A healthy financial services industry provides people with the funds they need to meet their monetary goals. It allows individuals to save for mortgages and car loans, helps businesses grow by providing them with capital infusions and shields property and lives from destruction or loss through insurance policies. The financial services industry includes banks, brokerage firms, credit card companies and many other entities. Some of these organizations are not for profit, which further broadens the scope of what is considered part of this industry.
It’s important to distinguish between a financial service and a financial good. A financial service is a temporary task while a financial good is a tangible product that has value beyond its initial provision. A stock, for example, is a financial good that can be sold or used in exchange for money. A mortgage loan, on the other hand, is a financial service that can be repaid or refinanced at any time, and it also offers protection against the loss of a home or other valuable asset.
In the past, the lines between different sectors of the financial services industry were clear. Banks offered checking and savings accounts, mortgages and auto loans, while brokers and mutual fund companies provided investment opportunities. However, since the 1970s, deregulation has blurred these boundaries and allowed financial conglomerates to offer a wide range of services. Banks now offer investment, commercial and consumer banking services, while brokers and fund companies have started to offer insurance products as well.
The largest sector of the financial services industry is investment banks, which provide a variety of advisory and brokerage services to corporations. They also help investors find and purchase securities, such as stocks, bonds and derivatives, and they provide underwriting services, which include issuing and selling new stock and bonds to raise capital. Private equity firms and angel investors are also a major component of this sector, as they provide funding to small businesses or startups in return for ownership stakes or profits.
Another aspect of financial services is credit unions and community development finance institutions, which provide loans to low-income individuals and families. These organizations are often not for profit and are operated by local members for the benefit of their communities. They may also be known as mutual credit associations or friendly societies.
Governments regulate the financial services industry to ensure transparency, encourage competition and protect consumers. They may establish licensing requirements and oversee the operations of individual financial services providers. They may also impose taxes to further specific monetary objectives. For instance, a country might require that companies sell shares and repay debt before issuing further capital to the public. Regardless of the regulatory framework, it is important that these providers act responsibly and ethically. If they don’t, their actions can disrupt global markets and bring the economy to a halt. This is why many of these companies are monitored closely by independent agencies, such as the Financial Industry Regulatory Authority (FINRA) and the Office of the Comptroller of Currency in the United States.