




































AGORA International Journal of Economical Sciences, http://univagora.ro/jour/index.php/aijes 

ISSN 2067-3310, E-ISSN 2067-7669 

Vol. 19, No. 1 (2025), pp. 154-162 

 

154 
 

FUNDAMENTALS OF INNOVATION IN MODERN BANKING 

SERVICES 

 

N. KHUDIYEV, R. MAMMADLI 

 

Nizami Khudiyev¹, Ragib Mammadli² 

¹ ² Azerbaijan State University of Economics (UNEC), Azerbaijan 

¹ https://orcid.org/0000-0002-9164-4009, E-mail: nizami_khudiyev@unec.edu.az  

² https://orcid.org/0009-0009-3721-3548,  

E-mail: mammadli.raqib.mammadali.2023@unec.edu.az  

  

Abstract: In today's constantly evolving technological world, banks need to implement 

modern innovations to remain competitive in banking environment and meet the growing needs 

of their customers. Innovative advancements help banks digitize their banking services, 

operations and management, improve efficiency, productivity and functionality, reduce costs, 

create new banking products and improve existing ones. In addition to their countless benefits, 

innovations also create numerous potential risks and challenges for banks. 

Using a mixed research methodology, this article examines the main types of innovation 

implemented by banks in banking services and management, highlights their main 

characteristics and analyzes their common benefits and challenges. Demographic analysis 

part of the article explores the number of users of digital banking services worldwide and the 

factors influencing their adoption of modern innovations. Based on the findings of this article, 

the conclusion part offers brief recommendations to banks for the effective implementation of 

modern innovations and maximizing their benefits. 

Keywords: banking innovation, innovative banking services, incremental innovation, 

disruptive innovation, substantive innovation 

 

1. INTRODUCTION 

Until the 20th century, the primary activity of banks was accepting deposits and 

granting loans to individuals and legal entities. But, the invention of the computer in the 1960s 

and subsequent technological advances revolutionized all sectors, including finance and 

banking. They enabled banks to expand their operations and create new banking services. 

Modern innovative technologies bring countless benefits to banks, improving their 

efficiency, productivity, and functionality, and making banking services more accessible to 

customers. However, there are several innovation strategies in the banking industry and banks 

should analyze and decide what type of innovation should be implemented to stay ahead of 

competitors. (Campanella & Peruta, 2020). 

The purpose of this article is to explore the main types of innovation in the banking 

sector, analyze the benefits and challenges of innovative banking services, and provide a 

detailed overview of how they are reshaping the banking environment. 

 

https://orcid.org/0000-0002-9164-4009
mailto:nizami_khudiyev@unec.edu.az
https://orcid.org/0009-0009-3721-3548
mailto:mammadli.raqib.mammadali.2023@unec.edu.az


Nizami KHUDIYEV, Ragib MAMMADLI 

 

155 
 

2. Types of Innovation in Modern Banking Services 

Innovation in banking refers to the creation of new services, products, or processes that 

enhance the existing banking experience. It is essential for meeting growing customer needs, 

improving efficiency and remaining competitive in the banking environment. Below are 

examples of the main types of innovation implemented by banks to achieve different goals. 

Incremental Innovation in Banking Services 

Incremental innovation plays an important role in improving banking services and 

products. Instead of developing completely new services and products, incremental innovation 

concentrates on existing ones. It gradually and continuously improves the functionality, 

efficiency and convenience of existing banking services. Incremental innovation has lower 

risks compared to other types of innovation strategies and allows banks to achieve noticeable 

results in a short period of time. (Ravi, 2021). 

One of the main benefits of incremental innovation is the ability to facilitate customer 

access to banking services and products, meets their needs and increases customer satisfaction. 

From an internal banking management perspective, incremental innovation automates a large 

part of banking tasks, helps banks reduce operational costs and improve management 

processes. 

The main purpose of incremental innovation is to enable banks to respond immediately 

to new emerging market trends, meet growing customer needs, maintain their competitiveness 

and gain a technological advantage over their competitors in the banking sector. 

Mobile banking applications perfectly illustrate the incremental innovation approach of 

banks. They regularly update banking apps to improve performance, strengthen security 

methods, add new features and improve the interface to make it more user-friendly. 

(Parameswar & Dhir, 2023). 

While incremental innovation helps banks reduce costs and optimize operational 

efficiency, implementing such minor technological improvements in banking management and 

services also requires financial investments. Moreover, with the constant growth of customer 

needs and expectations and the rapid evolution of technological advancements, incremental 

improvements alone may not always be sufficient. In such cases, banks need to implement 

more advanced innovations in order to achieve long-term profits. 

 

Disruptive Innovation in Banking Services 

Disruptive innovation fundamentally transforms the banking services landscape, brings 

new solutions to traditional services and drastically changes customer behavior. It introduces 

new banking services and financial products or creates cheaper, simpler, and more accessible 

alternatives to existing offerings. The primary objective of disruptive innovation is to offer 

banking services and products to underserved markets and people who are unbanked or live in 

remote regions and may not have access to conventional financial services. Typically, such 

innovation begins with limited market adoption and offers fewer features compared to existing 

services. However, over time, it gradually expands its offering, demonstrates its value, and 

attracts new customers. As customer acceptance of disruptive innovation increases and it gains 

traction in the market, innovation begins to disrupt traditional banking business models in the 

banking sector and challenge the dominance of banking institutions. 



FUNDAMENTALS OF INNOVATION IN MODERN BANKING SERVICES 

 

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Neobanks are a classic example of disruptive innovation. These digital financial 

institutions allow customers to use banking services completely online, without visiting a bank 

branch. Unlike traditional institutions, neobanks operate only in digital format, without specific 

infrastructure or branches. By minimizing overhead expenses, they offer digital banking 

services with lower rates than traditional banking services. (World Bank, 2023). 

Peer-to-peer (P2P) lending platforms are another example of disruptive innovation. 

These platforms offer direct lending and borrowing services to customers and disrupt 

traditional banking models in two ways: By removing intermediaries (banks) between 

individuals, P2P platforms offer more favorable interest rates for both lenders and borrowers. 

Secondly, these platforms facilitate access to credit for people who are not eligible for bank 

loans. 

Despite its countless advantages, disruptive innovation also carries several risks. 

Although it aims to offer more innovative services, customers accustomed to traditional 

banking services may refuse to adopt new and unfamiliar services. Developing such innovative 

services and products also requires considerable financial investment. Project failure can result 

in heavy financial losses for the organization. (Sharma, 2022). Additionally, newly developed 

services may present security and regulatory issues that require special attention from service 

providers. 

 

Substantive Innovation in Banking Services 

Substantive innovation involves making major changes or improvements to existing 

banking services, products, management processes and banking business models to 

significantly improve productivity, efficiency and effectiveness. This type of innovation falls 

somewhere between incremental and disruptive innovation. Substantive innovation does not 

completely disrupt existing business models, but it brings more significant improvements than 

incremental innovation and exerts a stronger impact on the banking sector. (Kittiwat, 2023). 

Substantive innovation often introduces new services, products, technologies or 

systems that improve the functionality and efficiency of banking operations, meets new 

customer expectations and brings additional value to the overall banking experience. It 

sometimes relies on customer feedback to improve banking services and products or find 

solutions to previously unmet needs. 

One of the most shining examples of substantial innovation is the integration of 

Artificial Intelligence (AI) technologies in the banking. These technologies enable banks to 

predict potential risks and identify signs of fraud and suspicious transactions. AI-powered 

programs help banks analyze large volumes of data in a short time and speed up the decision 

making process. (World Bank, 2023). 

Open Banking is another example of substantial innovation, which is reshaping the 

relationship between banks, customers and third-party service providers. Thanks to this 

technological innovation, banks securely share their customers' data (with their consent) with 

third-party service providers and enable them to create new banking services and financial 

products. These platforms then allow customers to access a wider range of financial services 

than those offered by banks. (Arnaboldi, 2021). 

Substantive innovation is characterized by a deeper and broader transformative impact 

on banking services, products, or management. The development of such innovation takes 



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considerable time and requires significant financial resources, but once introduced, it ensures 

long-term benefits and efficiency for banks. After the introduction, it is also necessary to train 

the bank staff, to teach them how to use the new technological advances correctly. To develop 

a substantial innovation, banks typically collaborate with other banks and financial institutions. 

By combining their resources and experience, banks and financial organizations accelerate the 

process of developing new technologies, share associated costs and maximize end results. 

 

Open and Closed Innovations in Banking 

The primary objective of each of the above-mentioned types of innovation is to improve 

banking services and management, as well as increase functionality and efficiency. However, 

there are also two sources of innovation in terms of banks obtaining these innovations: Open 

and closed. 

Open innovation involves banks acquiring a new technology, application, or service 

from external sources, such as technology companies or other financial institutions. Acquiring 

from external sources allows banks to avoid research and development expenses and quickly 

access the latest innovations on the global market. However, innovation developed by third-

party organizations sometimes do not offer banks exactly what they are looking for. 

Additionally, such innovation is more sensitive in terms of security and increases the risks of 

cyberattacks, data theft and financial losses. (Parameswar & Dhir, 2023). 

Technological advancement developed by banks themselves are called Closed 

innovation. This innovation relies heavily on the internal resources of banks, which are 

developed based on the banks' ideas and research. (Balkon, 2022). Closed innovation helps 

banks develop innovation that meet their needs. Furthermore, these types of innovations are 

more secure because they are known and used only by the bank. However, developing closed 

innovation can be time-consuming and more expensive than open innovation. 

 

3. Benefits of Innovation in Banking Services 

From increased accessibility and efficiency to faster transactions and advanced features, 

innovation in banking services offer numerous advantages to both banks and customers. Here's 

a brief overview of the key benefits: 

Accessibility and convenience. Innovative banking services such as mobile banking apps and 

online banking sites are available 24/7, anytime and anywhere, making them accessible and 

convenient for customers. With innovative advancements like live chat and robo-advisors, 

banks offer 24/7 customer support, resolving customer issues and answering their questions. 

Transparency. Innovative banking technologies allow banks and customers to view the details 

of all transactions and financial operations. Customers can check their bank accounts and track 

the history of transactions. Transparency also helps banks identify fraud and suspicious 

activities. (Lin, Liu & Wei, 2023). 

Cost efficiency. Innovation helps banks automate most of the processes, which helps them 

reduce costs by reducing the need for large numbers of bank personnel and physical bank 

branches. Reducing costs allows banks to offer banking services with lower fees. 

Faster credit approval. Innovative advances such as AI and big data allow banks to collect 

relevant customer data, analyze it quickly and speed up the loan decision-making process. 

(Sharma, 2022). 



FUNDAMENTALS OF INNOVATION IN MODERN BANKING SERVICES 

 

158 
 

New services and products. Innovation helps banks analyze market trends, identify unmet 

needs and develop new banking services and other financial products. It also allows banks to 

offer more personalized services to customers. (Harchekar, 2021). 

Improved Financial Inclusion. With the help of innovative banking platforms, anyone with 

internet access can open a bank account, obtain a loan, and send and receive money, regardless 

of their location. By offering banking services to the unbanked people, innovative technologies 

help improve financial inclusion. (Indriasari, 2022). 

 

4. Challenges of Innovation in Banking Services 

Despite the numerous advantages that innovation brings to banking services and the 

banking environment, it also has a number of disadvantages. The following are the main 

challenges of innovative banking services: 

Privacy concerns. Innovative banking services collect and store a significant amount of 

personal and financial data about customers. Although this data is used only to personalize 

financial services, customers are concerned about privacy and the risk of misuse of their 

personal data. (Revathi, 2019). 

Security risks. Digital banking platforms are always under attack from fraudsters and 

cybercriminals. Although banks use advanced security methods to protect themselves and their 

customers, the risk of manipulation and hacking remains. Cybercriminals’ access to digital 

banking systems can lead to financial losses for banks and their customers. 

Technical problems. Innovative banking services depend heavily on technology and failures, 

downtime or bugs in banking system can prevent customers from accessing banking services. 

High implementation costs. Innovations improve the efficiency, functionality and productivity 

of banks. However, developing or acquiring modern innovative achievements is very 

expensive. Due to these high costs, many banks postpone or refuse to implement the latest 

technological innovations. (Valverde, 2019). 

Customer experience issues. Customers accustomed to traditional services may struggle to 

adopt and use innovative banking services. Additionally, online customer support may 

sometimes be unable to resolve more complex issues, which can lead to frustration. 

Digital exclusion. While innovative banking services promote financial inclusion, they also 

drive digital exclusion. People without access to technology and the internet are unfortunately 

excluded from the benefits of modern banking services. (Indriasari, 2022). 

 

5. Methodology 

This article employs a qualitative research approach to study the types of innovation in 

modern banking services, assess their benefits and challenges, and analyze the demographic 

adoption of digital banking services across the globe. 

A literature review was conducted to write this article using relevant academic articles, 

books, and journals. In addition, information is collected from both academic and industry 

sources including reports, regulations, customer surveys and comments from banking 

professionals to analyze the benefits and challenges of innovation. 

The demographic analysis of digital banking services was conducted using statistical 

data from official sources such as the World Bank, International Monetary Fund (IMF), and 

various national banks of the countries. These data were used to study the adoption of digital 



Nizami KHUDIYEV, Ragib MAMMADLI 

 

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banking services across key demographic variables including age, education level, income 

level, etc. However, the lack of detailed data on the adoption of digital banking services in 

developing countries is a major limitation of this study. 

Although this article does not rely on primary data collection, it provides a 

comprehensive overview of the existing knowledge on innovation in modern banking services. 

 

6. Results - Demographic Analysis of Innovative Banking Services 

From a customer perspective, the primary banking innovation is digital banking 

services, which directly influence their behavior. This part of the article analyzes the 

demographic structure of innovative digital banking services, focusing on socioeconomic 

factors. 

 

Figure 1: Number of digital banking users 2019-2024 (in billions) 

 
Source: World Bank and IMF reports. 

 

As shown in Figure 1, the number of users of modern digital banking services continues 

to grow worldwide every year. Especially during the Covid-19 pandemic, lockdowns have 

boosted the use of these services. By 2024, more than 3 billion people use at least one digital 

banking service during the year. 

 

Figure 2: Percentage of adults using digital banking services in developed countries (2024) 

 
Source: World Bank and official websites of banks. 

1.7
2.1

2.4
2.7

2.9 3

2019 2020 2021 2022 2023 2024

96
90

76
68

61

45

DEVELOPED COUNTRIES

South Korea Singapore France  United Kingdom United States Japan



FUNDAMENTALS OF INNOVATION IN MODERN BANKING SERVICES 

 

160 
 

The percentage of the adult population using innovative banking services is generally 

higher in developed countries. (Figure 2). A Higher HDI, strong technological infrastructure, 

higher income and literacy levels are the main factors that positively influence the adoption 

rate of innovative advances by the population. 

 

Figure 3: Percentage of adults using digital banking services in developing countries (2024) 

 
Source: World Bank and official websites of banks. 

 

Figure 3 shows that the adoption rate of innovative banking services among adults in 

developing countries is significantly lower than in developed countries. Factors such as weak 

technological infrastructure, poor internet quality, low incomes and poverty slow down the 

adoption of modern innovations. 

Younger generations are the primary users of innovative banking services globally. 

According to a 2024 survey, 93% of Millennials and 81% of Gen Z use digital banking 

platforms for at least one financial service. While Gen Z customers adapt quickly to every 

innovation, Millennials are the main users of innovative banking services. Older generations 

favor traditional face-to-face banking services and the adoption rate of innovative services is 

relatively low among these customers. 

Income level of customer has a direct impact on the adoption rate of innovative banking 

services. Higher-income individuals tend to use modern banking platforms more frequently 

and require a wide range of financial services, such as investment advice, wealth management 

or cryptocurrencies. (Brown & Nyarondia, 2023). 

Education is another factor influencing customer behavior. More educated customers 

generally have better financial literacy, easily understand and use digital banking services, and 

quickly adopt new innovations. 

 

7. DISCUSSIONS/CONCLUSIONS 

Like other industries, modern innovation is transforming the traditional banking 

concept. Application of innovation in banking services improves their accessibility, makes 

them more convenient for customers, increases transparency and efficiency, and reduces costs 

for both banks and customers. (Lin, Liu & Wei, 2023). However, they also come with a number 

of challenges such as privacy, security and technical problems. These challenges require 

careful attention from banks and financial institutions. 

42

30

19
15

11 5

DEVELOPING COUNTRIES

Brazil Nigeria Pakistan Kenya Bangladesh Yemen



Nizami KHUDIYEV, Ragib MAMMADLI 

 

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The demographic analysis in this article reveals that several socioeconomic factors, 

such as quality of life, country infrastructure, education level and income level of customers 

influence their adoption of digital banking services. (Brown & Nyarondia, 2023). Moreover, 

analysis by customer age shows that older customers are more reluctant to use these services 

and prefer traditional banking methods. 

 But today, the banking industry is unimaginable without innovative advances. Every 

bank must implement innovation in banking services and management to remain competitive 

in the financial sector.  To minimize the risks and problems associated with innovation, banks 

should follow these recommendations: 

 Strengthen security mechanisms to protect data and prevent potential financial losses 

for both the bank and its customers. 

 Regularly check innovative banking systems to identify errors, vulnerabilities, and 

potential risks. 

 Implement 24/7 monitoring systems to prevent cyberattacks and detect suspicious 

transactions. 

 Train bank employees on the proper use of technological devices and innovative 

programs used in the bank. 

 Collaborate with other banks and financial institutions to share experiences in applied 

innovation and jointly find solutions to emerging threats and risks. 

It is obvious that the future of everything is formulated by innovation advancements. 

Banks should always implement latest innovation in order to meet growing needs of customers 

and stay remain competitive in modern financial environment. 

 

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Economics and Finance Issue 6, pp. 21-26. 

3. Brown, H. & Nyarondia, D. (2023). Technological innovation in banking and 

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Banking Sector. Journal of the Knowledge Economy, Special Edition. 

5. Indriasari, E. (2022). Intelligent Digital Banking Technology and Architecture: A 

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