It's understandable that people often use the terms "bank" and "financial services" interchangeably. Though there is some legitimacy to this practice, there are some important distinctions that differentiate the two.
Banking is a subset of the financial services sector, although not all bank services are strictly defined as financial services. To fully understand the difference between a financial services institution and a bank, or a financial service and a banking service, you may want to think of the distinction between the provision of a good and the intermediation of a service.
Another way to look at it is that financial services are interested in managing a customer's money through investments, insurance, and other facilities, where banks take deposits and provide loans. Banks are also typically divided into retail banks, which provide deposits and loans, and investment banks, which perform large-scale activities, such as securities underwriting and initial public offerings. Banks can only offer some of the products and services available in the financial services sector.
The following is a discussion on some of the differences between banks and the financial services sector that highlight their differences and similarities.
Key Takeaways
The financial sector is made up of a vast swath of economic entities, from retirement and investment companies, mortgage brokers, and banks.
Banks themselves are typically divided into retail banks and investment banks.
Banks are financial institutions that are licensed to provide loan products and receive deposits; non-banking institutions cannot do this.
Financial services include insurance, the facilitation of payments, wealth management, and retirement planning.
Though banks can provide some products offered by other financial service institutions, they cannot provide all.
According to the Finance andDevelopment 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 cards and debit cards, checks, and electronic funds transfers.
Consider a financial advisor.The advisor manages assets and offers advice on behalf of a client. The advisor does not directly provide investments or any other product.Instead, the advisor facilitates the movement of funds between savers and the issuers of securities and other instruments.
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.
Are Banks a Financial Services Sector?
Traditional banks offer both financial services and financial goods. A saver might open a savings account, wire funds, and/ortake out a car loan all from the same bank. Clearly, the bank is a provider of financial services and should be considered part of the financial services sector. Even the federal government includes banks in its description of the financial services sector. The Department of Homeland Security suggests that small community banks and credit unions are also part of this sector.
A financial service is a temporary taskrather than a tangible asset.
There are many members of the financial services sector that are not banks, though. Investment agencies and stock market brokers are not banks, but they certainly provide financial services. Their services are only intermediate services, not end goods. This distinction is similar to how economists distinguish between capital goods and consumer goods; an orange can be a consumer good if it is directly eaten by a consumer, but it can also be a capital good if a deli owner uses the orange to make juice.
What Are Different Types of Financial Service Companies?
Financial service companies enable consumers or businesses to acquire financial goods. Examples include investment banking firms, money managers, brokerages, banks, lenders, insurance firms, tax and accounting firms, credit card companies, payment processing firms, real estate, and fintech companies. The names and functions of these financial institutions can vary by the country in which they operate, such as discount houses in India and other nations.
What Are Some of the Biggest Financial Services Companies?
Some of the biggest companies in the financial services sector by market cap are Berkshire Hathaway, Visa, JPMorgan Chase, Mastercard, Bank of America, Wells Fargo, Morgan Stanley, S&P Global, American Express, and The Blackstone Group. The profits from these and other companies in the financial services sector make up a large portion of thegross domestic product(GDP) each year.
What Are Some of the Biggest Banks?
Some of the biggest banks in the world by market cap are Industrial and Commercial Bank Of China Ltd., China Construction Bank Corp., JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, BNP Paribas, HSBC Holdings, Banco Santander, and China Merchants Bank.
The Bottom Line
In a more aggregate sense, the banking industry is most concerned with direct saving and lending while the financial services sector incorporates investments, insurance, the redistribution of risk, and other financial activities.
Banks earn revenue primarily on the difference in the interest rates charged on loans or other forms of borrowing and the rates paid to depositors. Financial services primarily earn revenue through fees, commissions, and other methods.
Banks earn revenue primarily on the difference in the interest rates charged on loans or other forms of borrowing and the rates paid to depositors. Financial services primarily earn revenue through fees, commissions, and other methods.
The primary difference between banking and finance is that banking is a specific subset of finance. While banking is focused on managing deposits, loans, and other financial products and services provided by banks, finance encompasses a broader range of activities related to managing money and investments.
Banks manage customers' deposits and facilitate transactions, while finance broadly encompasses the management of funds, whether for individuals, corporations, or governments. Credit and Loans: Both sectors provide loans and credit services.
Non-banking financial institutions are not regulated by the government like banks are. This means that they are not subject to the same laws and regulations. Non-banking financial institutions do not take deposits from customers. Instead, they raise money by selling securities or borrowing money.
The financial sector consists of many different industries ranging from banks, investment houses, insurance firms, real estate brokers, consumer finance firms, mortgage lenders, and real estate investment trusts (REITs).
Banks offer comprehensive financial services, including deposit-taking, lending, payment services, investment products, and more. In contrast, NBFCs primarily deal in lending and investment activities, offering services like loans, asset financing, and investment advisory.
The primary difference in the battle of accounting vs finance is that accounting has a relatively narrow focus, while finance is wider-ranging, covering an array of specializations in the world of business, economics and banking.
Finance firms provide choices to consumers with weak credit. The reason why finance companies might be preferable in comparison to banks is that the former delivers lending possibilities to customers with low credit. The motive for this is because finance companies' major technique of making money is via loans.
Banks receive and process deposits and withdrawals. They safeguard your money for you. Banks also give out loans, but they are not the same as loan companies. Loan companies give out loans only (they do not safeguard your money) and will require you to make repayments for your loan.
The main difference between finance companies and other types of financial institutions such as commercial banks, savings institutions, and credit unions is that the finance companies do not take deposits for their capital.
Thus, banks act as financial intermediaries—they bring savers and borrowers together. An intermediary is one who stands between two other parties. Banks are a financial intermediary—that is, an institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank.
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, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual ...
The banking industry is the foundation of the financial services group. It is most concerned with direct saving and lending, while the financial services sector incorporates investments, insurance, the redistribution of risk, and other financial activities.
The non-financial account deals with all the transactions that are not in financial assets, such as Output, Tax, Consumer Spending and Investment in Fixed Assets. The financial account shows the accounts for each institutional Sector (Corporations, Households, Government) and for each type of financial asset.
What are two roles of the financial sector? The financial sector facilitates trade, acting as a lubricant to the economy.Its second role is to transfer saving, outflows from the spending stream, back into spending.
Banking, mortgages, credit cards, payment services, tax preparation and planning, accounting, and investing are types of financial services industries. Financial services are frequently the exclusive domain of businesses and professionals.
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