Financial Services Industry

            Financial services industry includes firms that are involved in investment, management, lending and transfer of money. Many companies deal with money but the difference between these companies and the financial institutions is that the financial institutions make money as their business. This industry is very large and it includes small local banks and international banks. There are various sectors in this institution namely: Investment banking, commercial banking, mortgage companies, credit card issuers, brokerage firms, investment research providers, exchanges, debt and credit rating agencies, money transfers, assurance/ guarantors and insurance. Each of this institution deals differently from the other as shown below.

Investment banking is the area of corporate banking that enables large institutional clients raise funds by issuing to them securities for debt or equity. It advises clients on financial transactions like mergers and acquisitions, provides custody services that entail processing of the world’s securities trades and goes further to service the associated portfolios, manages assets and hedge funds. Commercial banking involves firms that make loans to customers and take deposits. These customers could be either corporate or individuals. These firms may be involved in other activities but these are their major activities. The primary operations of banks are safeguarding customers’ money and allowing for withdrawals when customers need the cash, issuing checkbooks to enable payments to be done through the posts, giving commercial loans, personal loans and mortgage loans. Other services entail issuing credit cards and processing transactions done using these cards, issuing debit cards to be used instead of checks, issuing ATM’s to allow transactions in other branches, providing electronic fund transfers and wiring transfers between banks, providing notary services for financial and other documents, providing overdraft, charge card advances and cashier’s check or certified check.

Other bank services are private banking that involves providing personalized services like tax planning and wealth management to high net worth individuals. The other is capital market bank that involves restructuring debt for companies and underwriting debt and equity. Finally, there is the credit card machine service and networks that provides credit card machine and payment networks. Mortgage companies are specifically involved in providing money for customers to buy houses. Credit card issuers allow the customer cash advance that can help the customer purchase goods from a merchant. Brokerage firms are involved in selling the customers investments at a fee called the brokerage fee. They are also involved in buying investments for the customers. The investment research providers give information to their customers on the various available research options and give them information that will enable them invest in the most profitable securities.

Exchange institutions enable the customers to change currencies like the bureaus. This is referred to as currency exchange. They are also involved in wire transfers where clients can send money to international banks in other countries and finally they are involve in foreign currency banking, which enables clients to transact using foreign currencies. The money transfer institutions enable customers to send money to people who are far away. An example is Western Union. Debt and credit rating agencies assign credit ratings to companies. They therefore show the credit worthiness of a company. This can suggest to the customer the best companies to lend to and those to be denied credit. Those paying the underlying debt are given ratings at times hence the term debt rating. Assurance and guarantors issue bonds against defaults and losses in value.

Insurance companies provide a variety of services, which include insurance brokerage that involves insurance brokers who look for insurance on behalf of customers. According to Insurance Informat Inst., (2008), insurance underwriting has activities like giving of annuities, providing retirement, health, property & casualty and life insurances. Finally, they provide reinsurance services that are aimed at insuring insurers against losses. Other financial services are providence of private equity funds, venture capital providence that involves investing in new, fast growing businesses with an aim of taking such companies to an IPO. There are the conglomerates, which are involved in providing more than one financial service. For example, they can provide both insurance services and asset management services. They therefore diversify risk. Finally, there are angel investments that provide companies with starting capital in exchange for equity or convertible loan stocks.

The financial services offered by the companies in this industry are very beneficial to the customers and have both long term and short-term benefits. Benefits that are short term are those offered by commercial banks, money transfer agencies, credit card issuers and exchange agencies. Commercial banks enable the customers to save money. Without these banks, there would be an increase in theft cases and misappropriation of cash. Commercial banks also allow the customers to withdraw money whenever they need it and advance credit in case the customer’s cash is not sufficient to accomplish a desired project. This enhances customers’ lives by enabling them to do things they would not do with their limited cash. Money transfer agencies enable customers to send money to other areas. Credit cards have made many peoples’ lives easier. They can shop anywhere in the world and pay using cash in their accounts. This has also minimized the losses caused by pick pocketing. In addition, debit cards have enabled many people to live beyond their means. They can afford expensive items, which they would not buy with their cash float. Foreign exchange bureaus satisfy the customer’s immediate need of owning the desired foreign currency.

Most of the services provided by financial institutions have long-term benefits. Advices offered by investment banks enable the customers to make the right investment decision that will not only be profitable, but also safe. These investments could earn interest for the customer for many years therefore; if their money is invested in the highest interest earning securities, then they are assured of a good return in future. Mortgage institutions enable clients to own houses. These clients would have to work for several years to save up to buy the houses in normal cases but with the help of these institutions, people can leave in houses that they have not paid for in full. Mortgage payments are made over a long period while the client occupies the house. Mortgage interest for home ownership plans is tax exempt in most countries. This is an advantage to the client since they will pay less tax. Insurance companies are mostly concerned with insurances of items that have a long life span. An example is the life insurance that matures when the insured dies. The benefits are enjoyed by the next of kin. It therefore enables people to take care of those they care for when they are gone.

Various benefits in the financial services industry are beneficial to the employees. The prevalent employee benefits in this industry are housing (employer provided) benefit. Employees are provided with houses near the company. If the house is not the company’s, they pay a small amount and the company foots the remainder. There are health insurances, which can be enjoyed by the immediate family members of the employees therefore easing the employee’s burden of paying hospital bills. In some companies, employees can choose their preferred physician. There are disability income protection and retirement benefits that enable employees to save for their old age. The employer contributes a specified amount on behalf of the employees to the retirement scheme. There is also Employee Stock Owners Plan (ESOP) that enables employees to own a portion of the company after retirement.

Some large organizations provide day care for the employees’ babies. This enables the employee to have a peace of mind as she works. It also cuts on baby-sitting expenses the employee would have incurred. Tuition reimbursement is one of the key benefits. The employee can therefore further his/ her education at no cost. Sick leaves, short disability leaves, maternity leaves, new parenting leaves, adoption and assistance leaves, FMLA, bereavement leaves, military leaves and long term disability leaves are some of the paid leaves given by most companies in the industry. Other benefits are paid vacations and life insurances paid by the company. The main purpose of these benefits is to increase the employees’ economic security. It is therefore evident that most financial institutions care for their employees.

The word ‘perks’ is used for benefits of a more discretionary nature. ‘Perks’ are given to employees who do exemplary well. These ‘perks’ are hotel stays; take home cars, free leisure activities and allowances for lunch. In case of job promotions, they are given the first priority.    Many factors will influence the industries continued providence of the above named benefits some of these factors are the continuing increase in interest rates. Since the emergence of recession, companies have been trying to lower lending rates to attract more customers but they have not been making enough to break even. Instead of customers borrowing more, some have become skeptical of the market therefore causing big losses to the financial institutions. This could lead to the institutions hiking the lending rates. The house market slowdown has also been affecting the financial industry negatively. Many houses have depreciated and this has made financial providers lose a lot. The recession has also hit on the people very much influencing many of them to keep off mortgages. Financial services are also highly sensitive to the business cycles. In current times of recession, many people have reduced on their spending, which has adversely affected the companies. Sub-prime borrowers have lost confidence in the financial market and even become risk averse.

This has denied financial institutions money in this time of need. The solution to these problems would be cutting on employee benefits. Many companies are contemplating or have already reduced the amount allocated for employees’ health insurance, paid holidays, children’s education and many other benefits. Other customers have experienced an increase of brokerage fee and an increase in lending rates in certain securities. These changes could continue in the next 5 to 10 years if the recession worsens.

The financial services has several institutions namely investment banking, commercial banking, mortgage companies, credit card issuers, brokerage firms, investment research providers, exchanges, debt and credit rating agencies, money transfers, assurance/ guarantors and insurance. Each of this institution offers different services that are beneficial to their customers in different ways. With the current recession, each of these institutions faces many challenges that can be overcome in the following ways: first, the institutions should diversify rather than concentrate on providing one service (Webster, 2006).This diversification of risk in portfolios less affected by recession will enable them stay in business. Secondly, companies can venture into new markets. According to Inside the mind (2002), Africa and Asia could be a good option since there economies are not badly hit by the recession. Thirdly, companies can open branches where cost of living is less. This will enable the companies to spend less on employee benefits while still providing these benefits. Mergers could really help some of these institutions. It will enable them reduce expenses and increase their client base. There is also the advantage of skillful personnel who would cost the individual companies a lot, if they outsourced them. Financial institutions can also come up with many low interest packages to cater for the low earning customers. This will definitely increase their earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References:

Webster. M. (2006). Data Protection in the Financial Services Industry. Aldershot, U.A: Gower.

Insurance Informat Inst. (2008). Financial Services Fact Book. New York, NY: Insurance Informat Inst.

Ontario Ministry of Treasury and Economics. Library Services. (1984). Financial Services Industry: Emerging Issues and Trends, 1973-1984. Monticello, Ill: Vance Bibliographies.

Inside the minds. (2002). Financial Services Industry : The Future of Financial Services: Risks, Opportunities & Areas to Watch. Bedford, MA: Aspatore Book.