Innovate or die” a phrase popularized in the Silicon Valley has since the 19th century become a mantra for the business community. The phrase has driven innovation across industries. With it innovation has brought countless benefits to the contemporary business world. Banking is one such sector where innovation, put in simple terms, has made transactions easier, faster and much safer.

It was the banking innovation that introduced the ATM (Auto Teller Machine) to the world. Credit/Debit cards, cheque books, bank locker services and banker cheque are some innovations that have made carrying money easier and safer. Even smart phones and their technological capabilities are now being used to make banking even faster, and hassle free for consumers.

These innovations have been instilled into our lives in such a way that, as Raghuram Rajan, a former chief economist at the I.M.F. and a finance professor at the University of Chicago, says, “There’s a lot of stuff that does a lot of good that we take for granted, because it’s just become part of our everyday financial lives.”

However, what we fail to realize is that innovation is not all good, in fact the more innovation is incorporated into the banking sector the more consumers are reluctant to avail them. Too much innovation brings with it too much uncertainty about the viability of using a certain banking innovation. Economists, the likes of Nicola Gennaioli, Andrei Shleifer, and Robert Vishny argue that innovation is what leads to instability.

Investors get interested in a new product of the banking sector, precisely because it is new and has good expected returns, they pour money into the new product blindly without think it could back fire. Only when it is too late and the product starts to fail that investors and consumers start to panic.

On such example of innovation failure can be taken from Pakistan’s history. When credit cards were introduced into the market, the idea of being able to purchase goods without the risk of carrying actual money and being able to exceed credit limits attracted countless potential buyers to this new product of the banking sector.

It was only later that people realized the hidden costs of using credit cards, in their inability to repay the exceeded credit limit back to the banks in full. When this banking innovation back fired it not only made end users of the credit card defaulters but also caused excessive losses to the banking system in bad debts.

The real question here is how does one keep the good aspects of financial/banking innovation and avoid the bad ones. The answer in my point of view goes both ways, at the one end it is for the banking sector to realize that innovation is only good as long as its positive aspects are realized, for example, the A.T.M a banking innovation that did not fail. Excess of everything is bad and innovation is no exception to this notion.

On the other end, it is also the responsibility of consumers to carefully calculate the viability of a certain banking innovation and not blindly trusting the sales representatives’ words about the product and its benefits. A simple cost-benefit analysis and a little bit of research on the innovative product could go a long way in helping consumers make the right choices in ensuring their long term financial health.

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Source: Nation (Pakistan)

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