The financial services industry encompasses a wide variety of business lines, from insurance to money management. Financial services companies include credit card issuers, banks, and credit unions; payment processing firms; asset managers; credit-card network providers; and even global exchanges that facilitate stock, bond, derivative, and commodity trades. Whether providing investment advice or lending money, these companies influence every aspect of our economy and society.
A strong financial services industry is vital to a country’s citizens. It creates economic prosperity by encouraging consumers to spend and save. In turn, this boosts businesses of all sizes.
When the financial services sector falters, however, it can quickly bring a nation’s economy down. The global markets are highly interconnected, and any crisis can spread quickly. During a financial downturn, investment capital slows and unemployment rises, which in turn reduces consumer spending. In the worst cases, a country may experience a recession or even a depression.
In addition, the world’s nearly two billion people without access to banking or other financial services are being left behind. These “unbanked” consumers can’t use digital payments to buy basic goods and services. Thankfully, many new initiatives are working to close this gap by offering affordable and convenient services for the unbanked. One example is a sanitation company in Madagascar that was able to cut its costs by 20% when it switched to digital payments, making safe water and sanitation available to more than 3.6 million families for the first time.
Besides traditional banks, the financial services industry includes private equity funds and venture capital providers, who supply investment capital to start-ups in return for ownership stakes or profit participation. Other important subsectors are wealth management, which provides bespoke investment plans for high net worth individuals; and insurance, which offers protection against death or injury (e.g. life, disability income, and health insurance), against property loss or damage (e.g. car, home, and life insurance), or against liability or lawsuits (e.g. personal injury, malpractice, and fidelity insurance). A family office is a type of investment and wealth management firm that caters to a wealthy family or group of individuals with customized service. Finally, advisory services comprise companies that provide advice to investors, such as stock brokers and investment advisers. They also include underwriters, who assess and accept risk for insurers, as well as reinsurers, who sell insurance to insurance companies themselves to protect them from catastrophic losses. These sectors are complemented by accounting and tax filing services, currency exchange and wire transfer services, and credit card machine networks and services. Each has its own set of regulations and requirements. Despite these differences, all these financial services companies work together to shape the global economy and our daily lives. Hence, it is crucial to understand how these different sectors function and interact to ensure the world’s economic stability. A weak financial services industry can quickly lead to a recession, so it is essential for everyone to learn about these various sectors and what each one does to contribute to the economy.