Financial Innovation – Definition, Advantages of Applying, and More
Table of Contents
Financial Innovation Definition
Financial innovation is a growing trend, defined as creating investment vehicles and financing structures that maximize business growth.
Different entities in the world rely on this concept to achieve their goals. For example, through its Financial Innovation Laboratory, the Inter-American Development Bank (IDB) has been promoting this concept as an efficient way to find financing techniques for climate change mitigation and adaptation investments.
To understand how the concept of financial innovation can apply in organizations, Dinero spoke with Augusto Ruiz, an engineer specializing in corporate finance. He has been working on financial innovation for more than five years. For him, this is a concept that is on the rise because it allows optimizing the efforts of companies to obtain working capital.
Ruiz considers that financial innovation promotes new businesses through corporate or intrapreneurship, leveraging assets, capabilities, and relationships with highly sophisticated innovation ecosystems.
Hence, for the expert, financial innovation is an initiative that is becoming increasingly important for companies, moving from a trend to a necessity.
Advantages of Applying Financial Innovation
According to Ruiz, this is how companies empower with financial innovation:
- The more significant differential in the offer of products or services.
- Strength in the entry barriers to competitors.
- Optimization of costs associated with processes such as storage.
- Development of new strategies for local markets.
- New sales channels.
- Novel forms of relationship with communities.
- Unexplored paths to captivate customers, suppliers, and employees.
- Once it determines which of these aspects will promote, it is crucial to take action to specify them.
Where do you start?
The first thing that companies interested in applying financial innovation to their organization should start from an in-depth analysis of their financial statements to identify savings opportunities. Which become opportunities for innovation and investment, says the expert.
In this sense, Augusto Ruiz mentions that many companies complain of having unproductive assets, excess inventory, short-lived products, or obsolete inventories. Still, they have not stopped to think about what they can do with them.
And he emphasizes that the best thing that entrepreneurs can do is create a financial innovation strategy. It allows them to generate new income.
How to Apply Financial Innovation?
The ideal is to restore the value of non-performing assets through corporate exchanges or sell them at a lower cost to other market agents. And transform everything that generates a loss into profit for companies in the same ecosystem.
After generating cash flows and working capital with forgotten assets, new income must devise, even if they are small, exploring investment in new sectors that create an extra boost in the company.
Financial innovation can also fuel by advances related to digital banking. For the expert, “the number of opportunities that are opened by digitizing finances are beneficial.”
An example is integrating the advances of digital banking, which allows having transaction facilities such as payments with handles, contactless cards, charges through links, transactions by WhatsApp messages, chats for immediate response to concerns or objections. Multiple options that help to reach previously unexplored or difficult to access markets.
How to Innovate in Financing Mechanisms?
However, to optimize the company’s value. Ruiz invites entrepreneurs to take advantage of all the mechanisms associated with financing innovation that developed in the country in recent years.
The mechanisms to which entrepreneurs can apply are the subsidies offered by entities. Such as Minciencias, Innpulsa Colombia, Connect Bogotá, or Sena through the Sennova program.
Another option is to consider financing projects through models such as crowdfunding, where the company can obtain money from investors. Or people interested in investing in different options, securing working capital, Ruiz added.
Some examples of this financing model are the a2censo.com platform of the Colombian Stock Exchange or Sesocio.com. A marketplace through which more than the US $ 12 million already circulate that supports projects of companies in various sectors.
Financial innovation is of great help, both to seek financing and to diversify investments, starting from devising options that modify. The usual way companies with surpluses can make their investments, generating cash flow, growing through projects strategically, and increasing profitability of capital or assets.
Conclusion
Financial innovations have served as comprehensive solutions that allow expanding markets. As they arise, to meet the need that appears as a result of changes in the economy, financial systems, or regulations. It involves the introduction of new financial products or modifications in processes and renewal and changes in instruments or institutions. This type of innovation classify in three ways:
• Of products or services. It consists of the creation of new investment, financing, and risk transfer instruments.
• Of processes. Implementation of new risk management techniques, for example.
• From markets. Through changes in the structure and organization of existing markets or the appearance of new organized markets.
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