What
is a Financial Intermediary?
A
financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such
as a commercial bank, investment banks, mutual funds and pension funds. Financial intermediaries offer a number of
benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking and asset management. Although in certain areas, such as
investing, advances in technology threaten to eliminate the financial
intermediary, disintermediation is much less of a threat in other areas of finance,
including banking and insurance.
Breaking
Down Financial Intermediary
A non-bank financial intermediary does not accept deposits
from the general public. The intermediary may provide factoring, leasing,
insurance plans or other financial services. Many intermediaries take part in
securities exchanges and utilize long-term plans for managing and growing their
funds. The overall economic stability of a country may be shown through the
activities of financial intermediaries and growth of the financial services
industry.
Functions
of Financial Intermediaries
Financial intermediaries move funds from parties with excess
capital to parties needing funds. The process creates efficient markets and
lowers the cost of conducting business. For example, a financial advisor
connects with clients through purchasing insurance, stocks, bonds, real estate
and other assets. Banks connect borrowers and lenders by providing capital from
other financial institutions and from the Federal Reserve. Insurance companies
collect premiums for policies and provide policy benefits. A pension fund
collects funds on behalf of members and distributes payments to pensioners.
Mutual
Funds as Financial Intermediaries
Mutual funds provide active
management of capital pooled by shareholders. The fund manager connects with
shareholders through purchasing stock in companies he anticipates may
outperform the market. By doing so, the manager provides shareholders with
assets, companies with capital and the market with liquidity.
Benefits
of Financial Intermediaries
Through a financial intermediary,
savers can pool their funds, enabling them to make large investments, which in
turn benefits the entity in which they are investing. At the same time,
financial intermediaries pool risk by spreading funds across a diverse range of
investments and loans. Loans benefit households and countries by enabling them
to spend more money than they have at the current time.
Financial intermediaries also
provide the benefit of reducing costs on several fronts. For instance, they
have access to economies of scale to expertly evaluate the credit profile of
potential borrowers and keep records and profiles cost-effectively. Last, they
reduce the costs of the many financial transactions an individual investor
would otherwise have to make if the financial intermediary did not exist.
Example
of a Financial Intermediary Institutions
Several different types of financial intermediaries serve different
function in the economy. These are few of the most popular examples of financial
intermediaries.
- · Commercial Banks
- · Investment Banks
- · Insurance Companies
- · Credit Unions
- · Financial Advisors
- · Pension Funds
- · Mutual Funds
