Financial services are the transactions that enable the purchase of financial goods, such as mortgages and insurance policies. They include all the processes and support activities that are necessary to secure the finance needed to buy those products, such as appraisals and inspections of homes to qualify for a mortgage. Financial services also provide the tools and advice needed to manage financial risk. They include everything from aggregating savings to pooling risk (as is the case with life insurance policies) to facilitating investment and asset management.
Financial markets are highly interconnected, requiring a high degree of trust between providers and consumers. This trust is especially important because it enables people to move their money around and invest it in the real economy. Governments therefore regulate the provision of many of the critical financial services that enable people to borrow and save.
While people can handle many of the basic aspects of financial services themselves, it is often more cost-effective for them to pay someone else to do the work. This is particularly true of more complex services, such as investing or mortgage lending. Some of these services are very complex, requiring a level of expertise that many people don’t have the time or resources to develop themselves. The market for financial services is therefore very competitive and requires a high level of professionalism and competence.
Many of the different sectors that make up financial services are regulated by governments and other authorities, both to protect customers and promote fair and efficient competition. For example, banking services are heavily regulated to protect against depositors being cheated, while capital markets are regulated to limit volatility and ensure that investors get a good deal.
The different sectors within the financial services industry provide a wide range of services, but they generally fall into four categories:
Banks – Accept deposits from savers and loan funds to borrowers. They also help customers manage their money and invest their assets, and they provide the infrastructure for payment systems, such as credit and debit cards, electronic funds transfer and real-time gross settlement systems.
Investment banks – Underwrite debt and equity for businesses, governments and other entities seeking to raise funds. They also advise these entities on mergers and acquisitions. Private wealth management – Offer investment and advisory services to high net worth individuals. These firms may be private or family offices, or they might be divisions of larger companies that focus on this niche.
The future of financial services is uncertain, partly because of the emergence of new competitors from other industries, including tech giants like Apple and Amazon. Some experts believe that these rivals could steal business from traditional banks and create new types of digital services, such as a credit score built on your phone or an app that helps you manage your finances. Others argue that these disruptions will only have limited impact and that the overall health of the sector remains strong.