Financial intermediaries can help individuals or organizations settle transactions or manage their money/capital. Obviously, they play an important role in the growth of the economy in a nation. This article walks you through the basic information and enriches your knowledge about financial markets, in general.
What Is a Financial Intermediary?
A financial intermediary refers to an entity as the middleman between two parties to settle a financial transaction. It can be a commercial or investment bank, pension fund, mutual fund, etc.
When using financial intermediaries, you do not have to worry about safety, liquidity, and economies of scale related to banking and asset management. Yet, the advancement of technology might outperform the financial intermediary, in terms of reducing disintermediation.
Inside a Financial Intermediary’s Operation
Deposits are not the acceptable form in transactions between non-bank financial and the general public. Such ‘middlemen’ offer financial services such as leasing, insurance plans, factoring, etc. They might also get involved in asset exchanges and make use of long-term plans to manage and grow their funds. The activities of intermediaries and the rise of such a financial services industry contribute to the overall economic stability of a nation.
A financial intermediary will get funds from parties that have excess capital to those who are in need. As a result, it can create a balance in the financial markets and cut down on the cost of operating business.
For instance, the connection between a financial advisor and clients can be through the purchase of insurance, bonds, real estate, stocks, etc.
Banks are where borrowers and lenders meet for capital provision from financial institutions and the Federal Reserve. Insurance companies get premiums for policies and offer policy benefits. Meanwhile, a pension fund combines members’ funds and distributes payments to retired officers.
How Many Types of Financial Intermediaries Are There?
If a financial organization middling the transactions between two parties, it can be a financial intermediary. The following institutions are common intermediaries.
- Savings banks
- Mutual saving banks
- Credit unions
- Financial advisers/brokers
- Insurance companies
- Pension funds
- Stock exchanges
What Is a Financial Intermediary’s Function?
Financial intermediaries smooth the money flow in the economy and push growth. Their roles heavily depend on the type of services and products that they offer. It can be the provision of loans, mortgages, investment vehicles, insurances, etc. The following content covers some key roles that intermediaries take.
- Connecting households with the financial market.
- Protecting customers’ hard-earned money.
- Providing financial advisory services
- Cutting down on the expenses of business.
- Optimizing the capital structure through the balance between equity and debt.
Benefits of Financial Intermediaries
Money savers can collect their funds so that they can enlarge investments. At the same time, financial intermediaries combine risk by fund spreads across various investments and loans. Loan is a form that enables people to spend more money than their current budgets. So, it is beneficial for households and countries!
Besides, financial intermediaries help reduce costs on several fronts. For example, they can use their expertise to evaluate the credit profile of potential borrowers and cost-effectively manage their databases. Also, the cost of multiple transactions can decrease thanks to powerful tactics by financial intermediaries.
Example of a Financial Intermediary
The EU Commission added new financial instruments to the investments of the European Structural and Investment (ESI) fund. It aimed to build smoother access to funding for the promoters of urban development projects and startups.
You can attract greater public and private funding sources by using loans, guarantees, equity, etc. Also, these sources can be useful for reinvestments with many cycles in comparison to receiving grants.
Another example is a co-investment facility which aims to provide funds for startups for the development of business models. Besides, it can call for more financial support with an investment plan by a primary financial intermediary.
The EU Commission estimated the sum of public and private resource investment around $17.75 million per small and medium-sized enterprises.
In a Nutshell
Financial intermediaries and their roles are indisputable as we can see through the benefits in their services. Yet, using financial services requires knowledge and consideration to make a good decision.
Money or investment should be under the control of specialized experts who can be your reliable financial intermediaries! Hopefully, this article shares some main points for your foundation.