Finance

Financial sector is a pillar of American economy and daily business operations. Banks, insurance companies and financial services companies provide the core financial activities, payment and savings solutions, credit or capital availability, risk mitigation and financial information accuracy.

Leading American financial companies are involved in a wide range of activities along with the flows of money and capital in the economic cycle. Unsurprisingly that financial companies providing high value-added financial products and services which generate high returns on investment also face very fierce competition from both US and foreign financial sector players.

Struggle for market share between different types of banks, insurance companies, financial services companies and broader financial entities creates the dynamic environment in which companies specialize, diversify and acquire others in search of higher returns, costs cutting, better hedging of risks and greater investment security.

However, despite the competition has traditionally originated from companies of different financial verticals, one of the most serious threats the sector is currently facing is the disruption of traditional business by future FinTech startups and InsurTech companies. And some of them, among the largest US startups, have already turned into "unicorns" (startups with valuation of over $ 1 billion) creating a serious danger for traditional players.

Currently the most prominent financial companies still play a key role in the US economy and in spite of these new challenges most of them will remain at this position for the foreseeable future. Thanks to the immense financial power of the United States American financial companies will continue to struggle domestically and take advantage of the economies of scale provided by the size of the American market to expand their presence elsewhere in the world.

What is funding?

Funding is the process of providing funds for business, purchase or investment. Financial institutions such as banks provide capital to enterprises, consumers and investors to help them achieve their goals. The use of funding is vital in any economic system as it allows companies to buy products beyond their immediate reach.

In other words, funding is a way of using the time value of money (TVM) to leverage future expected money flows for projects started today. Funding also takes advantage of the fact that some people in the economy will have surplus of money that they want to use for making a profit while others require money to invest (also with the hope of making a profit) creating a market for money.

What are the main types of financial institutions

In today's financial services market there is a financial institution that provides a wide range of deposit, credit and investment products to individuals, enterprises or both. While some financial institutions are focused on providing services and reporting to the general public others more likely will serve only certain customers by submitting more specialized offerings.

In order to know which financial institution is best suited to meet specific needs it is important to understand the difference between the types of institutions and the purposes they serve.

Central banks

Central banks are financial institutions responsible for the supervision and management of all other banks. In the United States the central bank is the Federal Reserve Bank which is responsible for monetary policy and the supervision and regulation of financial institutions.

Individual consumers do not have direct contact with the central bank, instead of that large financial institutions work directly with the Federal Reserve Bank to provide products and services to the general public.

Retail and commercial banks

Traditionally retail banks have offered products to individual consumers while commercial banks have worked directly with businesses. Currently most large banks offer deposit accounts, lending and limited financial consulting for both demographic groups.

Products offered at retail and commercial banks include current and savings accounts, certificates of deposit (CD), personal and mortgage loans, credit cards and business bank accounts.

Internet banks

Internet banks which operate similarly to retail banks have become a new player in the financial institutions market. Online banks offer the same products and services as regular banks but do it through online platforms rather than through brick-and-mortar stores.

Credit unions

Credit unions serve a specific demographic group depending on their area of membership such as teachers or military personnel. Although the products on offer resemble those offered by retail banks, credit unions are owned by their members and act in the interest of them.

Savings and loan associations

Financial institutions that are run by both parties and provide no more than 20% of total business lending fall under the category of savings and loan associations. Individual consumers use savings and loan associations to open deposit accounts, personal loans and mortgage lending.

Investment banks and companies

Investment banks do not accept deposits, instead they help individuals, businesses and governments raise capital through the issue of securities. Investment companies better known as mutual fund companies pool funds from private and institutional investors to give them access to the broader securities market.

Brokerage firms

Brokerage firms help individuals and institutions buy and sell securities among available investors. Clients of brokerage firms can place dealings in stocks, bonds, mutual funds, exchange traded funds (ETFs) and some alternative investments.

Insurance companies

Financial institutions that help individuals transfer the risk of loss are known as insurance companies. Individuals and businesses use insurance companies to protect against financial losses resulting from death, disability, accidents, property damage and other disasters.

Mortgage companies

Financial institutions that issue or finance mortgage loans are mortgage companies. While most mortgage companies serve individual consumer market some specialize in lending to commercial real estate only.

How clients use banks

Clients use banks to keep their financial resources safe and easily available for use. Bank's customers deposits are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $ 250,000 which helps clients avoid losses in the event of bank failure. People rely on the ability of banks to pay them money when they ask for it.

Banks allow customers to pay financial obligations by drawing a check to a bank account. The banks involved then process the transaction, making it easier to transfer funds to the recipient.

Banks also provide their customers debit cards and it allows them to access money without issuing a check or withdrawing cash. Debit cards also make it easy to withdraw cash from ATMs.

Types of bank loans

Banks have many different types of loans.

For example, you can get overdraft protection for your current account. In most cases, if you withdraw more money than there is in the account the bank will charge you a commission. But overdraft protection which is usually provided in the form of a loan accessed when an account is overdraft can protect against these fees.

Banks also lend money to individuals and legal entities. These loans take the form of personal loans, commercial or business loans and housing or real estate (mortgage) loans.

Banks also issue credit cards which is another form of loans or credit line. The bank maintains its credit cards business by charging a payment processing fee to pay customers' credit cards bills. To support merchants who accept customers' credit cards banks may offer trade network services. They include card terminals or credit card machines.

Additional bank financial services

Other financial services that banks offer include customers assistance in transferring money via cable and wire transfers. They can do it by using the interbank network to transfer funds to customers.

You can also get a cashier’s check from a bank. That is when the bank guarantees the check so that the customer can offer it to the recipient as certified funds available. The bank withdraws money from your account in advance which guarantees the payee that the check will be paid.

Banks also offer notarial services to verify clients' important documents.

What is the financial services sector?

The financial services sector provides financial services to individuals and corporations. This segment of the economy consists of a variety of financial firms including banks, investment houses, lenders, financial companies, real estate brokers and insurance companies. The financial services industry is probably the most important sector of the economy leading in the world in terms of income and stock market capitalization. This sector is dominated by large conglomerates but it also includes a wide range of smaller companies.

According to the Department of Finance and Development of the International Monetary Fund (IMF) financial services are the processes by which consumers or businesses acquire financial commodities. For example, a payment system provider offers financial services when it accepts and transfers funds between payers and recipients. This includes accounts settled by credit and debit cards, checks and wire transfers.

Financial services companies manage money. For example, a financial advisor manages assets and advises on behalf of a client. The advisor does not directly provide investments or any other product rather it facilitates the flow of funds between depositors and securities issuers and other instruments. This service is a temporary task and not a tangible asset.

On the other hand, financial commodities are not tasks. They are things. A mortgage loan may seem as a service but in reality it is a product that lasts beyond the original position. Shares, bonds, loans, commodities, real estate and insurance policies are examples of financial goods.

The importance of the financial services sector

The financial services sector is the key driving force of the country's economy. It provides free capital flow and market liquidity. When the sector is strong the economy grows and companies in that sector can better manage the risks.

Strength of the financial services sector is also important for prosperity of a country's population. When the sector and the economy are strong consumers usually earn more. This increases their confidence and purchasing power. When they need access to credit for large purchases they apply for a loan from the financial services sector.

However, if the financial services sector fails it can lead to collapse of the country's economy. This can lead to recession. When the financial system begins to collapse the economy suffers. Capital starts drying up as lenders tighten lending controls. Unemployment rises and wages may even fall forcing consumers to stop spending money. To compensate for that, central banks cut interest rates in an attempt to stimulate economic growth. This is primarily what happened during the financial crisis that led to the Great Recession.