Companies in the financial services industry are in the business of managing money. Globally, the financial services industry leads the world in terms of earnings and equity market capitalization. Large conglomerates dominate this sector, but it also includes a diverse range of smaller companies.
According to the Finance and Development department of the International Monetary Fund (IMF), a financial service is best described as the process by which a consumer or business acquires a financial good. For example, a payment system provider is providing a financial service when it is able to accept and transfer funds from a payer to a recipient. This includes accounts that are settled through credit and debit cards, checks and electronic funds transfers.
Consider a financial advisor. The advisor manages assets and offers advice on behalf of a client. The advisor does not directly provide investments or any other product. Instead, the advisor facilitates the movement of funds between savers and the issuers of securities and other instruments. This service is a temporary task rather than a tangible asset.
Financial goods, on the other hand, are not tasks; they are things. A mortgage loan may seem like a service, but it's actually a product that lasts beyond the initial provision. Stocks, bonds, loans, commodity assets, real estate and insurance policies are examples of financial goods.
Commercial banking services are the foundation of the financial services group. The operations of a commercial bank include the safekeeping of deposits, issuance of credit and debit cards, and the lending of money. The banking industry is most concerned with direct saving and lending while the financial services sector incorporates investments, insurance, the redistribution of risk, and other financial activities. Banks earn revenue primarily on the difference in the interest rates charged for credit accounts and the rates paid to depositors. Financial services like these primarily earn revenue through fees, commissions, and other methods like the spread on interest rates between loans and deposits.
An investment bank typically only works with deal makers and high-net-worth clients, not the general public. These banks underwrite deals, secure access to capital markets, offer wealth management and tax advice, advise companies on mergers and acquisitions, and facilitate the buying and selling of stocks and bonds. Financial advisors and discount brokerages also occupy this niche.
Individuals may access financial markets like stocks and bonds through investments services. Brokers (either human or self-directed online) facilitate the buying and selling of securities and take a commission for their service. Financial advisors may charge an annual fee based on assets under management and direct several trades in the pursuit of constructing and managing a well-diversified portfolio. Robo-advisors are the latest incarnation of financial advice and portfolio management, with fully-automated algorithmic portfolio allocations and trade executions.
Hedge funds, mutual funds and investment partnerships invest money in the financial markets and collect management fees in the process. These organizations require custody services for trading and servicing their portfolios, as well as legal, compliance and marketing advice. There are also software vendors that cater to the investment fund community by developing software applications for portfolio management, client reporting and other back-office services.
Private equity funds, venture capital providers and angel investors supply investment capital to companies in exchange for ownership stakes or profit participation. Venture capital was especially important to tech firms in the 1990s. Much of what goes on behind the scenes in the making of big deals is attributed to this group.
The vast financial services sector also includes accountants and tax filing services, currency exchange and wire transfer services, and credit card machine services and networks. It also includes debt resolution services and global payment providers such as Visa and Mastercard, as well as exchanges that facilitate stock, derivatives and commodity trades.
