What is the Financial Sector?

If you work in a bank, investment firm, or insurance company, your job is in the Financial Sector. It is a cornerstone of any modern economy, consisting of a vast network of companies and institutions. They are all involved in handling the flow of money.

The financial sector is the system that allows us to save, invest, borrow, and spend.

The Oxford Reference Dictionary has the following definition of the term:

“The part of the economy concerned mainly with lending and borrowing, long or short term. This includes banks, non-bank financial intermediaries such as building societies (UK) or savings and loan associations (US), as well as merchant banks, insurance companies, pension funds, and a range of financial managers and advisers.”

The Financial Sector vs. Financial Services Sector

The two terms are very similar. The financial sector is a section of the economy consisting of firms and institutions that provide financial services to commercial and retail customers.

Many people use the two terms interchangeably, but there is a slight and subtle difference between the two.

  • The Financial Sector

This is a broad term, it includes all businesses and organizations involved in the management, investment, transfer, and lending of money, plus the regulatory framework that governs them.

  • The Financial Services Sector

The financial services sector is more specifically focused on the services aspect – it is a subset of the financial sector that provides financial services to businesses and individuals like you and me.

The financial services sector includes banking services, investment services, insurance services, and any other service tha manages money for the purpose of savings, investment, or for other financial transactions.

Put simply, the financial services sector is part of the financial sector.

Two images depicting the FINANCIAL SECTOR and a definition of the term
Image created by Market Business News.

Key Players

  • Banks

For most of us, banks are the most familiar institutions in the financial sector. They hold our deposits, lend us money to buy homes and cars, and provide services like checking accounts (UK: current accounts).

Banks have been part of our financial landscape for over two thousand years.

  • Investment Firms

These firms help people and businesses buy and sell stocks (shares), bonds, mutual funds, commodities, derivatives, real estate, and other financial assets.  They manage funds and advise us on how to increase wealth.

  • Insurance Companies

We pay premiums to insurance companies, and in return, they protect us from financial risks, that is, they cover the costs related to unexpected events like accidents, illnesses, thefts, fire, property damage, liability claims, natural disasters, and loss of income.

  • Central Banks

Central banks are an important part of the financial sector. Central banks act as the “bank for banks.” They are in charge of monetary policy, that is, they set interest rates and oversee the nation’s money supply to keep the economy running smoothly.

Examples of central banks include the Federal Reserve (United States), the European Central Bank (European Union), the Bank of England (United Kingdom), the Reserve Bank of Australia (Australia), the Bank of Canada (Canada), and the Reserve Bank of India (India).

Why the Financial Sector Matters

The financial sector is a crucial part of the economy. Let’s see why it is important:

  • Savings and Investment

It provides a safe place where we and businesses can save our money. These savings are subsequently funneled back into investments that help companies expand and create jobs.

  • Managing Risk

Thanks to insurance companies, we can manage or minimize risk and its consequences. There are also investment options for investors with varying levels of risk tolerance, from risk-averse to risk-seeking individuals.

  • Facilitating Payments

Thanks to credit cards, debit cards, online payment systems, mobile payment apps, digital wallets, contactless payments, and card readers, everyday spending is easy.

  • Supporting Businesses

Businesses of all sizes, from small startups to giant multinational corporations rely on the financial sector for loans, investment capital, financial advising, M&A services, asset management, accounting services, and other services.

Final Thoughts

The financial sector is a complex, and vital part of our economic lives. Since the advent of the Internet, it has undergone significant change, adapting to the digital age with innovations like online banking, fintech startups, and blockchain technology.