A:

Banking is a subset of the financial services sector, although not all bank services are strictly defined as financial services. To fully understand the difference between a financial services institution and a bank, or a financial service and banking service, think of the distinction between the provision of a good and the intermediation of a service.

Financial Good Vs. Financial Service

According to the Finance & Development department of the International Monetary Fund (IMF), a financial service is best described as the process by which a consumer or business acquires a financial good.

For example, a payment system provider is providing a financial service when it is able to accept and transfer funds from a payer to a recipient. This includes accounts that are settled through credit and debit cards, checks and electronic funds transfers.

Consider a financial adviser: the adviser manages assets and offers advice on behalf of a client. The adviser does not directly provide investments or any other product; rather, the adviser facilitates the movement of funds between savers and the issuers of securities and other instruments. This service is a temporary task, rather than a tangible asset.

Financial goods are not tasks; they are things. A mortgage loan may seem like a service, but it's actually a product that lasts beyond the initial provision. Stocks, bonds, loans, commodity assets, real estate and insurance policies are examples of financial goods.

Banks Vs. Other Financial Services

Traditional banks offer both financial services and financial goods. A saver might open a savings account, wire funds and take out a car loan all from the same bank. Clearly, the bank is a provider of financial services and should be considered part of the financial services sector.

Even the federal government includes banks in its description of the financial services sector. The Department of Homeland Security suggests that small community banks and credit unions are also part of this sector.

There are many members of the financial services sector that are not banks, though. Investment agencies and stock market brokers are not banks, but they certainly provide financial services. Their services are only intermediate services, not end goods. This distinction is similar to how economists distinguish between capital goods and consumer goods; an orange can be a consumer good if it is directly eaten by a consumer, but it can also be a capital good if a deli owner uses the orange to make juice.

In a more aggregate sense, the banking industry is most concerned with direct saving and lending while the financial services sector incorporates investments, insurance, the redistribution of risk, and other activities. Banks earn revenue primarily on the difference in the interest rates charged for credit accounts and the rates paid to depositors. Financial services earn revenue through fees, commissions, and other methods.

RELATED FAQS
  1. What other sectors are most similar to banking?

    Learn valuable information about the many different subsectors in the financial services sector that most closely resemble ... Read Answer >>
  2. What are the biggest trends affecting the profitability of the financial services ...

    Explore the trends that most affect the financial services sector, including the role of central bank policy and challenges ... Read Answer >>
  3. What are the main reasons an investor should consider an allocation to the banking ...

    Learn about investment opportunities in the commercial and investment banking industry. Find out why many investors choose ... Read Answer >>
  4. What is the financial services sector?

    Go beyond banks and credit unions to learn about the diverse group of companies that make up the fast-growing financial services ... Read Answer >>
  5. What other sectors are most similar to financial services?

    Learn about the various components of the financial services sector as the main economic area that allows countries to export ... Read Answer >>
  6. What economic indicators are important for investing in the financial services sector?

    Read about some of the most important macroeconomic indicators that investors in the financial services sector should watch ... Read Answer >>
Related Articles
  1. Investing

    Best Mutual Funds For Financial Service Company

    Understand the investment opportunities in the financial services sector, and learn about the best mutual funds for financial service company exposure for 2016.
  2. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  3. Personal Finance

    What is an Investment Bank?

    An investment bank is a financial intermediary that performs a variety of services.
  4. Personal Finance

    Choose To Beat The Bank

    From internet banking to credit unions, it's in your power to cut fees and maximize service.
  5. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  6. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  7. Financial Advisor

    Financial Funds Provide Diversity ... And Risk

    Sector funds can provide maximum exposure to financial industry stocks, but this benefit is a double-edged sword.
  8. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
RELATED TERMS
  1. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  2. Financial Sector

    A category of stocks containing firms that provide financial ...
  3. Services Sector ETF

    Exchange-traded funds (ETFs) that invest in either the consumer ...
  4. Service Sector

    The portion of the economy that produces intangible goods. According ...
  5. Retail Banking

    Typical mass-market banking in which individual customers use ...
  6. Universal Banking

    A banking system in which banks provide a wide variety of financial ...
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  4. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  5. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center