What is Financial Services? Nature, Objectives, Need, Types, Role, Emerging Trends

What is Financial Services?

Financial services refer to a broad range of services provided by financial institutions to individuals, businesses, and governments. These services are primarily aimed at managing and facilitating financial transactions, investments, and risk.

According to Ivana S. Domazet, the author of Digital Marketing and Service Industry: Digital Marketing in the Banking Industry, financial services are concerned with the design and delivery of advice and financial products to individuals, business, and government.

According to the International Monetary Fund (IMF), a financial service is not the financial good itself—say a mortgage loan to buy a house or a car insurance policy—but something that is best described as the process of acquiring the financial good. In other words, it involves the transaction required to obtain the financial good. The financial sector covers many different types of transactions in such areas as real estate, consumer finance, banking, and insurance. It also covers a broad spectrum of investment funding, including securities.

For example, when financial institutions help individuals or organisations trade their shares in the stock market, or help individuals save their money in fixed deposits or savings account; they are basically providing a financial service.

Financial institutions provide financial services and facilitate financial transactions such as loans, insurance, credit cards, investment opportunities, money management, providing information on the stock market and market trends.

According to Section 65(10) of the Finance Act, 1994, banking and financial services include the following services supplied by a banking company or a financial institution, including a non-banking financial firm:

• Financial leasing services including equipment leasing and hire-purchase by a body corporate
• Credit card services
  
  
• Merchant banking services
  
  
• Securities and foreign exchange (forex) broking

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Nature of Financial Service

Financial services can include a wide range of activities that have a financial component. Financial services refer to the mobilisation and allocation of savings. It encompasses all operations related to the conversion of savings into investment. The nature of financial services can be described by the following points:

Customer-focused

Financial services are customer-focused services that are provided according to the needs of clients. Before designing and supplying such services, financial institutions conduct thorough research into the demands of their customers. They are designed to meet a customer’s unique requirements, which vary from individual to individual.

Intangibility

Financial services are intangible and as a result, the financial institutions face difficulty in selling them. Such organisations should concentrate on enhancing their brand image by offering customers new and high-quality items. Firms with a higher level of market credibility have an easier time selling their products.

Inextricably linked

Financial services are created and delivered at the same time. These services are inextricably linked and can- not be pre-stored. Both the manufacturing and supply functions are performed at the same time in this scenario.

Manages funds

Financial service providers are experts at managing public’s money. Such financial services allow users to convert their unused savings into productive revenue-generating assets or investments.

Financial intermediation

These financial services also provide financial intermediation by bringing lenders and borrowers together. Financial services mobilise funds from those who have a surplus and make them available to the seekers of funds.

Market-based

Financial services are market-based, and their prices fluctuate according to market conditions. It is a dynamic activity that changes in response to changes in the socioeconomic environment and the wants of clients.

Risk dispersion

One of the most important features of financial services is risk distribution. These services distribute the risk that an individual is unwilling to bear among a group of people who are all prepared to accept it. Financial firms spread risk and protect customers from harm by offering a variety of insurance plans.

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Objectives of Financial Services

Financial services are the economic services given by a variety of financial organisations that deal with money management. It is an intangible financial market product such as loans, insurance, stocks, credit cards, and so forth. Institutions such as banks, insurance companies, investment funds, credit unions, brokerage firms, and consumer financing businesses provide financial services.

Some of the major objectives of financial services include:

Raising Capital

Financial services are an efficient way to raise funds. It offers a variety of financial instruments to individuals, investors, corporations, and organisations through which they can raise funds or invest their money.

Encouraging Savings

There are various financial services that help customers invest and grow their money. For example, mutual funds allow people to invest money and get decent returns without taking much risk.

Deploying Funds

Financial services allow proper allocation of financial resources for profitable uses. In the financial market, there are several investment routes and instruments where people can invest their money to gain money.

Reducing Risk

Financial services play a significant role in risk reduction. These institutions provide services that helps in risk diversification and providing insurance coverage for safeguarding people from damage.

Helping Achieve Economic Growth

Financial services assist the government in achieving overall economic growth. For its different demands, the government can simply raise both short-term and long-term funds. It aids in the development of a country’s overall infrastructure and employment prospects.

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Needs for Financial Services

Financial services are a part of the overall financial system which pro- vides different types of finance such as credit instruments, financial products and services. The following points describe the importance and need of financial services:

Increasing investment

The availability of financial services increases demand, and the producer, in order to match the consumer’s demand, increases investment. At this point, financial services, such as merchant bankers, come to the rescue of the investor by allowing the manufacturer to raise funds through the new issue market.

The stock market assists investors in mobilising additional funds. Investments from other countries are being enticed. Domestic and international factoring and leasing organisations help producers to not only sell their products but also to buy sophisticated machinery and technology for future production.

Promoting savings

Mutual funds and a variety of investment options are available for the convenience of retirees and the elderly so that they can be assured of a respectable return on investment without taking on too many risks. Various reinvestment options are available for consumers interested in growing their money. The operations of various financial services are governed by law to safeguard public interest.

Minimising risks

The presence of insurance companies reduces the risks of both financial services and producers. Various forms of risks are covered, including those posed by natural calamities as well as those posed by changing business conditions.

Maximising returns

The availability of financial services allows entrepreneurs to maximise their profits. This is achievable since financing is available at a fair cost. For acquisition of assets, producers might use a variety of financial options. They may even opt to lease some high-value assets in specific circumstances.

Assuring higher yield

Availability of financial services encourage more producers to enter the market and raise their output in order to meet consumer demand thereby increasing their revenues and their wealth. Financial services improve producer’s reputation and encourage them to diversify their portfolios. The stock market, as well as many types of derivative markets, offers several chances for investors to increase their returns.

Ensuring growth of the economy

The development of all industries is critical for the economy’s progress. Financial services ensure that funds are distributed evenly across all three sectors, namely primary, secondary, and tertiary, so that activities are spread out evenly across all the three sectors. As a result, the economy grows in a more balanced manner, resulting in more job opportunities.

Consumers can use financial services to receive a variety of products and services that will help them enhance their standard of living. Hire purchase, leasing, and housing finance organisations make it possible to buy a car, a house, and other necessary as well as pleasurable products. As a result, the client is driven to save while enjoying the benefits of assets gained through financial services.

Financial institution’s activities are expanded

Financial services help financial institutions to not only raise capital but also to disburse their funds in the most profitable way possible. Financial institutions finance services such as mutual funds, factoring, credit cards, and hire purchase finance.

Financial institutions are able to increase their activities and, diversify the ways in which their funds are used. This promotes economic growth.

Ensuring a thriving capital market

The presence of a thriving capital market is one of the key indicators of any economy. The presence of high levels of activity in the capital market indicates the presence of a favourable economic situation. Financial services ensure that all businesses may obtain sufficient capital to increase output and, in turn, earn more profits.

In the absence of financial services, there would be a scarcity of funds, which will have a detrimental impact on the business operations and only result in negative capital market growth. When the capital market is in active mode, foreign monies flow in. As a result, capital market fluctuations are mostly linked to the availability of financial services.

Domestic and international trade promotion

Financial services help to promote both domestic and international trade. Factoring and forfaiting organisations ensure that items are sold more frequently in the home market and that goods are exported more frequently to other countries. Banking and insurance services also help increase promotional activity.

Regional growth that is well-balanced

The government analyses economic growth, and regions that lag behind are given fiscal and monetary incentives, such as reduced taxes and lower loan rates, to encourage additional investment.

This results in increased output, employment, income, demand, and, ultimately, price increases. Producers will make more money and will be able to expand their operations. As a result, the existence of financial services aids backward regions in developing and catching up with the rest of the country.

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Types of Financial Services

Financial services are economic services offered by the finance sector, which includes credit unions, banks, credit-card companies, insurance companies, accounting firms, consumer-finance firms, stock brokerages, investment funds, individual managers, and certain government-sponsored organisations.

Due to demand factors (increasing discretionary incomes, personalised financial solutions, etc.) and supply drivers, India’s diversified and comprehensive financial services business is quickly expanding (new service providers in existing markets, new financial solutions and products, etc.). Several significant subsegments make up the Indian financial services business.

Mutual funds, pension funds, insurance firms, stockbrokers, wealth managers, financial consulting businesses, and commercial banks are among them, and they range in size from tiny local players to major global corporations. Individuals, commercial corporations, and public organisations are among the cli- ents who benefit from the services.

Some of the most prominent types of financial services include:

Banking

The banking industry is India’s financial services industry’s backbone. There are a number of public (27), commercial (21), foreign (49), regional rural (56) and urban/rural cooperative (95,000+) banks in the nation. Individual Banking (checking accounts, savings accounts, debit/credit cards, and so on) is one of the financial services offered in this area.

• Commercial Banking (merchant services, checking accounts and savings accounts for businesses, treasury services, etc.)
  
  
• Financing (business loans, personal loans, home loans, automobile loans, working-capital loans, etc.)

The Reserve Bank of India (RBI) is in charge of overseeing and maintaining the banking sector’s liquidity, capitalisation, and financial health.

Professional Advisory

Financial institutions also provide advisory services which assists the individuals and businesses with a wide range of responsibilities. Financial advisors can assist with investment due diligence, business appraisal, and real estate ventures, among other things. Advisors assist clients in making sound financial decisions in all such situations.

Wealth Management

This form of financial service enables consumers to save money wisely and, where possible, get a return on their investment. Customers’ money is managed and invested across a variety of financial instruments, including debt, equities, mutual funds, insurance products, derivatives, structured products, commodities, and real estate, based on the clients’ financial goals, risk profile, and time horizons.

Mutual Funds

Mutual funds are investments where numerous parties participate. The investor’s money is managed by professionals. Because the initial investment in a mutual fund is less than that in other traditional investments such as bonds and the stock market, they are a popular choice for people who are unsure about their money. The investments are also well-diversified which reduces risk.

Coverage/Insurance

In the financial services industry, this is one of the most popular sectors. Insurance is a monthly or annual payment system that provides a safety net and covers the costs of large and often unforeseen expenses. There are numerous types of insurance available, including health, auto, home, renters, and life insurance.

A few examples of financial institutions providing financial services are:

• Banks
• Banks that make investments (Wealth management)
• Credit card companies
• Insurance companies
• Stock brokerage and advisory companies
• Investment firms
• Accountancy firms
• Financial institutions
• Merchant banks
• Leasing firms
• Venture capital firms
• Factoring firms
• Mutual fund companies

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Role of Financial Services

Every economy relies heavily on financial institutions. For banking and non-banking financial institutions, they are governed by a central government entity. Furthermore, these institutions aid in the transi- tion from net savers to net borrowers by bridging the gap between idle savings and investment and their borrowers.

The following points help in describing the role of financial services:

Assists businesses in growth

Financial services aid in the growth of enterprises by providing financial support. Companies use the loans to purchase fixed assets and/or invest in other business operations.

Ensures growth of capital

The financial services system in an economy drives both working capital and fixed capital growth by encouraging the issuance of debentures, shares and short-term loans.

Encourages entrepreneurship

Entrepreneurs seeking finance and investors for their businesses can also take advantage of financial services. Banks are hesitant to lend to new or inexperienced entrepreneurs but angel investors and venture capitalists provide capital to all these entrepreneurs which fosters entrepreneurship in India.

Encourages competition

Investors have the option of putting their money in a broad and expanding financial services sector and market. More clients for a service and company if the services are better. This ensures that enterprises compete which in turn benefits the investors, the general public and businesses in a country.

Encourages unrestricted trade

The availability of options for investors and the general public ensures that commerce is unrestricted, with trustworthy institutions and corporations acting as mediators. It also aids the growth of domestic and international trade in goods and services.

Helps build financial services network

The financial services industry includes many different companies and banks. It is a collection of businesses that collaborate on a variety of financial issues. For example, a person who possesses a large sum of money. He saves a portion of his money in a bank and invests the rest in the stock market. He makes a profit by investing in high-yielding equities. He now decides to purchase a vehicle and insure it.

Encourages access to credit and loans

The wheels of this financial system are also credits and loans. Borrowing and lending money, then repayment of it with interest, is a time-honoured mechanism of capital exchange. However, there is a big imbalance between loans and their repayment due to problems with low income and excessive market demand for money.

Many businesses and people in India are unable to repay loans and credit card debts. This leads to the economy’s demise and the accumulation of debts and leverage. This industry needs to be controlled with a greater focus on the sort of buyer.

Helps create jobs

One more way the financial services sector contributes to the economy is through job creation. This industry requires a diverse workforce with a variety of skills, including management, accounting, legal, information technology, etc. This industry requires skilled workers.

According to a study of India’s top 250 corporations, the financial services sector employs about 28% of the country’s workforce. This is beneficial to both employees and society since it promotes a better awareness of how the financial market operates among the general public.

Ensures balance in economy

The financial services sector contributes in diversifying the capital market and relieves the government and central authorities of their monopoly. It also stimulates more private-sector investment and overall market growth that is innovative and facilitative.

This also protects the economy from shocks in the event of any unanticipated losses. The government and private financial service organisations are equally accountable for the economy’s balance and seamless operation in this situation.

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Emerging Trends in Financial Services

Financial institutions and banking systems are essential components of every economy. It is critical for an economy to flourish if these areas run smoothly. Banking and financial services have seen a significant transformation as a result of the introduction of digital technologies. Customers find it handy and adaptable at the same time, thus new trends are gaining traction quickly. The introduction of various technical improvements in the financial technology business has stemmed from the creation of financial technology.

Some of the most significant emerging trends in financial services are:

Digitisation of financial services

With the rapid advancements in technology, digital services have become an essential aspect of banking operations as institutions have kept up with the changes to make services more convenient. The first phase of digitisation in India started in the 1980s when the information technology was employed to fulfil fundamental operations such as customer service, bookkeeping, and other administrative tasks.

To improve the client experience, fundamental banking systems were gradually adopted. The most significant change occurred in the 1990s, when India’s market was liberalised and opened up to the rest of the globe. The establishment of private and multinational banks accelerated the technological advancements in the banking industry. Customers can access banking services from anywhere due to availability of online banking, Immediate Payment Service (IMPS), Real Time Gross Settlement (RTGS) and telebanking.

Banking on the go

Although digital services were introduced about a decade ago, they were available only through desktop computers which required the customers to be at home or have access to computers with internet connection. However, with the widespread use of smartphones, users now use their phones to access banking services aided by lower data prices.

Interface for Unified Payments (UPI)

Introduction of Unified Payments Interface (UPI) has revolutionised the way people make payments and receive money. UPI allows transactions to be completed in a matter of seconds. Google Pay and BHIM (Government of India) are two key applications that enable UPI-based payments.

Blockchain

Blockchain is a powerful technology that is still in its early stages of development. When it comes to digital services, security is a crucial consideration. Despite technological advancements, fraud activities in the digital sphere continue to be a problem. The answer to these problems is blockchain. There is no room for any malpractices in it, just because of the way it runs. Computer science, data structures, and cryptography are all used in the technology.

Robots with Artificial Intelligence (AI)

Many private and public banks have begun to deploy chatbots or artificial intelligence (AI) robots to help with customer service. The practise is currently in its early stages, but it will undoubtedly develop and become more widely known in the days to come.

Fintech Businesses

Fintech, or financial technology, is a game-changing force in the industry. Fintech firms are now specialising in producing technology solutions that aid businesses in managing their financial operations, such as new software, applications, processes, and business models. Fintech investments have skyrocketed in the last decade, making it a multibillion-dollar business on a global scale.

Banks dealing specifically in digital transactions

Digital banks use only IT platforms that can be accessed via mobile phones, laptops, or tablets. Digital banks are paperless and branchless banks and they appear to be on the verge of displacing the traditional banking system. These financial institutions offer high-speed banking services at a minimal transaction fee. These virtual banks are an excellent option in today’s fast-paced society.