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 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 >>
  2. 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 >>
  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

    What is an Investment Bank?

    An investment bank is a financial intermediary that performs a variety of services.
  3. Investing

    FAS: Direxion Daily Financial Bull 3X ETF

    Obtain a thorough review and analysis of the Direxion Daily Financial Bull 3X fund, a leveraged ETF that tracks the performance of the financial sector.
  4. 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.
  5. Personal Finance

    Choose To Beat The Bank

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

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  8. 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.
  9. Investing

    The Globalization Of Financial Services

    The key to survival for many financial institutions will be to efficiently serve a global customer base.
  10. Investing

    KBE: SPDR S&P Bank ETF

    Explore analysis of the SPDR S&P Bank ETF, and learn how the ETF tracks the banking sector and how investors can benefit from this ETF.
RELATED TERMS
  1. Financial Institution - FI

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

    A financial system can be defined at the global, regional or ...
  3. Retail Banking

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

    A banking system in which banks provide a wide variety of financial ...
  5. Limited Service Bank

    Any type of banking business facility that is located separately ...
  6. Open Banking

    Open Banking is a system that provides a user with a network ...
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center