Financial services are broadly considered to include “everything that touches money.” While you may think of this sector as comprising solely banks and hedge funds, the reality is that financial services encompass a wide range of business activities. This includes everything from personal banking and credit cards to investment management, insurance, mortgages and more.
Financial institutions are crucial to the economy because they channel cash from savers to borrowers and redistribute risk. Banks, for example, pool savings and loans to fund investments in the form of mutual funds or other products and then loan the proceeds to borrowers. This allows depositors to earn a higher return on their investments while not having to bear the risks of investing directly in companies or other assets. In addition, insurance providers redistribute risk by providing protection against loss (such as life or property) and against liability.
Financial services also provide businesses with the capital they need to grow. This can take the form of venture capital, which provides funding in exchange for equity stakes or profit participation, and merchant banks, which facilitate the sale of new issues on the stock market. These services are critical to the development of primary, secondary and tertiary industries, which in turn lead to economic dynamism.