Financial services are a broad category of service sector businesses that are tied to money management and consumer finance. Financial services providers are an essential part of the economy, providing a crucial source of credit to individuals and companies as well as facilitating investment, risk management, and capital formation. They also provide many other business-to-business services, including payment systems and commodity/derivative exchanges. The financial services industry is also a major driver of other industries, shaping their standards, practices and operations. The financial services market is a powerful economic force that is constantly changing and expanding.
There are four major categories of financial services: insurance, banking, wealth management, and investing. These services encompass a variety of different industries and professions, including mortgage lending, investment banking, asset management, commercial banks, and consumer banks. Financial services are important to everyone, and the right provider can make a big difference.
Insurance services are one of the most common forms of financial services, and probably the best known. They include life and health insurance, as well as property and auto insurance. These services are designed to protect individuals against unforeseen events that can otherwise be financially devastating, such as the death of a loved one or a house fire.
In addition to providing protection against unforeseen risks, insurance services can help people manage the risk of these events by spreading the cost over a large group of individuals. This is known as pooling resources and is a basic principle of insurance. Another important function of insurance is to act as a catalyst for investment in new and emerging industries. For example, a company that produces an innovative new type of automobile may require substantial capital investment to develop and produce the cars. Financial services companies such as venture capital providers and angel investors can provide this necessary investment.
Banks are vital providers of financial services, as they can collect funds from individuals and businesses, pool them, and then lend them to others who need the money. This enables people to have access to the funds they need without having to save for them, and it helps stimulate the economy by allowing businesses to expand and hire more workers.
Other important financial services include investment banking, which underwrites debt and equity for public and private entities that are looking to merge or take over other companies, and structured finance, which develops more intricate (derivative) products for high net worth individuals and institutions with specific investment goals. Finally, there are the financial market utilities, which provide the backbone for the industry by operating clearing houses, stock and derivative exchanges, and payment systems.