The financial services industry refers to various institutions that facilitate the transfer of funds between savers and spenders. Examples are banks, insurance companies, pension funds, and securities companies.
Savers have some money to invest in some assets, such as time deposits, stocks, and bonds. Meanwhile, spenders need cash for various purposes, ranging from buying a house, buying a production machine, or funding an infrastructure project.
Structure of the financial services industry
Companies in the financial services industry offer various financial services such as investment services, facilitating fund transfers, retirement planning, and mortgage brokers.
The two main types of financial institutions are:
- Depository institutions such as commercial banks, saving institutions, and credit unions.
- Non-depository institutions such as pension funds, insurance companies, brokerage firms, investment banks, and stock exchanges.
Financial institutions act as financial intermediaries and play an essential role in the financial services industry. For example, savers don’t have the time or expertise to manage their investment money. The presence of banks allows them to obtain returns by putting their money in time deposits. That way, they can get regular interest payments.
Why the financial services industry is important
The regulator strictly regulates the operation of the financial services industry. This industry has a vital role in the efficient allocation of financial resources.
An effective and efficient financial industry not only increases investor confidence and investment but also:
- Promote economic growth and development
- Increase access to low-cost funds
- Expanding access to finance and credit in the economy
This industry efficiently matches those who need money with those who have savings to invest while minimizing costs for each. That way, money moves to support the most productive business and economy.
For companies, they can access external funding sources from financial services. For example, they borrow money from banks, issue shares, or bonds. When the financial services industry develops well, it allows companies to bear a lower cost of funds. From the money raised, they can use it to buy capital equipment or other necessities.
The strength of the financial services sector is also essential for household prosperity. When the economy grows strong, their income prospects are bright, increasing their confidence and purchasing power. They then turn to the financial services sector to borrow and finance purchases on credit such as houses and cars.
Those are the positive points. There are negative points too.
The failure of the financial services sector can also drag a country towards an economic crisis. When the financial system is damaged, the economy can suffer. Credit availability is shrinking because lenders are more alert to the risk of default. High-interest rates also increase the cost of borrowing money. All of that can lead to a recession and cause a crisis in the economy.