Financial services encompasses a wide range of services related to finance. It is a subsector of the service industry that includes everything from consumer finance to investments to insurance. The financial services industry is a major economic driver for many countries around the world.
Many people equate the term “financial services” with Wall Street and the stock market, but the financial sector goes much deeper than that. It is made up of an entire array of industries and institutions that provide the necessary tools for the economy to function.
The main components of the financial services industry include the following:
Intermediation: Providers help channel cash from savers to borrowers, and redistribute risk. For example, banks take on the risk that borrowers won’t pay their loans, while allowing depositors to shed that risk by pooling their money together. The same idea is at work in insurance companies, which provide coverage against risks by combining many policy holders’ payments into a pool that can cover any individual losses.
Investment: Providers offer advice and access to investments, and help consumers and businesses manage their wealth. For example, a stock broker can help an investor choose which stocks to buy and sell, while also advising them on how to diversify their portfolio.
Credit: Often considered to be one of the most important financial services, credit helps individuals and business acquire assets. For example, if you need to buy a car or a house, a lender will give you a mortgage loan to purchase the property.