Unit 1: OVERVIEW OF

FINANCIAL
SERVICES
Unit 1: OVERVIEW OF FINANCIAL SERVICES
08 Hrs.

• Concept of Financial Services,

• Characteristics of Financial Services
• Objectives,
• Functions
• Financial Services Market – Concept and Constituents.
• Types of Financial Services – Fund Based and Fee Based,
• Growth of Financial Services in India,
• Problems of Financial Services Sector.
INTRODUCTION

The Indian financial services industry has undergone a metamorphosis since1990.

Before its emergence the commercial banks and other financial institutions dominated the field and
they met the financial needs of the Indian industry.

It was only after the economic liberalisation that the financial service sector gained some
prominence.

Now this sector has developed into an industry.

In fact, one of the world’s largest industries today is the financial services industry.

Financial service is an essential segment of financial system. Financial services are the foundation of
a modern economy.

The financial service sector is indispensable for the prosperity of a nation

Meaning of Financial Services

Financial services refer to services provided by the finance industry.

The finance industry consists of a broad range of organisations that deal with the
management of money.

These organisations include banks, credit card companies, insurance companies,

consumer finance companies, stock brokers, investment funds and some government
sponsored enterprises.
Financial services can also be called financial intermediation.

Financial intermediation is a process by which funds are mobilised from a large number of
savers and make them available to all those who are in need of it and particularly to corporate
customers. There are various institutions which render financial services.

Some of the institutions are banks, investment companies, accounting firms, financial
institutions, merchant banks, leasing companies, venture capital companies, factoring
companies, mutual funds etc.

These institutions provide variety of services to corporate enterprises. Such services are called
financial services.
 CHARACTERISTICS OR NATURE OF FINANCIAL SERVICES

1. Intangibility:

Financial services are intangible. Therefore, they cannot be standardized or reproduced in

the same form.

The institutions supplying the financial services should have a better image and confidence
of the customers. Otherwise, they may not succeed.

They have to focus on quality and innovation of their services. Then only they can build
credibility and gain the trust of the customers.
2. Inseparability:

Both production and supply of financial services have to be performed simultaneously. Hence, there should be
perfect understanding between the financial service institutions and its customers.

3. Perishability:

Like other services, financial services also require a match between demand and supply. Services cannot be
stored. They have to be supplied when customers need them.

4. Variability:

In order to cater a variety of financial and related needs of different customers in different areas, financial
service organisations have to offer a wide range of products and services. This means the financial services
have to be tailor-made to the requirements of customers. The service institutions differentiate their services to
develop their individual identity.
5. Dominance of human element:

Financial services are labour intensive. quality financial products. Financial services are
dominated by human element. Thus, It requires competent and skilled personnel to
market the quality financial products.

6. Information based:

Financial service industry is an information based industry. It involves creation,

dissemination and use of information. Information is an essential component in the
production of financial services
Objectives of financial services are :

 Maintain the public’s confidence in the financial system;

 Facilitate the deterrence of financial crimes;

 Supervise financial services licensees in accordance with legislation, regulations and codes;

 Ensure periodic evaluation of the legislative and regulatory framework in accordance with
developments in the financial services sector;

 Promote best practices, mutual assistance and exchange of information by maintaining contact and
forging relations with foreign regulatory authorities, international associations of regulatory authority
bodies or groups relevant to its functions;

 Facilitate the development of the financial services sector.

Importance of Financial Services

The successful functioning of any financial system depends upon the range of financial services offered
by financial service organisations.

The importance of financial services may be understood from the following points:

1. Economic growth: The financial service industry mobilises the savings of the people, and channels
them into productive investments by providing various services to people in general and corporate
enterprises in particular. In short, the economic growth of any country depends upon these savings and
investments.

2. Promotion of savings: The financial service industry mobilises the savings of the people by providing
transformation services. It provides liability, asset and size transformation service by providing huge
loan from small deposits collected from a large number of people. In this way financial service
industry promotes savings.
3. Capital formation: Financial service industry facilitates capital formation by rendering various capital
market intermediary services. Capital formation is the very basis for economic growth.

4. Creation of employment opportunities: The financial service industry creates and provides employment
opportunities to millions of people all over the world.

5. Contribution to GNP: Recently the contribution of financial services to GNP has been increasing year
after year in almost countries.

6. Provision of liquidity: The financial service industry promotes liquidity in the financial system by
allocating and reallocating savings and investment into various avenues of economic activity. It facilitates
easy conversion of financial assets into liquid cash.
Types of Financial Services

Financial service institutions render a wide variety of services to meet the requirements
of individual users. These services may be summarized as below:

1. Provision of funds:

(a)Venture capital
(b)Banking services
(c)Asset financing
(d) Trade financing
(e)Credit cards
(f) Factoring and forfaiting
2. Managing investible funds:

(a)Portfolio management
(b)Merchant banking
(c)Mutual and pension funds

3. Risk financing:

(d)Project preparatory services

(e)Insurance
(f) Export credit guarantee
4. Consultancy services:

(a)Project preparatory services

(b) Project report preparation
(c) Project appraisal
(d) Rehabilitation of projects
(e) Business advisory services
(f) Valuation of investments
(g) Credit rating
(h) Merger, acquisition and reengineering
5. Market operations:

(a)Stock market operations

(b) Money market operations
(c) Asset management
(d) Registrar and share transfer agencies
(e) Trusteeship
(f) Retail market operation
(g) Futures, options and derivatives
6. Research and development:

(a) Equity and market research

(b) Investor education
(c) Training of personnel
(d) Financial information services
Scope of Financial Services
The scope of financial services is very wide.

This is because it covers a wide range of services.

The financial services can be broadly classified into two:

(a)fund based services and

(b)non-fund services (or fee-based services)
Fund based Services

The fund based or asset based services include the following:

1. Underwriting
2. Dealing in secondary market activities
3. Participating in money market instruments like CPs, CDs etc.
4. Equipment leasing or lease financing
5. Hire purchase
6. Venture capital
7. Bill discounting.
8. Insurance services
9. Factoring
10. Forfeiting
11. Housing finance
12. Mutual fund
 Growth of Financial services in India

• The present growth rate of financial sector in India is about 8.5% p.a.

• An increase in growth rate is equivalent to growth of our economy.

• Over the past few years, there have been reforms in monetary policies, economic
policies, opening up of financial markets, development of other financial sectors etc.
In present times, a wide variety of financial products and services are offered to
consumers to keep them satisfied.

• The Reserve Bank of India has also played a major role to help in growth of
financial sector of India.
• The diversified financial sector of India comprises of banks, mutual funds,
insurance companies, pension funds etc.

• Do you know that the banking sector in India holds more than 60% of the total
financial assets of the country.

• At present, India is without any doubts one of the world’s most vibrant capital
market.

• Let’s take a look at growth of some of the financial sectors of India one by one.
Growth of the banking sector

• Being one of the most extensive, the entire Indian banking system has a total asset value
of approximately US$ 270 billion with total deposits being around US$ 220 billion.

• The banking system in India is continuously advancing and transforming itself.

• The current development of Core banking, Internet banking etc. has made banking
operations easy and customer friendly.
Growth of the Capital Market in India

The capital markets in India have also witnessed changes. Some of them are

1. Stock exchanges facing privatisation.

2. Removal of ill-used forward trading mechanism
3. In order to serve different investors in different locations, the introduction of InfoTech
systems in National Stock Exchange.
4. The increase in the ratio of transaction with deposit system and share ratio.
Growth in the Insurance sector in India

1. The market potential in India is immense. But it is untapped. So now in order to utilise
this opportunity, both foreign and Indian private players are providing tailor made
products with opening of the market.
2. Because of huge competition and entry of new players, the insurance sector has also
witnessed innovations like innovative insurance based products, services and value etc.
3. Many foreign companies like New York Life, Aviva, Standard Life have also entered
this sector.
4. Now a days, the insurance companies are engaged in aggressive marketing, selling
and distribution techniques because of the extreme competition that they face from
each other.

5. The credit for the development of this sector also goes to the active part of the
regulatory body –Insurance Regulatory and Development Authority
Growth of the Venture Capital market in India

1. In spite of the hindrances by the external setup, the venture capital sector in India is a
very active financial sector.

2. In India, currently, there are around 2 international and 34 national venture capital
funds registered by SEBI.
Report on Financial-Services-August-2022.pdf
Problems of Financial Services Sector
• Financial industry challenges are largely generational. The late 1800s were marked by notorious
gangs that plundered banks throughout the American Wild West.

• The 1900s witnessed women struggling to enter the male-dominated banking industry.

• And now? Well, now we have digital banking. The long-held promise of digital technology to
transform financial institutions has not been broken.

• It just hasn’t been fully kept. The digitization of the financial industry was supposed to solve
problems. And it has.

• It has also created some new ones in the process.

 • As more and more institutions adopt distributed
1. Cybercrime in Finance ledger technology (DLT), blockchain will
become the de facto solution to keeping
• Reports of data breaches by financial services financial data secure while at rest.
companies:
• Data breaches involving financial service firms • Integrating DLT with existing financial
increased by 480% from 2017 to 2018. infrastructures poses some serious obstacles that
must be overcome.
• With each attack costing financial institutions
millions, innovative solutions are needed if we
are to avoid a repeat of the lawless days of the
Wild West.

• Whatever cybercrime solutions emerge to

protect financial services, blockchain
technology must be the foundation Period.
2. Regulatory Compliance in Finance:

• The ever-changing regulatory environment poses a constant challenge for financial institutions of all
types. Regtech is an emerging industry that can help ease the burden of compliance.

• By using the latest FinTech technologies to address regulatory compliance, RegTechstartups are
bridging the gap between regulators and the financial service industry.

• Automated reporting, automated audits, and process streamlining are only a few of the benefits offered
by RegTech applications.
3. Big Data Use in Finance
• Big data provides both opportunities and obstacles for financial service providers. Tapping into
social media, consumer databases, and even news feeds can help banks better serve their customers,
while better protecting their own interests.

• But sorting through torrents of unstructured data for useful information is no small undertaking. It
requires powerful data analytics technology if institutions are to reap a benefit.

• Fortunately, data analytics solutions are emerging with the potential to transform asset management,
trading, risk management, and other financial services.
4. AI Use in Finance Industry
• Experts believe that AI will transform nearly every aspect of the financial service industry. Automated
wealth management, customer verification, and open banking all provide opportunities for AI solution
providers.

• But that’s all been said before. So why should we expect AI to keep that promise now? Powerful
advances in deep learning technology are paving the way for AI.

• In fact, if you have been alerted by your bank of suspicious activity on your account, you have likely
already benefited from AI.

• The challenge that financial services face is learning how to benefit from the power of AI, without
being victimized by it. In R&D labs across the world, that question is being pondered at this very
moment.
6. Customer Retention in the Financial Services Industry
• Competition for financial service clients has never been fiercer. While brand loyalty may not be
dead, it is definitely on life support.

• What matters to most customers in 2019 is greater personalization, more automated services,
and easier access to services. Institutions that can deliver all three will capture their share of the
market.

• Key to not losing the battle is recognizing that customers are less concerned with brand
familiarity than getting the services they want. Providing customers those services is key to
client retention.
7. Employee Retention in the Financial Service Industry
• Today’s financial service companies not only find it difficult to attract customers, but they are also
finding it difficult to attract employees.

• A lack of qualified talent to fill new IT roles, and a millennial workforce that shuns long-term
employment, are leading factors in finding good help. Institutions that want to attract and retain a
qualified workforce must change their philosophy.

• No longer is it enough to offer good pay and benefits; workers now expect employers to nurture a culture
that is accommodating to the values and lifestyles of the employee.

• Change is necessary if stable and qualified workforces are to be achieved. But don’t expect it to come
easy.
8. Blockchain Integration in Finance
• Blockchain is a key component in the battle against cybercrime. But data security is not the only
application for blockchains in the financial sector.

• Far from it, cases across the globe are already proving the value of blockchain in a wide variety of
banking and investment applications.

• From solving challenges faced by investment banks to helping customers make safer payment
transactions, the list is growing daily.

• Having said that, industry-wide adoption of blockchain is unlikely to occur until we reach a tipping
point in the maturity of the technology. When that will happen is anyone’s guess.
9. Customer Experience in the Financial Services Industry
• cx isn’t just a buzzword, it is one of the most important issues facing firms in the financial services
industry.

• Banking customers, today, expect banking to be mobile, with a la carte services, and they don’t care
if the bank is a FinTech no one ever heard of.

• Changing old-age traditions will take time and money, but mostly open mindedness.
10. Crossing the Digital Divide in Financial Services Marketing
• Success in the era of digital banking means more than having a mobile app. It means digitizing your
entire brand.

• How do you do that? You shift your advertising campaigns from conventional ad media to digital
channels. Which is another way of saying you reach your target audience where they are today, rather
than where they were yesterday.

• Of course, social media exposure is necessary, but you need more than a Facebook ad. You must tap big
data and AI to help locate potential customers, and to deliver customized offers in real time.