Technological Change, Financial Innovation, and Diffusion in Banking

Abstract

This paper discusses the technological change and financial innovation that has been experienced by commercial banking over the past 25 years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations -- delineated as new products or services, new production processes, or new organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed.

Keywords: Technological change, financial innovation, banking

JEL Classification: G21, O31, O33