Financial services are a wide range of economic services that are tied to finance and include insurance, banking, credit, venture capital, and investment management. They are a key enabler of the global economy, providing support to people and businesses through loans and mortgages, investment and savings accounts, and other types of securities and assets. The industry is also involved in providing advice, data analysis and risk management services to help companies and individuals make better decisions.
A strong financial services sector is essential for a healthy economy. It provides the money people need to buy homes, cars and other goods; it helps businesses grow and expand; and it safeguards against risk through insurance policies. Without a vibrant financial services sector, families and businesses struggle to get the funding they need. But a robust financial services sector is not only about putting money in the pockets of consumers; it’s about helping people and businesses plan for the future, grow their economies and improve the lives of millions of people around the world.
The main areas of financial services are deposit-taking; lending of all kinds, including credit, factoring and hire purchase finance; payment systems, such as cheques, bank drafts and electronic funds transfer; and securities trading. Many of these areas are regulated by government agencies to ensure that consumers are protected.
Many banks have diversified by offering different types of products and services in addition to their traditional deposit taking activities. For example, some have become mutual fund companies and brokerage houses or bought insurance companies to offer a broader range of products. Some have even merged with each other to form large financial conglomerates.
Increasingly, these large financial services companies are reshaping their business models to compete with new entrants like fintechs and digital giants that have expanded from other industries. These players bring with them different strengths, weaknesses and opportunities to amplify and catalyze the impact of their roles in the industry.
A healthy financial services sector is vital for a country’s economy because it gives people the confidence to spend, while protecting them against risks like health, property and life insurance. It gives businesses access to financing that allows them to take on more debt and invest in research and development, thus growing their economies. And it encourages savers to put their money into investments that give them a higher return. This can boost consumption and encourage producers to increase production, thus creating jobs and increasing supply. Moreover, it helps backward regions of the country to develop and catch up with the rest of the developed nation. This process is known as economic integration. A weak financial services sector can quickly bring down a nation’s economy, leading to a recession and possibly a depression. It can happen when lenders impose stricter requirements on lending and thus drying up the flow of capital, or when central banks cut interest rates to stimulate spending. Alternatively, it can happen when the banking system collapses and stops lending altogether.