V.M.

Prasad

Financial innovation in general, it refers to the creating and marketing of new types of securities Examples of spanning the market
Investors to be more aware of the need to hedge certain

types of risk. The development of interest rate swaps in the early 1980s after interest rates skyrocketed. The development of credit default swaps in the early 2000s.

Examples of mathematical innovation

The market in options exploded after the development of

the BlackScholes model in 1973. Flash trading exists since 2000.

Examples of innovation to avoid taxes and regulation

total return swaps to convert dividends into capital gains,

which are taxed at a lower rate

Financial system/institutional innovations. Process innovations.

Product innovations

The creation of the ATM was a greater financial innovation. Innovation affecting the payments system include credit and debit cards and online payment systems like PayPal.

Financial Innovations improves the functions of the financial economy.

Resource allocation based on risk profile of varying needs Risk-sharing Risk-pooling Hedging Reducing agency costs caused by

Sophisticated hedging and risk management will become an integrated part of the corporate capital budgeting and financial management process. Retail customers (households) will continue to move away from direct, individual financial market participation such as trading in individual stocks or bonds and move to aggregate bundles of securities, such as mutual funds, basket-type and index securities and custom-designed securities designed by intermediaries.

Payment systems act on the supply side of FI by providing products, processes and systems World Bank Global Payments Survey 2010 101 central banks participated and 173 innovative retail payment instruments and methods reported

Innovative payment instruments and methods driver of financial inclusion in 14% of the countries

P2B, P2P and utility bill payments most common types

Small proportion of 10% support government payments

Innovations in retail payments CPSS Report May 2012 Access channels branches/BCs; ATMs; PoS terminals; Internet Access devices PPIs, credit/debit cards, mobile phones, computers

Product innovations Card payments: internet; contactless cards using NFC; dongles on mobiles; Mobile payments through SMS, USSD, or NFC Electronic bill presentment and payment (EBPP)
They meet the 4As requirement for Financial Inclusion: Availability, Affordability, Accessibility and Acceptability

Business models

Bank-led

Non-bank led

Hybrid

Models adopted as per banking penetration and financial ecosystem

India has chosen a co-operative and collaborative framework with banks playing a lead role with non-banks acting as BCs/partners driven by ICT based solutions

To make available structured modern payment and settlement systems, including innovative products, for facilitating greater financial inclusion and promoting a less cash society - the green initiative Banks: expanding the reach of banking Banks free to choose BCs - corporate/Individual BC Inter-operability of BCs permitted Simplified KYC norms Use of Aadhaar Basic bank account with ATM/Debit card facility Role of non-banks as a BC; and as an Authorised payment system entity Issuance of PPIs including mobile wallets
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Providing impetus

To infrastructure Rationalisation of Merchant Discount Rate for debit cards - attract more number of merchant establishments to have acceptance infrastructure WLAs: to expand the reach of ATMs in Tier III to VI centres To non-cash instruments Rationalisation of PPI Guidelines - 3 broad categories of PPIs; focus on electronic issuance All 3 categories of PPIs can be used for domestic money transfer. To remittances Domestic Money Transfers (DMT) guidelines and rationalisation of NEFT customer charges To mobile banking: banks free to fix daily limits based on risk perception

To access centralised payment systems Rationalisation of access criteria for direct membership; and Opening a sub membership route - to expand reach of modern electronic payment systems to all banks and their customers in smaller centres 12

Providing impetus To EBTs and Direct Transfer of Subsidy (DTS): Aadhaar-enabled unified payment infrastructure using Aadhaar as a natural financial address and authentication mechanism for sending payments to accounts of beneficiaries and enabling withdrawal BCs with micro-ATMs will perform transactions on the basis of Aadhaar number and bio-metric authentication Pilots in several states for effecting EBT and DTS payments using Aadhaar e-FMS (e- fund management system) implementation in states Using ECS for electronic benefit transfers such as MG-NREGA payments to the beneficiaries Several state governments are making attempts in this direction Recently, the state government of Odisha has rolled out the eFMS through out the entire state for effecting MG-NREGA payments By enhancing security features (e.g. 2nd factor authentication for card present & card not present transactions)
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An innovation is more than just a great idea. innovation requires attention to other people: what they value and what they will adopt. It must contribute to transformation in a society and be adopted by users. Grounded innovation is an approach that aims to balance the two axes of inquiry: understanding how the world works and invention. Today we are living in a world where we have to consider both technology and users as drivers of innovation. Simply put, grounded innovation is when your technology meets utility.

International Bank Account Number (IBAN)/ Basic Bank Account Number (BBAN) help in interoperability and portability of bank accounts Committee under CGM, DPSS constituted GIRO system Effecting credit transfer from payer to payee from any bank branch or authorised non-bank Scope of implementing a cheque based GIRO to be examined Committee under ED, RBI being formed Aadhaar Use as both address and identity proofs

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