Financial services are the economic services provided by the finance industry, which

encompasses a broad range of businesses that manage money, including credit

unions, banks, creditcard companies, insurance companies, accountancy companies, consumer-
finance companies, stock brokerages, investment funds, individual managers and
some government-sponsored enterprises.

WHAT ARE FINANCIAL PRODUCTS?

Securities and investments created to provide buyers and sellers with short term or long term
financial gains are known as financial products. These allow liquidity to circulate in an economy
and risk to be spread. Many of the financial products are in the form of contracts that you can
negotiate on financial markets. The contracts stipulate cash movement at present and in future,
depending on conditions stated.
Financial products can help us grow the amount of money we have to meet various financial goals,
such as retirement, children’s education, marriage and so on.

Financial products are investments and securities that are created to provide buyers and
sellers with a long term or short term financial gain. Financial products enable risks to be
spread, and liquidity to circulate around an economy.

Financial products refer to instruments that help you save, invest, get
insurance or get a mortgage. These are issued by various banks, financial
institutions, stock brokerages, insurance providers, credit card agencies and
government sponsored entities. Financial products are categorised in terms of
their type or underlying asset class, volatility, risk and return.

Consolidation
Consolidation in the financial services sector, both domestically and cross-border, is one of the key trends
affecting the sector, as a consequence of a perceived need for firms to secure economies of scale and scope
in an environment characterized by more open and less fragmented markets. This is reflected in the decline
in the number of financial institutions, and the rise of mergers and acquisitions, both in developed and
emerging economies. This process has also had the effect of increasing concentration levels in some
national markets, and is also changing the ownership structure of domestic financial institutions.

Internationalization of financial services

Financial services have become increasingly internationalized over the years. The presence of foreign
financial services providers in national markets has grown significantly in the last two decades. As shown
by recent studies, market shares of majority foreign-owned banks increased dramatically in East Asia,
Eastern Europe and Latin America, sometimes exceeding 50 per cent of the market. Cross-border trade in
financial services is also an important component of services exports worldwide. In 2005, financial
services and insurance accounted for 18 per cent of world exports of ‘other commercial services’.
Financial services trade has experienced rapid growth in recent years. For example, between 2000 and
2005, insurance was among the top three fastest growing sectors, with a rate of 14 per cent (WTO
International Trade Statistics 2007).

Changing role of financial services providers

With falling barriers to entry in the financial services industry, the differences between financial
institutions have been eroded, and an increasing number of competitive services and products are being
offered by different types of institutions. For example, commercial banks have been allowed to enter into
 investment banking, finance companies provide banking products, and insurance companies also provide
different forms of financing.

Competition and outsourcing

Cost reduction has become a priority for institutions in the new competitive environment, and one of the
responses to cost pressures within the sector has been the outsourcing of specific functions to other
countries, a process usually referred to as ‘offshoring’. Outsourcing/offshoring has become a significant
feature of the international financial services sector.

Difference between financial services and financial products:

Financial Good Vs. Financial Service
According to the Finance & 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 adviser: the adviser manages assets and offers advice on behalf
of a client. The adviser does not directly provide investments or any other product;
rather, the adviser 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 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.

Among the things money can buy, there is a distinction between a good (something tangible that
lasts, whether for a long or short time) and a service (a task that someone performs for you). A
financial service is not the financial good itself—say a mortgage loan to buy a house or a car
insurance policy—but something that is best described as the process of acquiring the financial
good. In other words, it involves the transaction required to obtain the financial good. The
financial sector covers many different types of transactions in such areas as real estate, consumer
finance, banking, and insurance. It also covers a broad spectrum of investment funding, including
securities (see box).
 What do they do?

These are some of the foremost among the myriad financial services.

Insurance and related services

• Direct insurers pool payments (premiums) from those seeking to cover risk and make
payments to those who experience a covered personal or business-related event, such as an
automobile accident or the sinking of a ship.
• Reinsurers, which can be companies or wealthy individuals, agree, for a price, to cover
some of the risks assumed by a direct insurer.
• Insurance intermediaries, such as agencies and brokers, match up those seeking to pay to
cover risk with those willing to assume it for a price.
Banks and other financial service providers
• Accept deposits and repayable funds and make loans: Providers pay those who give them
money, which they in turn lend or invest with the goal of making a profit on the difference
between what they pay depositors and the amount they receive from borrowers.
• Administer payment systems: Providers make it possible to transfer funds from payers to
recipients and facilitate transactions and settlement of accounts through credit and debit cards,
bank drafts such as checks, and electronic funds transfer.
• Trade: Providers help companies buy and sell securities, foreign exchange, and
derivatives.
• Issue securities: Providers help borrowers raise funds by selling shares in businesses or
issuing bonds.
• Manage assets: Providers offer advice or invest funds on behalf of clients, who pay for
their expertise.
But distinctions within the financial sector are not neat. For example, someone who works
in the real estate industry, such as a mortgage broker, might provide a service by helping
customers find a house loan with a maturity and interest rate structure that suits their
circumstances. But those customers could also borrow on their credit cards or from a commercial
bank. A commercial bank takes deposits from customers and lends out the money to generate
higher returns than it pays for those deposits. An investment bank helps firms raise money.
Insurance companies take in premiums from customers who buy policies against the risk that a
covered event—such as an automobile accident or a house fire—will happen.
 Intermediation
At its heart, the financial sector intermediates. It channels money from savers to borrowers,
and it matches people who want to lower risk with those willing to take on that risk. People
saving for retirement, for example, might benefit from intermediation. The higher the return
future retirees earn on their money, the less they need to save to achieve their target retirement
income and account for inflation. To earn that return requires lending to someone who will pay
for the use of the money (interest). Lending and collecting payments are complicated and risky,
and savers often don’t have the expertise or time to do so. Finding an intermediary can be a better
route.
Some savers deposit their savings in a commercial bank, one of the oldest types of financial
service providers. A commercial bank takes in deposits from a variety of sources and pays interest
to the depositors. The bank earns the money to pay that interest by lending to individuals or
businesses. The loans could be to a person trying to buy a house, to a business making an
investment or needing cash to meet a payroll, or to a government.
The bank provides a variety of services as part of its daily business. The service to depositors
is the care the bank takes in gauging the appropriate interest rate to charge on loans and the
assurance that deposits can be withdrawn at any time. The service to the mortgage borrower is
the ability to buy a house and pay for it over time. The same goes for businesses and governments,
which can go to the bank to meet any number of financial needs. The bank’s payment for
providing these services is the difference between the interest rates it charges for the loans and
the amount it must pay depositors.
Another type of intermediation is insurance. People could save to cover unexpected expenses
just as they save for retirement. But retirement is a more likely possibility than events such as
sickness and auto accidents. People who want to cover such risks are generally better off buying
an insurance policy that pays out in the event of a covered event. The insurance intermediary
pools the payments (called premiums) of policy buyers and assumes the risk of paying those who
get sick or have an accident from the premiums plus whatever money the company can earn by
investing them.
Providers of financial services, then, help channel cash from savers to borrowers and
redistribute risk. They can add value for the investor by aggregating savers’ money, monitoring
investments, and pooling risk to keep it manageable for individual members. In many cases the
intermediation includes both risk and money. Banks, after all, take on the risk that borrowers
won’t repay, allowing depositors to shed that risk. By having lots of borrowers, they are not
crippled if one or two don’t pay. And insurance companies pool cash that is then used to pay
policy holders whose risk is realized. People could handle many financial services themselves,
but it can be more cost effective to pay someone else to do it.
Cost of services
How people pay for financial services can vary widely, and the costs are not always
transparent. For relatively simple transactions, compensation can be on a flat-rate basis (say,
$100 in return for filing an application). Charges can also be fixed ($20 an hour to process loan
payments), based on a commission (say, 1 percent of the value of the mortgage sold), or based
on profits (the difference between loan and deposit rates, for example). The incentives are
different for each type of compensation, and whether they are appropriate depends on the
situation.
Regulation
Financial services are crucial to the functioning of an economy. Without them, individuals
with money to save might have trouble finding those who need to borrow, and vice versa. And
without financial services, people would be so intent on saving to cover risk that they might not
buy very many goods and services.
Moreover, even relatively simple financial goods can be complex, and there are often long
lags between the purchase of a service and the date the provider has to deliver the service. The
market for services depends a great deal on trust. Customers (both savers and borrowers) must
have confidence in the advice and information they are receiving. For example, purchasers of life
insurance count on the insurance company being around when they die. They expect there will
be enough money to pay the designated beneficiaries and that the insurance company won’t cheat
the heirs.
The importance of financial services to the economy and the need to foster trust among
providers and consumers are among the reasons governments oversee the provision of many
financial services. This oversight involves licensing, regulation, and supervision, which vary by
country. In the United States, there are a number of agencies—some state, some federal—that
supervise and regulate different parts of the market. In the United Kingdom, the Financial
Services Authority oversees the entire financial sector, from banks to insurance companies.
Financial sector supervisors enforce rules and license financial service providers.
Supervision can include regular reporting and examination of accounts and providers,
inspections, and investigation of complaints. It can also include enforcement of consumer
protection laws, such as limits on credit card interest rates and checking account overdraft
charges. However, the recent sudden growth in the financial sector, especially as a result of new
financial instruments, can tax the ability of regulators and supervisors to rein in risk. Regulations
and enforcement efforts cannot always prevent failures—regulations may not cover new
activities, and wrongdoing sometimes escapes enforcement. Because of these failures,
supervisors often have the authority to take over a financial institution when necessary.
The role of mortgage-backed securities in the recent crisis is an example of new financial
instruments leading to unexpected consequences. In this case, financial firms looking for steady
income streams bought mortgages from the originating banks and then allocated payments to
various bonds, which paid according to the mortgages’ underlying performance. Banks benefited
by selling the mortgages in return for more cash to make additional loans, but because the loan
makers did not keep the loans, their incentive to check borrowers’ creditworthiness eroded. The
mortgages were riskier than the financial firms that bought them anticipated, and the bonds did
not pay as much as expected. Borrowers were more likely to default because of their lower
income, which reduced the amount bondholders took in—both of which hurt gross domestic
product growth. Mortgage-backed securities were initially intended to help mitigate risk (and
could have done so under the right circumstances), but they ended up increasing it.
Productive uses
Financial services help put money to productive use. Instead of stashing money under their
mattresses, consumers can give their savings to intermediaries who might invest them in the next
great technology or allow someone to buy a house. The mechanisms that intermediate these flows
can be complicated, and most countries rely on regulation to protect borrowers and lenders and
help preserve the trust that underpins all financial services. ■

Financial service is one of the component of the financial system, Lets look
at the meaning and its importance.

Meaning of financial services

Financial service is part of financial system that provides different types of

finance through various credit instruments, financial products and services.

In financial instruments, we come across cheques, bills, promissory notes,

debt instruments, letter of credit, etc.

In financial products, we come across different types of mutual funds.

extending various types of investment opportunities. In addition, there are
also products such as credit cards, debit cards, etc.
In services we have leasing, factoring, hire purchase finance etc., through which
various types of assets can be acquired either for ownership or on lease.
There are different types of leases as well as factoring too.
Thus, financial services enable the user to obtain any asset on credit,
according to his convenience and at a reasonable interest rate.

Importance of Financial services

It is the presence of financial services that enables a country to improve its
economic condition whereby there is more production in all the sectors
leading to economic growth.

The benefit of economic growth is reflected on the people in the form of

economic prosperity wherein the individual enjoys higher standard of living.
It is here the financial services enable an individual to acquire or obtain
various consumer products through hire purchase. In the process, there are
a number of financial institutions which also earn profits. The presence of
these financial institutions promote investment, production, saving etc.

Hence, we can bring out the importance of financial services in the following
points:

Importance of Financial Services

1. Vibrant Capital Market.
2. Expands activities of financial markets.
3. Benefits of Government.
4. Economic Development.
5. Economic Growth.
6. Ensures Greater Yield.
7. Maximizes Returns.
8. Minimizes Risks.
9. Promotes Savings.
10. Promotes Investments.
11. Balanced Regional Development.
12. Promotion of Domestic & Foreign Trade.
1. Promoting investment
The presence of financial services creates more demand for products and the
producer, in order to meet the demand from the consumer goes for more
investment. At this stage, the financial services comes to the rescue of the
investor such as merchant banker through the new issue market, enabling the
producer to raise capital.
The stock market helps in mobilizing more funds by the investor.
Investments from abroad is attracted. Factoring and leasing companies, both
domestic and foreign enable the producer not only to sell the products but
also to acquire modern machinery/technology for further production.
2. Promoting savings
Financial services such as mutual funds provide ample opportunity for
different types of saving. In fact, different types of investment options are
made available for the convenience of pensioners as well as aged people so
that they can be assured of a reasonable return on investment without much
risks.
For people interested in the growth of their savings, various reinvestment
opportunities are provided. The laws enacted by the government regulate the
working of various financial services in such a way that the interests of the
public who save through these financial institutions are highly protected.

Financial Services offered by various financial institutions

 Factoring.
 Leasing.
 Forfaiting.
 Hire Purchase Finance.
 Credit card.
 Merchant Banking.
 Book Building.
 Asset Liability Management.
 Housing Finance.
 Portfolio Finance.
 Underwriting.
 Credit Rating.
 Interest & Credit Swap.
 Mutual Fund.
3. Minimizing the risks
The risks of both financial services as well as producers are minimized by the
presence of insurance companies. Various types of risks are covered which
not only offer protection from the fluctuating business conditions but also
from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides
minimizing the risks. Taking this aspect into account, the government has
not only privatized the life insurance but also set up a regulatory authority for
the insurance companies known as IRDA, 1999 (Insurance Regulatory and
Development Authority) .
4. Maximizing the Returns
The presence of financial services enables businessmen to maximize their
returns. This is possible due to the availability of credit at a reasonable rate.
Producers can avail various types of credit facilities for acquiring assets. In
certain cases, they can even go for leasing of certain assets of very high value.
Factoring companies enable the seller as well as producer to increase their
turnover which also increases the profit. Even under stiff competition, the
producers will be in a position to sell their products at a low margin. With a
higher turnover of stocks, they are able to maximize their return.

5. Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is
the yield which attracts more producers to enter the market and increase
their production to meet the demands of the consumer. The financial
services enable the producer to not only earn more profits but also maximize
their wealth.

Financial services enhance their goodwill and induce them to go in for

diversification. The stock market and the different types of derivative market
provide ample opportunities to get a higher yield for the investor.
6. Economic growth
The development of all the sectors is essential for the development of the
economy. The financial services ensure equal distribution of funds to all the
three sectors namely, primary, secondary and tertiary so that activities are
spread over in a balanced manner in all the three sectors. This brings in
a balanced growth of the economy as a result of which employment
opportunities are improved.
The tertiary or service sector not only grows and this growth is an important
sign of development of any economy. In a well-developed country, service
sector plays a major role and it contributes more to the economy than the
other two sectors.

7. Economic development
Financial services enable the consumers to obtain different types of products
and services by which they can improve their standard of living. Purchase of
car, house and other essential as well as luxurious items is made possible
through hire purchase, leasing and housing finance companies. Thus, the
consumer is compelled to save while he enjoys the benefits of the assets
which he has acquired with the help of financial services.

8. Benefit to Government
The presence of financial services enables the government to raise both
short-term and long-term funds to meet both revenue and capital
expenditure. Through the money market, government raises short term
funds by the issue of Treasury Bills. These are purchased by commercial
banks from out of their depositors’ money.
In addition to this, the government is able to raise long-term funds by the
sale of government securities in the securities market which forms apart of
financial market. Even foreign exchange requirements of the government
can be met in the foreign exchange market.

The most important benefit for any government is the raising of finance
without offering any security. In this way, the financial services are a big
boon to the government.

9. Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only
raise finance but also get an opportunity to disburse their funds in the most
profitable manner. Mutual funds, factoring, credit cards, hire purchase
financeare some of the services which get financed by financial institutions.
The financial institutions are in a position to expand their activities and thus
diversify the use of their funds for various activities. This ensures economic
dynamism.

10. Capital Market

One of the barometers of any economy is the presence of a vibrant capital
market. If there is hectic activity in the capital market, then it is an indication
of the presence of a positive economic condition. The financial services
ensure that all the companies are able to acquire adequate funds to boost
production and to reap more profits eventually.

In the absence of financial services, there will be paucity of funds which will
adversely affect the working of companies and will only result in a negative
growth of the capital market. When the capital market is more active, funds
from foreign countries also flow in. Hence, the changes in capital market is
mainly due to the availability of financial services.
11. Promotion of Domestic and Foreign Trade
Financial services ensure promotion of domestic as well as foreign trade. The
presence of factoring and forfaiting companies ensures increasing sale of goods
in the domestic market and export of goods in the foreign market. Banking
and insurance services further contribute to step up such promotional
activities.
12. Balanced Regional development
The government monitors the growth of economy and regions that remain
backward economically are given fiscal and monetary benefits through tax
and cheaper credit by which more investment is promoted. This generates
more production, employment, income, demand and ultimately increase in
prices.
The producers will earn more profits and can expand their activities further.
So, the presence of financial services helps backward regions to develop and
catch up with the rest of the country that has developed already.
Players in financial services sector
1. Financial service sector comes under the tertiary sector in which banks
play a major role. For the growth of financial services industry, banks are led
by the central bank of the country followed by commercial banks, co-
operative banks, development banks, foreign banks, etc.
2. Hire purchase financier is also a player in the financial service sector as he
enables the consumer to buy the product on credit basis.
3. Leasing companies through financial and operating lease ensure the
acquiring of assets by producers on a long-term basis at a reasonable charge.
4. Factoring enables the seller to obtain 80% value of sales from the financial
companies undertaking factoring services.
5. Underwriters and merchant bankers are additional players who promote
not only companies but also ensure dynamic activity in the capital market.
6. Book-builders help companies in allotting shares to different categories of
investors.
7. Mutual funds ensure investment by the public and also ensure tax relief to
the investor.
8. Credit cards, another important player in the financial services, ensure the
circulation of plastic money and enable purchase on credit by the consumer.

9. Credit rating companies play an important role by giving different credit

ratings to companies to mobilize public deposits.
10. Housing finance companies and insurance companies also promote
investment in the economy as they also form a part of the players in the
financial services.
11. Asset liability management company enables mutual funds to undertake
proper investment in different types of companies.
12. Finance companies in general and also as a part of non-banking finance
companies provide additional funds to the above players so that there is more
activity in the economy.
In addition to the above players, the government acts as the umpire and the
various enactments as rules for playing a fair game in the field of financial
services.