A financial service is the process of accessing to and purchasing the financial product, for example a loan or a deposit. The financial system is large and comprises a wide amalgam of financial products ranging from real estate transactions to insurance.
The differences within the system are latent and unclear, for example, a real estate agent provides a service helping consumers to locate a loan that suits their circumstances, but these clients can also locate that service through other players such as a commercial bank.
The commercial bank will borrow the deposits from savers to channel them to those who want to increase their spending items; in exchange, these spending units will pay the institution for the service provided and the institution will pay to the saver for trusting it. On the other hand, investment banking aims to help companies to raise funds. Finally, insurance companies get premiums from customers to protect themselves against a risk, such as a road accident.
The role of the financial system is that of intermediation; it channels the money from savers to borrowers, and is responsible for being a point of union to put those people who want to reduce their risk in contact with others who are willing to take it. An example is that of people who save for their retirement who may be favoured by intermediation: The higher the profitability they receive from their savings, the lower the amount they must save to achieve their savings planning, taking into account the “ghost” of inflation.
To secure the desired profitability, it is important to bear in mind that one must lend money to someone who will pay to use it an interest rate. To find those people, spending units, who will pay to use the accumulated savings, it is necessary to find an intermediary who will take care of this function.
The commercial bank or deposit-taking institution that attracts savings and pays an interest rate for them uses it to transfer these savings to other agents in the form of a loan so that they can undertake their spending plans. It also offers a wide range of services in its day-to-day activities. For the saver who deposits the money, the service provided by the deposit-taking institution translates into the receipt of an interest rate and a series of services such as the disposal of funds. For the borrower, it is interpreted as the ability to undertake expenses such as buying a home and paying for it within a specified period. The profitability of the intermediation is calculated as the difference in the interest rate received by borrowers and the payment to savers.
Another method of intermediation is the financial product associated with risk, that is, the insurance. A person will be able to save for a probable circumstance such as retirement, but there are other circumstances such as accidents that have a low probability of occurrence. Insurance is created to cover this low probability, paying for the occurrence of the accident after taking out an insurance policy. The insurance company, the intermediary, pools the premiums of consumers and takes the risk of settling claims.
Thus, a financial service provider makes it easy to channel cash from savers to borrowers and to redistribute risk. In certain cases, intermediation includes money and risk, since, for example, banks take the risk that the borrower will not repay the money, a risk that the saver does not bear.
Savers could carry out a wide range of financial services on their own, but the time taken and the risk they would bear is much greater. Without intermediaries, savers could find it difficult to move their money to people who need it, and without financial services, savers would have to save large amounts and consume fewer goods and services.
Financial services that appear simple at first sight can be very complex, and there is often a significant period between purchase and delivery of the service. The foundation of the service market lies on trust; consumers will trust the advice and information they receive, and the soundness of the providers.
Governments oversee the provision of financial services because of their importance to the economy, as well as for the need to promote security between providers and customers. For this supervision, the bodies in charge demand compliance with the regulations, grant the necessary licenses so that these providers can act and ensure compliance with consumer protection laws.
However, the active expansion of the financial system, with special mention of new financial instruments, may affect the ability of regulators and supervisors to monitor and control risk. Regulations can fail due to irregularities that may arise because of the width of the system, which can lead to cracks in the system.
Instead of having the money immobilized, as it can be “under the mattress”, financial services help the money move towards productive investments such as delivering savings to intermediaries so that they can invest them in future technological innovations or give a person the chance to buy the car of their dreams.
Among the main financial services offered by service providers, we can find:
- Insurance companies and the like:
- Insurance
- Reinsurers.
- Intermediaries (agencies and brokers). They help to bring demand and supply in contact.
- Banks and other providers.
- To accept deposits and grant loans.
- To manage payment systems.
- To issue securities.
- To manage assets.
