What are financial services?

The benefits that can be bought with money are divided into goods (something material that exists for some time, long or short, time) and services (orders,

which someone performs for you). A financial service is not the financial good itself, say a home mortgage or car insurance, but something that can be most accurately described

as a process of acquiring a financial product. In other words, it is a transaction required to obtain a financial commodity. The financial sector covers many different types of transactions in areas such as real estate,

consumer loans, banking and insurance activities. It also includes a wide range of financing

investments, including securities (see box).

However, the divisions within the financial sector are not clear-cut. For example, someone working in the operations sector

In real estate, say, a mortgage broker can provide services to clients by helping them find a home loan that suits their specific circumstances in terms of repayment terms and interest rates. But these clients can also take a loan from credit cards or from a commercial bank.

A commercial bank accepts deposits from customers and lends this money in order to earn a higher profit than its payments on these deposits.

An investment bank helps companies raise funds. Insurance companies receive premiums from customers who purchase policies to protect against the risk of an insured event such as

like a traffic accident or a house fire.

The financial sector is, by its very nature, an intermediary. It transfers money from savers to borrowers and brings together

those interested in reducing risk with those willing to take on additional risk. Mediation can be

useful, for example, for people making pension savings.

The higher the profit that future retirees receive

their investments, the less they need to save to achieve their retirement income target

taking into account inflation. To make such a profit, you need

lend this money to someone who is willing to pay for its use (pay interest). Lending and collections are complex and risky activities, and

In many cases, savers do not have the necessary knowledge or time. A more acceptable option for them

maybe find an intermediary.

Some savers place their funds in commercial banks, one of the oldest types of financial service providers. A commercial bank accepts deposits from various sources and pays interest to depositors. Bank earns money to pay interest by lending individuals or companies. Such loans can be provided to an individual wishing to buy a home, a business making an investment or needing

cash to pay salaries, or to a government agency.

The Bank provides various services as part of its daily activities. Services to depositors consist of a careful assessment by the bank of the appropriate level of interest rates charged on loans and the guaranteed possibility

withdraw funds from the deposit at any time. Services for borrowers on a mortgage are to ensure the opportunity to buyhousing and pay for it within a certain period.

The same applies to commercial organizations and government bodies, which can contact the bank for satisfy a variety of financial needs. By paying the bankfor the provision of these services is the difference between those charged by them interest rates on loans and the amount they must pay depositors.

Another type of mediation is insurance. People could save for unexpected expenses, similar to how they save for retirement.

But retirement is more likely than events like illness and traffic accident. People who want to protect themselves from such risks usually have more it makes sense to buy an insurance policy that provides payments

in case of an insured event. Insurance intermediary unites

payments (called premiums) from policyholders and assumes the risk of paying sick or injured people out of the premiums plus additional proceeds, which the company can receive from their investment.

In this way, financial service providers help transfer funds from savers to borrowers and redistribute risk. They can create added value to the investor by aggregating savers' funds, tracking investments and pooling risk so that keep it within limits acceptable for individual clients. In many cases, mediation includes aspects both risk and money. After all, banks take on the risk that that borrowers will not repay the debt, and thereby allow depositors to get rid of this risk. Since they have many borrowers, they do not lose their ability to function if one

or two borrowers will not pay their debts. And insurance companies pool funds, which are then used to payments to policyholders whose insurance risks are realized.

People could carry out many financial services themselves, but paying someone to do them may be more cost-effective.

Financial services can be paid for in very different ways.

ways, and these costs are not always transparent. For relatively simple transactions, payment may be made at a flat rate (say, $100 per application). Fees may also be fixed ($20 per hour for processing loan payments), in the form of commissions (say, 1 percent of the value of the mortgage sold) or based on profit (for example, the difference between loan rates

and deposits). Forms of incentives are different for everyone type of payment, and their validity depends on the situation.

Financial services are essential to the functioning of the economy. If they did not exist, it would be difficult for people who have money to save to find those in need of loans and vice versa. And in the absence of financial services they would be so busy saving to protect themselves from the risk that they would not be able to buy large quantity of goods and services.

Moreover, even relatively simple financial products can have complex structures, and there is often a significant time lag between the time a service is purchased and the date on which the supplier is required to provide the service. The services market largely depends on trust. Clients (both savers and borrowers) need to be confident that the advice and information they receive is correct. For example, Life insurance customers expect that the insurance company will not disappear at the time of their death. They expect the insurance company to have sufficient funds to pay their designated beneficiaries and that it will not defraud their heirs.

The importance of financial services for the economy and the need to strengthen trust between suppliers and consumers are among the reasons for government control over the provision of many financial services. This control includes licensing, regulation and supervision, with differences between countries. The United States has a number of state and federal agencies that oversee and regulate various parts of the market. In the United Kingdom

The Financial Services Authority oversees everything financial sector, from banks to insurance companies.

Financial sector regulators enforce regulations and issue licenses to financial service providers. Supervision may include regular reporting and review of records and suppliers, inspections and complaint investigations. It may also include measures designed to ensure compliance with laws protecting consumer rights, such as capping interest rates on credit cards and overdraft fees on current accounts. However, the recent dramatic growth of the financial sector, especially as a result of the introduction of new financial instruments, may seriously test the ability of regulators and supervisors to contain risk.

Rules and sanctions are not always able to prevent failures - rules may not apply to new activities, and violations may not in all cases result in enforcement sanctions. Because of these inefficiencies, supervisors are often given the authority to exercise control over a financial institution when necessary.

The role of mortgage-backed securities in the recent crisis is an example of how new financial instruments can produce unexpected results. In this case financial companies interested in sustainable income bought mortgage loans from originating banks and then

distributed payments among various bonds, payments on which were made depending on the overall performance of servicing the relevant mortgage loans.

Banks benefited from the sale of mortgages, receiving additional cash for additional loans,

But because the lending institutions did not keep the loans on their balance sheets, they had less incentive to check the creditworthiness of borrowers. 

Mortgage 

The loans turned out to be riskier than the financial companies that bought them expected, and the payments on the bonds were less than expected. Probability of borrower default

was higher due to their lower income, which reduced the income of bondholders; both of these factors held back growth gross domestic product. Mortgage-backed securities were originally intended to reduce risk

(and under the right circumstances they could perform this function), but in the end they only increased the risk.