A financial service is like any other good (like a mortgage or an insurance policy) but one that involves money. This sector provides the things that people need to secure and control their finances: investment products, debt management and credit and financing services. A healthy financial services industry helps people buy goods and services that wouldn’t be affordable if they had to save for them over a long period of time, and it gives them the security that their property, health and income are covered against loss or damage.
A healthy financial services industry also keeps the economy moving, allowing those with money to lend it to those who need it for things like homes, cars and education. The industry also allows individuals to save money for down payments and retirement, and it shields businesses from risks through the sale of insurance policies. The financial services industry also includes the critical financial utilities that support these functions, such as stock and commodity exchanges, real-time gross settlement systems and payment networks.
The major areas of the industry are deposit-taking and lending, brokerage, asset management, investment banking, and debt and equity financing. Other important areas include reinsurance, debt resolution and financial market infrastructures (such as payment systems, global currency exchanges and wire transfer services, credit card machines and networks).
Deposit-taking and lending are the core of the finance industry, and the types of deposits and loans offered by banks are vast. In addition to standard consumer loans and mortgages, they offer business loans, commercial lines of credit, venture capital and specialized forms of lending such as private equity and debt restructuring. They also provide safekeeping and custodial services for securities, cash and other assets.
Brokerage services include the sales of investment products such as stocks, mutual funds and bonds to individual customers. They also provide advisory services to help customers make informed decisions about their investments. Asset management firms manage the wealth of high-net worth individuals and institutions, often through complex products such as derivatives. They also advise companies on mergers and acquisitions.
The financial services industry also provides essential intermediation services, such as aggregating savers’ funds and monitoring investments. They may also redistribute risk by pooling cash from many depositors to loan to borrowers, shedding some of their own risk and enabling them to extend more credit to more customers. For example, insurance companies mitigate their own risk by selling reinsurance to other insurers, so they are not financially crippled if a few of their policyholders default on their payments.