Digital innovation often starts with a radical idea. It can be a new way to store and process information, a new business model, or a new service. But the idea is just the start: Realizing the benefits of innovation requires hard work, sufficient investment, and user adoption.
Disruptive innovation has been the name of the game in the financial sector over the past decade. New financial technology (fintech) firms have emerged, large digital platforms (big techs) are offering payment services and credit, crypto assets and stablecoins are growing in value, and many institutions are adopting artificial intelligence. Each of these is challenging traditional financial intermediaries, like banks, insurers, and asset managers, and the services that they provide (Ben Naceur and others 2023).
Digital innovations can both complement and substitute for services in the traditional financial system. Many services seem to offer a stark alternative to existing intermediaries and services in the short term. But in the medium term, they often complement existing services, leading to even greater competition and a more diverse financial system. Still, innovations don’t always lead to the best outcomes on their own: Things can, and frequently do, go wrong. Harnessing the benefits of digital innovation often requires forward-thinking public policy.
