Financial services

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Financial services is a term used to refer to the services provided by the finance industry. Financial services is also the term used to describe organizations that deal with the management of money. Banks, investment banks, insurance companies, credit card companies, government sponsored enterprises, and stock brokerages, are examples of the types of firms comprising the industry, which provides a variety of money and investment related services. Financial services is the largest industry (or industry category) in the world, in terms of earnings; as of 2004, the industry represents 20% of the market capitalization of the S&P 500.[1]

Contents

[edit] History of financial services

[edit] United States: Gramm-Leach-Bliley Act

The term financial services became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies in the US financial services industry to merge. Critics of this act say the term financial services attempts to make the unison of these operations sound natural, ignoring the history of problems that have arisen from combining them, such as conflicts of interest and monopolization[citation needed]. Others, noting that many of the restrictions abolished by the Gramm-Leach-Bliley Act had never existed in other countries or had been abolished earlier than in the US, say the term financial services is a natural one, in long term use, which means nothing more than its constituent words[citation needed].

In the USA almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution. Allstate Insurance, for example, now provides CDs and investment brokerage services. Bank of America offers full-featured brokerage products, while E*TRADE has expanded into offering bank accounts and loans. Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S., e.g., in Japan, non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. This is essentially the style of Citigroup and JP Morgan Chase.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company. This is the style of Washington Mutual and Wells Fargo.

[edit] Banking Services: What do banks do?

Main article: Bank

The primary operations of banks include:

  • Keeping money safe while also allowing withdrawals when needed
  • Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
  • Provision of loans and mortgage loans (typically loans to purchase a home, property or business)
  • Issuance of credit cards
  • Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
  • Facilitation of standing orders and direct debits, so payments for bills can be made automatically

[edit] Virtual banking

Banking from home is called virtual banking, because it allows transactions that bypass branches and ATMs; in the case of Internet banking, there is no need to contact a bank staff member. Virtual banking has changed the way people bank in many ways. In the past, people opened a bank account when they first started work and stayed with that bank for their whole lives; now, it is much easier to move an account, mortgage or loan from one banking institution to another. Many customers look at what other banks are offering and change their account if they find a better deal, so banks now have fewer loyal customers. It is common for credit card companies to entice new customers with offers such as zero per cent interest for the first six months.

[edit] Commercial bank

A commercial bank is what is commonly considered a 'bank'. The term 'commercial' is used to distinguish it from an 'investment bank', a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity). Major commercial banks include:

[edit] Top ten banking groups in the world ranked by tier 1 capital

Top ten banks in the world (as at end-2004) according to The Economist:[2]

Rank Company Tier 1 Capital
(US$ billions)		 Country
1. Citigroup 73 US
2. JPMorgan Chase 69 US
3. HSBC 67 UK
4. Bank of America 64 US
5. Credit Agricole Group 63 France
6. Royal Bank of Scotland 43 UK
7. Mitsubishi Tokyo Financial Group 40 Japan
8. Mizuho Financial Group 39 Japan
9. HBOS 36 UK
10. BNP Paribas 35 France

[edit] Private banking

The term private bank is simply a marketing term for a bank or a division of a financial services company targeted towards wealthy individuals. Often it is used to describe specifically the lending services targeted towards this group, such as large margin loans.

This table displays the results of the Ultra high new worth (US$30m+) category of the 2006 private banking awards:[3]

Rank 06 Company Rank 05
1. JPMorgan Private Bank 1
2. Goldman Sachs 3
3. UBS 2
4. Citigroup Private Bank 4
5. Credit Suisse Private Banking 5
6. HSBC Private Bank 7
7. Pictet & Cie 6
8. Merrill Lynch n
9. Rothschild 8
10. ABN Amro Private Banking 10

Ranking: 'n' denotes 'nominated'

[edit] Investment Banks

Investment banks (capital market banks) underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products. Prominent investment banks include:


See also: Mergers & acquisitions

[edit] Bank cards

Bank cards include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.[citation needed]

[edit] Credit card machine services and networks

Companies which provide credit card machine and payment networks call themselves "merchant card providers". These include:

[edit] Investment Services

[edit] Asset Management

Main article: Investment management

Asset management is the term usually given to describe companies which run collective investment funds.

The following is Global Investor’s 2005 ranking of the top 10 investment managers by assets under management:[4]

Rank Company Assets under management
(US$million)		 Country
1. Barclays Global Investors 1,400,491 UK
2. State Street Global Advisors 1,367,269 US
3. Fidelity Investments 1,299,400 US
4. Capital Group Companies 1,050,435 US
5. The Vanguard Group 852,000 US
6. Allianz Global Investors 790,513 Germany
7. JPMorgan Asset Management 782,646 US
8. Mellon Financial Corporation 738,294 US
9. Deutsche Asset Management 723,366 Germany
10. Northern Trust Global Investments 589,800 US

[edit] Hedge Fund Managers

[edit] Custody services

Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004.[5] Firms engaged in custody services include:

[edit] Insurance related

Main article: Insurance

[edit] Insurance Brokerage

Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Significant companies in this sector of the financial services market include:

[edit] Insurance Underwriting

Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Some well known insurers include:

[edit] Reinsurance

Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses. Firms in this sector include:

See also: Underwriting

[edit] Intermediation or advisory services

[edit] Stock brokers (private client services) and discount brokers

Stock brokers assist people in investing, online only companies are called 'discount brokerages', companies with a branch presence are called 'full service brokerages' or 'private client services. Some of these are:

  • Ameritrade IZone - a subsidiary of Ameritrade

Other low-cost brokerages that function in a similar way to a dividend reinvestment program include:

[edit] Market share

The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share.[6]

In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32 % market share, etc. Despite this fragmentation, financial service companies as a group are by far the most profitable in the world, and if any grew to the same market share percentages as any other retail industry, the potential profit would be large.

[edit] 2004

S&P 500 index market capitalization in 2004:[7]

  • Financial Services: 20.30%
  • (Computer hardware & software: 15.30%) (as comparison to 1999)
  • Healthcare: 13.40%
  • Industrial Materials: 12.20%
  • Hardware (computer hardware): 10.80%
  • Consumer Goods: 9.70%
  • Consumer Services: 8.80%
  • Energy: 6.50%
  • Software: 4.50%
  • Business Services: 3.90%
  • Media: 3.90%

[edit] 1999

S&P 500 index (500 large American companies) market cap in 1999:[8]

  • Technology (hardware, software): 29.8%
  • Financial: 13.1
  • Consumer Staples: 11
  • Consumer Cyclicals: 9.2
  • Healthcare: 9
  • Capital Goods: 8.4
  • Communication Services: 8
  • Energy  : 5.5
  • Basic Materials: 3.00%
  • Utilities: 2.3
  • Transportation: 0.7

[edit] Brand equity

Each year, BusinessWeek and Interbrand publish their 100 Best Global Brands study, ranking the financial value of brands. The following are the financial services companies in this list, ranked by this study for 2006:[9]

Rank Brand Brand value
(US$billion)		 Annual
change		 2005
Rank		 Country
of origin
11 Citigroup 21.46 7% 12 U.S.
14 American Express 19.64 6% 14 U.S.
21 Merrill Lynch 13.00 8% 25 U.S.
28 HSBC 11.62 11% 29 U.K.
33 J.P. Morgan 10.21 8% 34 U.S.
36 Morgan Stanley 9.76 0% 33 U.S.
37 Goldman Sachs 9.64 13% 37 U.S.
42 UBS 8.73 15% 44 Switzerland
87 ING 3.47 9% 87 Netherlands

[edit] Glossary

Glossary for reading financial services reports:

  • Asset sensitive - a financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive.
  • Charge-offs - written off debt
  • Cost of funds - the cost of loan capital, the cost of funding assets; free liabilities include interest free checking accounts
  • Liability sensitive - the inverse of asset sensitive.
  • Operating leverage - a simple indication of a firm' s earnings strength; usually measuring the operating income as a percentage of gross income

[edit] Acronyms

  • NCL - net credit losses - cost of charge-offs, written off debt[10]
  • NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid[11]
  • NII - net interest income - interest income less interest cost
  • NIM - net interest margin - margin between interest income and interest cost
  • NPA - non performing assets - interest bearing assets not paying interest


[edit] Companies

[edit] See also

[edit] References

  1. ^ Contrary Investor
  2. ^ The Economist: The world's biggest banks, List of the world's ten largest banks by tier 1 capital at the end of 2004
  3. ^ Euromoney
  4. ^ Barclays Global Investors
  5. ^ Prudential: Securities Processing Primer
  6. ^ The Opportunity: Small Global Market Share, Page 11, from the Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04
  7. ^ Street Authority
  8. ^ Contrary Investor
  9. ^ BusinessWeek/Interbrand 2006 Global Brand Survey
  10. ^ CardReport: Charge-off
  11. ^ The Street
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