Financial services are the intermediaries that help individuals and companies put money to productive use. They connect those who have money to spare with those who need it, facilitating investment, borrowing, and saving. These services also enable people to pay for things that they could not afford if they were to buy them outright, such as life insurance policies or houses.
Though the term “financial services” is often used to refer to banking, stock brokers, and mortgage lenders, it actually encompasses a much broader range of industries. These include investment agencies and firms, credit card networks, global payment systems, and insurance companies, among others. The sector includes both regulated entities and unregulated ones, such as credit rating agencies and debt resolution services.
While consumers might view financial goods as services, economists distinguish between them and end products like consumer or capital goods. For example, an orange is a consumer good when eaten directly by a person, but it becomes a capital good when sold to a deli to make juice. Similarly, an insurance policy that pays for a house that burns down is a financial good, but the broker who searches for rates or the underwriter who creates the policy are both providing a service.
The operation of financial services requires a high level of trust. For instance, purchasers of life insurance trust that the company they purchase it from will still be around when they die and will pay out to their beneficiaries. Regulatory bodies play an important role in upholding this trust, especially when it comes to protecting borrowers and savers.