The World Of Financial Institutions
Everyone has dealings with financial institutions (whether they realise it or not) and they have become an almost necessary part of society.
What do we mean by a financial institution?
A financial institution is any business which deals with deposits, lends money, or provides any type of financial service such as insurance or investments. There are a number of different types of financial institutions and they all play an important part in keeping the economy going.
The financial world is massive
Most people, when they think of the financial industry will mainly focus on their high street bank. It’s understandable when you consider that the general public deal with high street banks on a regular basis. There is however a lot more to the financial industry than commercial banking.
So what other types of financial institutions are there?
Commercial banks are the type you will find on your high street. They allow people to deposit and borrow money. They also allow people to carry out financial transactions without the use of physical cash (credit/ debit cards, cheques, bank transfers). Commercial banks may also provide other services such as foreign exchange, business banking, insurance, etc.
Some of the other types of financial institutions also include –
- Investment banks – provide services to businesses and government agencies
- Brokerage firms – facilitates trades between buyers and sellers
- Credit unions – these are usually non profit organisations who mainly provide loans and savings for their members
- Pension companies – employers, employees, and the government pay into pensions, this money is then taken out to provide and income for people after retirement
- Insurance companies – provide security for people in the event of unexpected events such as theft, loss, accidents, illness, and death
- Investment companies – invest money on behalf of their customers, the profits and losses are shared amongst everyone
How do these financial institutions affect me?
Most people will only have dealings with a select few financial institutions, especially when you take into consideration the extra services that commercial banks offer which can be found elsewhere. So where does this leave the public?
If you only have a basic current account and/ or a savings account, then as long as you don’t become overdrawn then the financial industry will be making very little money from you. It’s when you start obtaining other products such as credit cards, loans, insurance, pensions, stocks, or shares that the financial industry makes a profit from you.
All these things are fine as long as you ensure that you can afford the payments, fees, or potential loses.
How can the financial industry benefit me?
It may seem that by taking out or loan or insurance that you effectively lose out, but this is not the case. Your credit score is dependent on how well you are at keeping on top of your finances. By getting a credit card or a loan and paying them off without incurring any additional charges you are proving that you are financially responsible.
This can help you if/when you decide to get a mortgage or if you want to secure a large loan, for instance if you want to start a business or make a large purchase.