If you want to know all about financial intermediaries, you are definitely reading the right article. It contains all you need to know, including the definition, examples, types, etc.
Financial intermediaries are simply middlemen. They are negotiators who act as links between parties.
When it comes to financing, some intermediaries make things happen.
Your knowledge of financial intermediaries can help you hire the right negotiator for your business or finance needs.
The following are quick details about financial intermediaries. You will get to know what they mean, examples and types, and other important facts.
What are Financial Intermediaries?
Financial Intermediaries are individuals or organizations that act as a link between the investors and the borrowers, to meet the financial objectives of both parties.
A financial intermediary can also be defined as an entity that facilitates a financial transaction between two parties.
He or she is a link that brings two parties together and intending to help everyone achieve their set objectives.
Wikipedia’s definition of a financial intermediary is also in line with the definitions mentioned above. It reads “A financial intermediary is an institution or individual that serves as a middleman among diverse parties to facilitate financial transactions.”
Functions of Financial Intermediaries
Financial intermediaries perform various functions for their different clients.
Any of the functions that are provided would be dependent on what the intermediary is set up to do from the onset.
That said, here are the common functions of financial intermediaries:
- They accept deposits from clients with excess cash.
- They help convert savings into investments for clients.
- They provide facilities to store cash and liquid assets for clients
- They provide short and long term loans to clients who need them. These loans can be used to finance homes, education, auto, small businesses, and other personal needs.
- They advise clients on how to invest and grow their money.
- They engage in risk transformation by converting risky investments into relatively risk-free one.
Indeed, these various functions are targeted at helping clients maximize their returns and reduce their risks.
Examples and Types of Financial Intermediaries
The following are common examples of financial intermediaries
These are companies or organizations that allow customers to deposit money into an account. Examples of the depository institutions include:
These are for-profit institutions that accept deposits from their registered customers. They also issue loans and give financial advice to clients.
These are non-for-profits organizations that accept deposits from members. Members can obtain loans from their combined savings.
Fees for loans are usually lower than what obtains from banks. Besides lending, credit unions also oversee many credit-related inquiries.
These are financial institutions and government entities that collect regular contributions from employers to provide retirement income for employees.
The collected sum is invested in different profitable schemes. The employer’s or investor’s fund is returned with interest after their retirement.
These are companies that sell insurance policies to clients. They are financial intermediaries in the sense that they collect insurance premiums from clients and pool and if a claim is made by a customer, the insurance company will access the pool of money to indemnify the customer.
These are institutions that facilitate the buying and selling of stocks like penny stocks, shares, or securities.
People can buy stocks or sell stocks of corporations through these platforms.
The exchanges facilitate the entire process so that the customers get their desired assets while the corporations get the funding they need.
Stock Exchanges act as financial intermediaries and earn revenue from transaction fees and interest rates.
Mutual Fund Companies
These are platforms pool resources from different investors or members. They eventually invest the funds in bonds, securities, and other investment options to achieve a capital gain in the future.
There are companies with a pool of assets that regularly sell and redeem their shares.
The fund manager invests the funds into a larger investment fund so that investors can benefit from being part of it.
Mutual funds enable small investors to benefit from a large investment trust.
Other examples of financial intermediaries include:
- Building societies
- Cooperative societies
- Financial advisors
Advantages of Financial Intermediaries
Financial intermediaries offer lots of advantages that include the following:
- Financial intermediaries save time and cost – You save time and cost of finding the right lenders. You leave that function to a specialist while you use your time for other important things.
- Financial intermediaries lower the default risk – you may not likely lose all your investment if an intermediary handles it for you.
- Financial intermediaries help to customize services for their clients.
- Financial intermediaries provide economies of scale. The cost of borrowing much needed money and lending money through financial intermediaries is lower than direct lending/borrowing.
- Financial intermediaries provide economies of scope. Financial intermediaries can focus on the lending or borrowing demands of their clients. This helps them to improve on their products and services which can be used as templates for different clients.
- Financial intermediaries provide greater liquidity. You can borrow large sums of money through these intermediaries than from a non-financial intermediary.
- Financial intermediaries are Financial Specialists who understand the best levels and timing of profitable investments.
Disadvantages of Financial Intermediaries
- There may be high fees and commissions – Financial intermediaries impose fees on their services. These fees could be higher.
- There are often Opposing goals – Investors and financial intermediaries often have opposing goals. The conflicting goals may result in the goal or objective of just one of the parties to be fulfilled.
- They may be low returns on investment – Financial intermediaries may provide low returns on the investments made on behalf of clients. This is because their main goal of profit is prioritized above the high-interest returns for investors.
- They charge High Interests on Loans to borrowers. Most financial intermediaries charge a high rate of interest on the loan provided to the borrowers. This so they can earn a profit.
The above is what you should know about financial intermediaries. They are many types and examples around. They offer a lot of functions to clients.
There are many benefits associated with using them. There are also disadvantages associated with the operations of these middlemen.
By and large, the benefits definitely outweigh the drawbacks.