Up to now, I have deliberately remained vague on the objectives of innovation. Why do financial institutions innovate? Innovations are better ways of doing business, but better at what? Broadly speaking, the core function of financial institutions is intermediation.
For example, if a business can obtain capital from the outside, it can invest and grow faster than when it can rely only on retained earnings. Financial institutions are ready to stand between savers who have the money and businesses that need the money. Another important function, especially for banks, is effecting payments.