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What are the biggest challenges and potential risks associated with financial innovation? How can leaders mitigate these risks while promoting progress?

Financial Innovation will involve either a new product being introduced, or a new process or method being adopted. So, any innovation involves a change and a departure from what has been followed or used hitherto. It is important to have this background to understand the challenges and risks that emanate when one adopts any innovative product and/or process.

When a new product is introduced or a new process is implemented first and foremost it is important that the same be thoroughly tested for varied scenarios under which the product or process is expected to function. It is important to get the product or the process right the first time right. Failure of financial innovation could have financial ramifications and hence, there is no margin for error. The rigour adopted for testing the proto is an important aspect of innovation and the same should not be compromised in any case. This should be the responsibility of any innovator.

After having launched the innovative product or the process the next important challenge is educating the user on the functioning of the innovative product or process. Many of the problems associated with innovation arise from the fact that organisations or individuals who implement the innovation do so without having a complete understanding of the innovation. Partial understanding of the same can result in complications. Case in point is use of derivative products which caused many organisations to make huge provisions when they incurred financial losses. Similarly, we have also seen investments being made in innovative products with little or no intrinsic value, where the technology is not yet tested or even approved by the regulator.

Another area of challenge as well as risk connected with Financial innovation is absence of or delayed implementation of regulations, which should define the contours within which the innovative product or process will function. In absence of regulations the implementation and use thereof is left to interpretation which can differ from person to person. Further, absence of regulation makes the implementation very risky. Hence, regulators should ensure that any innovation is allowed to be put into effect only after the norms for functioning of the product / process are well defined.

The leaders in order to mitigate the above challenges and risks have to ensure that while Innovation itself emanates from unstructured thinking, the process followed for launching an innovation and use thereof has to be defined in a structured way, including getting regulators on board before the launch.

What are the most significant trends you see shaping the future of financial innovation?

Financial Innovation will continue to evolve at a very rapid pace. Not only will the kind and type of Innovation increase rapidly, but even the speed at which innovation gets introduced will shorten over a period. Innovation is expected to get influenced by:

Technology and Digitalisation will have significant influence on kind and type of innovation.

Formalisation of Economy is another trend that will influence innovation. For any innovation to be sustainable, scalability is critical. Formalisation of economy will help bring scale

Risk Management & Risk Transfer will be another trend that will influence innovation. As organisations plan to mitigate incidence of risk they will work with innovation to address the prevalent risk.

What core principles should guide financial innovation to ensure it benefits society as a whole?

Any innovation should:

Address the unstated need of the customer and help solve an existing problem or improve existing terms of usage.

iBe Scalable. If the innovation is not scalable it does not benefit the society at large and that can serve as a limitation. It should be cross deployable and a larger part of the society should benefit from the same.

Be Simple to understand and implement. A complex innovation can create risks which are not well understood.

Be Regulated to ensure that it is interpreted and deployed in a consistent manner.

How can leaders within the financial sector foster a culture of innovation and embrace these emerging trends?

To foster a culture of innovation any organisation should ensure that ideas are welcomed from one and all. Innovation can happen at any level in an organisation and hence democratisation of the innovation process is a key. Further, to ensure that innovation culture is promoted one has to ensure that failure is not penalised. While innovation may be awarded and recognised, even failure must be celebrated. That will ensure that individuals are not afraid to take risks or innovate. Another key aspect of fostering innovation is through collaboration. When individuals work in collaboration they get a full perspective which helps them understand the cross linkages and advantages as well as pitfalls. Collaboration ensures that innovation is full proof. It also brings in accountability and responsibility.

Can you share an example of a time when you successfully led your team or organisation through a significant change or adaptation in response to market dynamics?

The Company had not accessed equity funding for over 3 decades. However, keeping in mind the need to shift gears by way of investments in manufacturing, R&D and digitalisation it was essential to tap equity markets and reach out to new sets of investors. This would ensure that the Company does not end up over-leveraging and at the same time the new set of investors can help create liquidity and also lead to better price discovery. This involved driving change by way of getting the Board and Investors aligned. The same was successfully done and the QIP issuance of Rs 1000 cr was closed successfully.