Financial services
Encyclopedia
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit union
s, bank
s, credit card
companies, insurance
companies, consumer finance
companies, stock broker
ages, investment funds
and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization
of the S&P 500
in the United States
.
partly as a result of the Gramm-Leach-Bliley Act
of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brand
s of the acquired firm, and adds the acquisition
to its holding company simply to diversify its earnings
. Outside the U.S. (e.g., in Japan
), non-financial services companies are permitted within the holding company
. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company...
" is what is commonly referred to as simply a "bank". The term "commercial
" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds
(debt) or stock
(equity).
within the financial industry costs the UK (regulated by the FSA
) an estimated £14bn a year and it is believed a further £25bn is laundered
by British institutions.
), only having a 3 % US market share
. In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks
has a 32% market share.
Credit union
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s, bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s, credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
companies, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies, consumer finance
Consumer finance
Alternative financial services in the United States refers to a particular type of financial service, namely sub-prime lending by non-bank financial institutions. This branch of the financial services industry is more extensive in the United States than in some other countries, because the major...
companies, stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
ages, investment funds
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
of the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
History of financial services
The term "financial services" became more prevalent in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
partly as a result of the Gramm-Leach-Bliley Act
Gramm-Leach-Bliley Act
The Gramm–Leach–Bliley Act , also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress...
of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brand
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
s of the acquired firm, and adds the acquisition
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
to its holding company simply to diversify its earnings
Earnings
Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...
. Outside the U.S. (e.g., in Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
), non-financial services companies are permitted within the holding company
Holding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company...
Banks
A "commercial bankCommercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
" is what is commonly referred to as simply a "bank". The term "commercial
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
" is used to distinguish it from an "investment bank," a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
(debt) or stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
(equity).
Banking services
The primary operations of banks include:- Keeping money safeSafeA safe is a secure lockable box used for securing valuable objects against theft or damage. A safe is usually a hollow cuboid or cylinder, with one face removable or hinged to form a door. The body and door may be cast from metal or formed out of plastic through blow molding...
while also allowing withdrawalWithdrawalWithdrawal can refer to any sort of separation, but is most commonly used to describe the group of symptoms that occurs upon the abrupt discontinuation/separation or a decrease in dosage of the intake of medications, recreational drugs, and alcohol...
s when needed - Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
- Provide personal loans, commercial loansLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, and mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s (typically loans to purchase a home, property or business) - Issuance of credit cards and processing of credit card transactions and billing
- Issuance of debit cards for use as a substitute for checks
- Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
- Provide wire transfers of funds and Electronic fund transfers between banks
- Facilitation of standing orders and direct debitDebitDebit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
s, so payments for bills can be made automatically - Provide overdraftOverdraftAn overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account. - Provide internet banking system to facilitate the customers to view and operate their respective accounts through internet.
- Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
- Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's checkCashier's checkA cashier's check is a check guaranteed by a bank. They are treated as guaranteed funds and are usually cleared the next day. It is the customer's right to request "next-day availability" when depositing a cashier's check in person...
or certified checkCertified checkA certified check or certified cheque is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned...
. - NotaryNotaryA notary is a lawyer or person with legal training who is licensed by the state to perform acts in legal affairs, in particular witnessing signatures on documents...
service for financial and other documents
Other types of bank services
- Private bankingPrivate bankingPrivate banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers...
- Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services. Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks. - Capital market bank - bank that underwrite debt and equityStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured financeStructured financeStructured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid lawsStructured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid laws...
products. - Bank cards - include both credit cardCredit cardA credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s and debit cardDebit cardA debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s. Bank Of America is the largest issuer of bank cards. - Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".
Foreign exchange services
Foreign exchange services are provided by many banks around the world. Foreign exchange services include:- Currency exchangeCurrency exchangeCurrency exchange can refer to:* Bureau de change* Foreign exchange market...
- where clients can purchase and sell foreign currency banknotes. - Foreign Currency Banking - banking transactions are done in foreign currency.
- Wire transferWire transferWire transfer or credit transfer is a method of electronic funds transfer from one person or institution to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office...
- where clients can send funds to international banks abroad.
Investment services
- Asset managementInvestment managementInvestment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
- the term usually given to describe companies which run collective investment funds. Also refers to services provided by others, generally registered with the Securities and Exchange Commission as Registered Investment Advisors. - Hedge fund managementHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. - Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately $100 trillion.
Insurance
- Insurance brokerage - Insurance brokerInsurance brokerAn insurance broker finds sources for contracts of insurance on behalf of their customers. The three largest insurance brokers in the world, by revenue, are Aon, Marsh & McLennan, and Willis Group Holdings.-Purpose of insurance brokers:...
s shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry. - Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokerInsurance brokerAn insurance broker finds sources for contracts of insurance on behalf of their customers. The three largest insurance brokers in the world, by revenue, are Aon, Marsh & McLennan, and Willis Group Holdings.-Purpose of insurance brokers:...
s, and stock brokerStock brokerA stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
s. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
, retirement insurance, health insuranceHealth insuranceHealth insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...
, and property & casualty insurance. - ReinsuranceReinsuranceReinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
- Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.
Other financial services
- Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.
- Private equity - Private equityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets - Venture capitalVenture capitalVenture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business. - Angel investment - An angel investorAngel investorAn angel investor or angel is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity...
or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital. - ConglomerateConglomerate (company)A conglomerate is a combination of two or more corporations engaged in entirely different businesses that fall under one corporate structure , usually involving a parent company and several subsidiaries. Often, a conglomerate is a multi-industry company...
s - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail bankingRetail bankingRetail banking is banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.-Types of...
, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capitalEconomic capital-Finance and Economics:In financial services firms, economic capital can be thought of as the capital level shareholders would choose in absence of capital regulation....
for a conglomerate is usually substantially less than economic capitalEconomic capital-Finance and Economics:In financial services firms, economic capital can be thought of as the capital level shareholders would choose in absence of capital regulation....
is for the sum of its parts. - Debt resolution is a consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to payoff their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards or in some cases merchant accounts. There are many services/companies that can assist with this. These can include debt consolidationDebt consolidationDebt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan....
, debt settlementDebt settlementDebt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full....
and refinancingRefinancingRefinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...
.
UK
FraudFraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
within the financial industry costs the UK (regulated by the FSA
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
) an estimated £14bn a year and it is believed a further £25bn is laundered
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
by British institutions.
Market share
The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market capitalization. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (CitigroupCitigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
), only having a 3 % US market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
. In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks
Starbucks
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 55 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and...
has a 32% market share.
See also
- Accounting scandalsAccounting scandalsAccounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
- Alternative financial servicesAlternative financial servicesAlternative financial services are financial services provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance...
- BFSIBFSIBanking, Financial Services and Insurance is an industry term of art for companies that provide a range of such products/services....
- Cyberspace Law and Policy CentreCyberspace Law and Policy CentreThe Cyberspace Law and Policy Centre is one of the research and social justice centres at the University of New South Wales Faculty of Law in Sydney, Australia....
- European Financial Services RoundtableEuropean Financial Services RoundtableThe European Financial Services Roundtable is a European organization, located in Brussels, Belgium, of financial service companies to provide a voice on policies of the European Union related to financial matters...
- Financial analystFinancial analystA financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis for external or internal clients as a core part of the job.-Job:...
- Financial data vendors
- Financial markets
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- FinancializationFinancializationFinancialization is a term sometimes used in discussions of financial capitalism which developed over several decades leading up to the 2007-2010 financial crisis, and in which financial leverage tended to override capital and financial markets tended to dominate over the traditional industrial...
- Government sponsored enterprise
- Institutional customersInstitutional customersInstitutional customers is a term used in the financial services industry to differentiate retail customers and corporate customers from other financial institutions such as banks, insurance companies and fund management companies....
- International Monetary FundInternational Monetary FundThe International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
- Investment managementInvestment managementInvestment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
- List of banks
- List of investment banks
- Misleading financial analysisMisleading financial analysisFinancial analysis of an organization is misleading when it is used to misrepresent the organization, its situation or its prospects....
- Thomson Financial League Tables