It is widely viewed that financial innovation, conducting in various forms ofproduct, process, and institution, has a positive effect on the growth of the realeconomy by improving the efficiency of the financial industry. On the otherhand, there are mixed evidences of its effect on financial stability in the senseof a double-edged sword. Since the channels and impacts of financial innovationare greatly influenced by the development stage of a country’s own financialsystem and economic situation, it should be comprehensively examined throughempirical analysis, rather than by theoretical models. In this respect, this paperdiscusses on financial innovation in terms of concepts, drivers, and effects, andderives some policy implications from empirical analysis, using proxy indicatorsfor financial innovation in OECD countries, Our preliminary results show thatfinancial innovation has a positive effect on the growth and profitability of thebanking industry, but has a negative (statistically insignificant) effect onstability. In contrast with such a finding for OECD countries, Korea’s financialinnovation activities can be characterized by high growth performance with lowprofitability and weak stability. Judging from low scores in institutional andregulatory factors of the Global Innovation Index and the Economic FreedomIndex, it is expected that there will be further room for improvement in financialinnovation activities to enhance regulatory efficiency. This suggests thatregulation innovation, rather than market and product innovation, can contributemore to the growth and stability of Korea’s financial sector.