Financial services

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Financial services refers to services provided by the finance industry.

The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.[1]

Contents

[edit] History of financial services

[edit] In the United States

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 operating in the US financial services industry at that time to merge.[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.

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.

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.

[edit] Banks

Main article: Bank

A "commercial bank" is what is commonly referred to as simply 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).

[edit] Banking services

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
  • Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)
  • Issuance of credit cards and processing of credit card transactions and billing
  • Issuance of debit cards for use as a substitute for checks
  • Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
  • Provide wire transfers of funds and Electronic fund transfers between banks
  • Facilitation of standing orders and direct debits, so payments for bills can be made automatically
  • Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.
  • Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
  • Provide a cheque guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.
  • Notary service for financial and other documents

[edit] Private banking

The providing of banking services to very wealthy individuals and families. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services. [2]

Services are provided by a bank or a division of a financial services company.

This table displays the results of the Ultra high net 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] Capital market 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 amongst them 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 Bank Asset Management 723,366 Germany
10. Northern Trust Global Investments 589,800 US

[edit] Hedge fund management

Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Prominent hedge funds include:

[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

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 investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Examples of discount brokerages include:

Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds. Examples include:

[edit] Conglomerates

A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc.

A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

[edit] Financial Crime

[edit] UK

Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn is laundered by British institutions.[6] and is the responsibility of the Financial Services Authority

[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.[7] 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.

[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:[8]

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 rports:

  • 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
  • Cost-to-Income Ratio (CIR, C/I ratio) - An important measure of the efficiency of financial institutions, this refers to their operating expenses divided by their operating revenues. [Euromoney: cited below]
  • Diversification - In portfolio management, refers to the variety of securities within a portfolio in terms of its geographical or sectoral spread, or in terms of its credit quality. In general, risk is reduced as portfolio diversification increases. [Euromoney: cited below]
  • Equity-Linked Annuity - An annuity paying a fixed minimum rate, qualifying for bonus payments linked to the performance of an equity benchmark such as the S&P500.

[9]

[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] See also

[edit] Notes

  1. ^ Contrary Investor
  2. ^ http://www.investorwords.com/5946/private_banking.html investorwords.com
  3. ^ Euromoney
  4. ^ Barclays Global Investors
  5. ^ Prudential: Securities Processing Primer
  6. ^ "Watchdog warns of criminal gangs inside banks", Guardian. Retrieved on 2007-11-30. 
  7. ^ The Opportunity: Small Global Market Share, Page 11, from the Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04
  8. ^ BusinessWeek/Interbrand 2006 Global Brand Survey
  9. ^ Guide: Financial terminology from Annuities to to Zero-coupon bonds
  10. ^ CardReport: Charge-off
  11. ^ The Street

[edit] References

  • Porteous, Bruce T.; Pradip Tapadar (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0. 
  • Wengler, C.; Cornelia Gerster (2004). European Banking and Financial Services Law. Kluwer Law International. ISBN-10: 9041122990.