The financial services industry is an economic sector that comprises a broad range of service providers. These include: banks, building societies and credit unions; debt management companies; credit-card companies; pawnbrokers; insurance companies; stock brokerage firms; investment funds; and other enterprises engaged in financial intermediation.
Financial services are essential to the functioning of an economy. They allow individuals with money to save to find those who need it, and those who need to borrow to cover expenses, invest for the future, and buy goods and services. The industry has made great strides toward financial inclusion in recent years, and millions of formerly excluded people have now opened accounts.
Governments regulate many aspects of the financial services industry to ensure a level playing field and protect consumers. Banks, for instance, are subject to strict regulations that prevent them from engaging in practices that would be illegal if they were not regulated. The financial services industry also includes non-governmental organizations such as charitable foundations that provide counseling and advice on financial matters.
In the United States, the industry is governed by the Federal Reserve System, the Securities and Exchange Commission, the National Credit Union Administration, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and other independent regulatory agencies. It also includes private companies that engage in specialized financial intermediation. These include hedge fund managers, investment advisory firms, and asset management companies.
These entities take in cash from savers and lend it to borrowers, earning profit on the difference between what they pay depositors and receive from borrowers. They also redistribute risk by pooling the savings of many savers to protect them against the failure of one or two borrowers. This allows savers to earn higher returns on their investments and reduces the cost of borrowing for borrowers.
Some of these businesses also act as intermediaries, facilitating mergers and acquisitions. They may also underwrite debt and equity for public and private companies to help them raise capital. They may even manage assets on behalf of clients, charging a fee for their expertise.
Lastly, these firms promote domestic and foreign trade. They may facilitate the sale of goods and services in local markets by ensuring the availability of cash, or they might help companies export by offering discounted credit. They may also step up the promotional efforts of backward regions, offering fiscal and monetary incentives to encourage more production, saving and employment, which in turn leads to more demand and higher prices. Financial services also promote international trade by enabling foreign exchange.