'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 and includes
merchant banks,
credit card companies, consumer finance companies,
government sponsored enterprises, and
stock brokerages. 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]
History of financial services
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
1980s, 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 . 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 .
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.
Banking Services: ''What do banks do?''
Main articles: 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
★ 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 cheques guaranteed by the Bank itself prepaid by the customer which are the recognised as valid by other Banks;sometimes called travellers cheques.
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.
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:
===Top ten banking groups in the world ranked by
tier 1 capital===
Top ten banks in the world (as at end-2006) according to
The Economist:
[2]
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 net worth (
US$30m+) category of the 2006 private banking awards:
[3]
Ranking: 'n' denotes 'nominated'
Capital Market Banks
''
Capital Market banks''
underwrite debt and
equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into
structured finance products. Prominent amongst them include:
★
Barclays Capital
★
Bear Stearns
★
Citigroup Global Markets (formerly
Salomon Brothers)
★
Credit Suisse First Boston
★
Goldman Sachs
★
ING
★
JPMorgan Chase
★
Lehman Brothers
★
Merrill Lynch
★
Morgan Stanley
★
Nomura
★
UBS
★
Gleacher Shacklock
''See also:
Mergers & acquisitions''
Bank cards
''Bank cards'' include both
credit cards and
debit cards. Bank Of America is the largest issuer of bank cards.
★
American Express
★
Barclaycard
★
Capital One
★
Discover Card
★
HSBC
★
Intelligent Finance
★
MasterCard
★
Washington Mutual
★
VISA
Credit card machine services and networks
Companies which provide credit card machine and payment networks call themselves "merchant card providers". These include:
★
BA Merchant Services (Bank of America)
★
First Data Corporation
★
Heartland Payment Systems
★
US Bank
Investment Services
Asset Management
Main articles: Investment management
Asset management is the term usually given to describe companies which run
collective investment funds.
The following is
Global Investor’s 2005 ranking of the top 10 investment managers by assets under management:
[4]
| Rank | Company | Assets under management
(US$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 |
===
Hedge Fund Managers===
★
Andor Capital Management
★
BlackRock, Inc.
★
Cargill
★
Citadel Investment Group
★
Greenlight Capital
★
Man Group
★
Mellon Financial Corporation
★
Mizuho Holdings
★
Pequot Capital Management
★
RAB Capital
★
Renaissance Technologies
★
Soros Fund Management
★
UBS Investment Bank
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:
★
State Street Corporation
★
The Bank of New York
★
Mellon Financial Corporation
★
State Street Corporation
★
Investors Bank and Trust
★
JPMorgan Chase
★
PNC Financial Services Group
Insurance related
Main articles: Insurance
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:
★
Aon Corporation
★
Marsh & McLennan Companies
★
Wachovia
★
Wells Fargo
★
Willis
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:
★
Allianz
★
Allied Insurance
★
Allstate
★
AIG
★
AXA
★
Berkshire Hathaway
★
Chubb Corporation
★
CGNU
★
Independent Order of Foresters
★
Geico
★
MetLife
★
Mutual of Enumclaw
★
New York Life
★
Safeco
★
Scor
★
State Farm
★
Zurich Financial Services
Reinsurance
Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses. Firms in this sector include:
★
Berkshire Hathaway
★
Lloyd's of London
★
Munich Re
★
Swiss Re
''See also:
Underwriting''
Intermediation or advisory services
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:
★
A.G. Edwards
★
Ameritrade
:
★
Ameritrade IZone - a subsidiary of Ameritrade
★
Charles Schwab
★
E
★ TRADE
★
Edward Jones
★
Merrill Lynch
★
Morgan Stanley
★
Smith Barney
Other low-cost brokerages that function in a similar way to a
dividend reinvestment program include:
★
BUYandHOLD
★
Edgar, Dunn & Company (Edgar, Dunn & Company is a financial services consultancy)
★
FolioFN
★
General Electric (GE is one of the largest financial companies)
★
Sharebuilder
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, .....
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.
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.
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%
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
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]
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
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
Companies
★
CitiGroup
★
Primerica Financial Services
★
State Street Corporation
★
Ameriprise Financial, Inc.
★
American International Group
★
Fidelity Investments
★
The Hartford
★
Prudential
★
Kaupthing Bank
★
Linsco/Private Ledgers
★
Merrill Lynch
★
Metlife
★
World Financial Group
See also
★
Accounting scandals
★
BFSI
★
European Financial Services Roundtable
★
Financial analyst
★
Financial markets
★
Government sponsored enterprise
★
International Monetary Fund
★
Investment management
★
Misleading financial analysis
★
Thomson Financial League Tables
Notes
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 2006
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
References
★
Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates, , Bruce T., Porteous, Palgrave Macmillan, , ISBN 1-4039-3608-0
★
European Banking and Financial Services Law, , C., Wengler, Kluwer Law International, , ISBN-10: 9041122990
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