Defining Financial Services - Coursework Example

AN INTRODUCTION TO FINANCIAL SERVICES Defining Financial Services Financial services are services provided by the finance industry. The finance industry consists of a broad range of organizations that deal with the management of money, such as banks, credit card companies, consumer finance companies, insurance companies, stock brokerages, and some government-sponsored enterprises (Harris 1998). People who work in the industry range from self-employed entrepreneur to traders communicating internationally to sell their services to clients (Harris 1998). Financial services firms facilitate economic growth in their performance of essential functions that regulate the economy. Fifty years ago, financial services has accounted for less than 3 percent of GDP in the US and developed Europe, which at present, is mounted to almost 10 percent (Stephenson 2005). Thus, the financial services industry is one of the many industries that produce rapid growth in the world economy (Stephenson 2005). The modern financial industry witnessed 1986 as the 'big bang' era that opened London up more widely to international competition through electronic trading (Harris 1998). The onset of computer technology and global telecommunications systems has undoubtedly brought rapid changes that likewise brought changes to financial services. A widening of shared ownership and investment opportunities from few to many has been heralded by this development (Harris 1998). This development has bid adieu to the usage of a stockbroker, as it has now been possible for one to buy and sell certain financial investments through a visit to the local bank or using the computer. Services that Financial Institutions Provide Before the onset of advanced technology and computerization, there used to be a clear difference between a retail bank and a building society, or an insurance company, which all had a separate business from the retail bank. Today, financial institutions cannot be easily differentiated as the differences between them are disappearing while they continuously compete against each other to sell services that used to be sold by just one portion of the sector (Harris 1998). The past witnessed each firm with a narrow band of services, which it offered to a wide range of consumers and business clients. Even the payment system was controlled by commercial banks that have the authority to clear checks and drafts. Today, payments and money are facilitated electronically in volumes that are not easily handled in the physical form (Johnson 2000). Mortgage finance, which is now traded as securities, is likewise available from a wide range of sources while securities firm offer corporate and government securities as investment avenues (Johnson 2000). Even insurance companies provide products that compete with investments, which can be obtained through securities firms. It may be inferred that the dynamics of the banking industry have been permanently changed by mutual funds, which is an outcome of recent technology advancement (Johnson 2000). The same advancement has blurred traditional roles, causing difficulty to distinguish the product of a commercial bank from that of another financial institution. Banks are now selling insurance, with some having taken over some insurance firms. Virgin Boots offers a range of insurance companies in much the same way as Marks &Spencer sells investment products and pensions (Harris 1998). Likewise, if one needs a mortgage, he can go to a building society, a bank, an insurance company, and even a local supermarket. Financial services also witnessed the rapid growth of telephone call centres and helplines with their increased staffing jobs. A process of significant change in a period of new alignments in domestic markets and increased global competition is currently faced by the financial services industry (Johnson 2000). For several years, bank deposits have served as the basis for the country's payment mechanism, until such time electronic banking occurred, replacing physical currency. Banks as Players in Financial Services Banks are one of the many financial institutions that facilitate financial services and serve the economy. They are commercial, thrift (savings and loans associations as well as savings banks), investment companies, credit unions, insurance companies, credit unions, and finance companies. Most of people's banking needs can now be completed without having to enter the portals of a high street bank with cash from one's account , which can be readily extracted as well as checking one's current balance through ATM machines. This feature used to be non-existent in the banking system during the 60s and 70s. Customer accounts can also be operated through the telephone, again, an operation, which used to be unknown in the past decades. Some banks operate their own customer telephone service, while others outsource to do it for them, which is a contemporary mode of managing corporate processes. Most of these banks offer the facility for customers to check their account balance, pay bills by phone, or the interment at anytime (Harris 2006). This is another financial service that technology has provided. Unlike in the past, the banking environment has developed into being more international. It has been observed that commercial banks in industrialized countries have a common feature, particularly in their involvement in the payments mechanism, as well as in the provision of customer services and in financial support of commercial firms (Johnson 2000). Traditional banking services are not currently obtained from a wide range of financial institutions, such as investment companies, financial companies, insurance companies, and pension funds (Johnson 2000). There is a keener competition between domestic and foreign institutions as a result of this, alongside more integrated economies of the world. If there is anything constant in the changing financial services industry, it is no other than the continuing trend of markets, institutions, and economies toward integration (Johnson 2000). This integration is perhaps a by-product of a growing international market in which countries are participants, a result of a globalized economy. Banks have played a very functional role in the facilitation of financial services. Forty percent of the world's 1,000 largest commercial banks in 1999 were found in Europe, 18 percent were found in North America, 27 percent in Asia, and the remaining 15 percent is distributed to the rest of the globe (Johnson 2000). Those who control a large share of the world's banking assets are the banking systems of the United Kingdom, the United States and Canada, Germany, France, Switzerland, and Japan (Johnson 2000), countries which are also considered the most active financial players. In the United Kingdom, financial services had London as the world's center for international finance prior to 1914. Since London has historically provided significant amounts of long-term investment capital and short-term trade finance, the pound sterling became the major currency of the world (Harris 1998). Added to this was a long tradition of facilitating domestic and international trade by the government of the United Kingdom. The Bank of England, a private bank that enjoys certain government privileges, oversaw all banking operations and monetary policy, a function that has gone on for many centuries. The bank enjoys a quasi-official status, making it possible to achieve its desired results through requests (Johnson 2000). The banking system in the United Kingdom can now be described as one based on convention and mutual understanding between government, the Bank of England, and other financial institutions (Johnson 2000). Clearing banks in the United Kingdom provide the country's primary payment machinery alongside short-term liquidity through extensive overdrafts (Jonson 2000). They process 80 percent of all credit card transactions and check transactions, the largest of which are HSBC Holdings, Barclays Bank. National Westminster Bank, and Lloyd TSB Bank (Johnson 2000). Merchant banks, also known as secondary banks, primarily offer time deposits rather than the common demand deposits. Competition among them is high and one way of attracting large, wholesale deposits is through increased interest rates. On the other hand, both merchant and clearing banks use discount houses in adjusting their liquidity levels. Discount houses function as intermediaries between the clearing banks and the government , and are active dealers in short-term government securities (Johnson 2000). Meanwhile, the Bank of England does not conduct open market operations with banks, and does not make direct loans. Rather, it conducts these transactions with discount houses, which deal directly with the banks. Most countries in Europe use a giro system that performs a non-bank payment system that allows funds to be transferred from one account to another on the same day (Harris 1998). With the use of giro system, no payor float is incurred since payments are affected at a centralized location. In the United Kingdom , the giro system is not frequently used as compared to other European nations, partially because it was introduced only in 1968, unlike its counterparts who had them for a longer time (Johnson 2000). The major U. K. clearing banks dominate the retail banking market, in which they emphasize personal banking services, while encouraging the use of checks as they branch out nationwide. An extraordinary increase in the consumption of financial services has been exhibited in Britain in recent years, in which in the early 1990s, over 90 percent of its adult population is found to belong to financial service consumers (Burton 1994). During the 1980s, there were recorded periods showing that clearing banks lent more to personal sector consumers than industry consumers, to the point that "buying goods and services on credit was no longer a shameful admission of poverty" (Burton 1994). The credit card's new position, which heralded under Thatcherism, became the symbol of citizenship and the entrance ticket to the consumer world. The days of exclusive possession by the middle class of a financial service account have been truly blurred by the new positive regard given to credit cards and buying goods and services on credit (Johnson 2000). This repositioning of credit card companies allowed for a common usage of credit on personal necessities, and developing a mindset that such is a common occurrence among consumers. Since majority of the adult population in the United Kingdom are financial service consumers, they hold a concern on how banks, insurance companies, and building societies manage their accounts and insurance policies. This led to a critical evaluation of the proper role of financial institutions, as well as the way in which they treat their customers (Burton 1994). In Japan, the Japan Credit Bureau (JCB) is the most widely distributed credit card, followed by the Union Credit Card (Johnson 2000). Credit cards and related services may be considered a growth industry in Japan as consumer credit is developed in that country. However, consumer-banking services have generally evolved slower in Japan than in the United States and United Kingdom, primarily due to the focus of the larger city banks on large corporate clients (Johnson 2000). Regional banks that cater to individuals do not have comparable nationwide networks. It may also be noted that the mass media have played an important role in describing and making known to people the activities of financial institutions. There has been a considerable increase in the number of newspaper articles, radio, and television programs that provide consumer advice and guidance towards financial services. Despite the increasing growth in the global market of commercial institutions such as banks, credit card companies, insurance firms, and the like, non-commercial financing services also exist alongside their corresponding activities that aim to improve the economy. In the United States, the Alternative Agricultural Research and Commercialization Corporation is a financial institution that aims to foster development and commercialization of new nonfood and nonfeed products, which are delivered from animal by-products and forestry materials (Whipple 1998). There is also the Commodity Credit Corporation, aimed at stabilizing, supporting, and protecting farm income and prices. It also assists in maintaining balances and adequate suppliers of agricultural commodities and their products as well as facilitating the orderly distribution of commodities. Farm credit system provides privately financed credit to rural communities in which some of the services involved are long-term real estate loans, short-and-intermediate-term loans to agricultural producers, credit and mortgage life or disability insurance, estate planning, and consulting (Whipple 1998). References Burton, Dawn, 1994. Financial services and the consumer. Routledge. Harris Neil, 1998. Getting into financial services. UCAS, Trotman & Co. Ltd., Insutitute of Financial Services. Johnson, Hazel J., 2000. global positioning for financial services. World Scientific Publishing Co. Pte. Ltd. Stephenson, Roy, 2005. Marketing planning for financial services. Gower Publishing Ltd. Whipple, Desiree W. 1998. Financial services institutions. DIANE publishing. Read More