by A financial intermediary is an entity that facilitates a financial transaction between two parties. Such an intermediary or a middleman could be a firm or an institution. Some examples of financial intermediaries are banks, insurance companies, pension funds, investment banks and more.
One can also say that the primary objective of the financial intermediaries is to channel savings into investments. These intermediaries charge a fee for their services.
Examples of Financial Intermediaries
Bank: These intermediaries are licensed to accept deposits, give loans and offer many other financial services to the public. They play a major role in the economic stability of a country, and thus, face heavy regulations.
Mutual Funds: They help pool savings of individual investors into financial markets. A fund manager oversees a mutual fund and allocates the funds to different investment products.
Financial advisors: Such intermediaries may or not offer a financial product, but advises investors to help them achieve their financial objectives. These advisors usually undergo special training.
Credit Union: It is also a type of bank, but works to serve its members and not public. They may or may not operate for profit purposes.
Other financial intermediaries are pension funds, insurance companies, investment banks and more.
Functions of Financial Intermediaries
A financial intermediary performs the following functions:
- As said before, the biggest function of these intermediaries is to convert savings into investments.
- Intermediaries like commercial banks provide storage facilities for cash and other liquid assets, like precious metals.
- Giving short and long-term loans is a primary function of the financial intermediaries. These intermediaries accept deposits from the entities with surplus cash and then loan them to entities in need of funds. Intermediaries give the loan at interest, part of which is given to the depositors, while the balance is retained as profits.
- Another major function of these intermediaries is to assist clients to grow their money via investment. Intermediaries like mutual funds and investment banks use their experience to offer investment products to help their clients maximize returns and reduce risks.
Advantages of Financial Intermediaries
- They help in lowering the risk of an individual with surplus cash by spreading the risk via lending to several people. Also, they thoroughly screen the borrower, thus, lowering the default risk.
- They help in saving time and cost. Since these intermediaries deal with a large number of customers, they enjoy economies of scale.
- Since they offer a large number of services, it helps them customize services for their client. For instance, banks can customize the loans for small and long term borrowers or as per their specific needs. Similarly, insurance companies customize plans for all age groups.
- They accumulate and process information, thus lowering the problem of asymmetric information.
