Financial innovation is a key driver of economic development. Yet how technological progress itself shapes financial innovation remains underexplored. This paper  uses U.S. patent data from 2005 to 2019 and employs interrupted time series (ITS) analysis to provide large-scale evidence on the impact of major technological innovation waves on financial innovation.

The authors propose two competing channels. The "knowledge diffusion" channel suggests that new technologies help firms build on existing knowledge to pursue financial innovation. The "substitution" channel posits that technological breakthroughs create more profitable opportunities in non-financial domains, prompting resource-constrained firms to crowd out financial innovation by reallocating their efforts elsewhere.

Using time-series segmentation, the study objectively identifies three major waves of non-financial technological innovation beginning in 2007, 2014, and 2016. The results show that, following the first two waves, financial patent applications declined significantly as a share of total patents, and firms substantially reduced their hiring of financial inventors — consistent with a strong substitution effect. Cross-sectional analyses reveal that this effect is more pronounced among less profitable firms, financially unconstrained firms, and firms located near top research universities, highlighting the roles of internal resources and access to inventor human capital.

However, the substitution effect weakened markedly after the 2016 wave. The paper attributes this to a fundamental shift in the nature of financial innovation: financial patents have become broader in technological scope and higher in value, reflecting the deepening integration of finance with emerging technologies such as digital computing and FinTech. This convergence has made financial innovation more attractive, thereby mitigating the crowding-out effect.

The study contributes to the literature by providing the first systematic evidence on how technological innovation reshapes financial innovation, identifying inventor reallocation as a key mechanism, and documenting the evolving nature of financial innovation driven by the growing convergence of finance and technology.

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