Loading the player...

What is a 'Financial Institution - FI'

A financial institution (FI) is a company engaged in the business of dealing with monetary transactions, such as deposits, loans, investments and currency exchange. Financial institutions encompass a broad range of business operations within the financial services sector, including banks, trust companies, insurance companies, and brokerage firms or investment dealers. Virtually everyone living in a developed economy has an ongoing or at least periodic need for the services of financial institutions.

BREAKING DOWN 'Financial Institution - FI'

Because financial operations are a critical part of any economy, and because essentially all of a country's citizenry depends on financial institutions for transactions, savings and investment needs, governments consider it imperative to oversee and regulate banks and other financial service companies. Historically, the bankruptcy of financial institutions creates panic within an economy. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures regular deposit accounts to reassure individuals and businesses regarding the safety of their finances on deposit with financial institutions. The health of a nation's banking system is a linchpin of economic stability. Loss of confidence in financial institutions can easily lead to additional negative externalities in the economy.

Types of Financial Institutions

Financial institutions offer a wide range of products and services for individual and commercial clients. The specific services offered vary widely between different types of financial institutions.

Banks and similar business entities, such as thrifts or credit unions, offer the most commonly recognized and frequently used financial services: checking and savings accounts, certificates of deposit (CDs), home mortgages, and other types of loans for retail and commercial customers. Through means such as credit cards, wire transfers, letters of credit and currency exchange, banks act as payment agents, facilitating financial transactions between consumers and businesses or between companies.

Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings. They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions and other corporate restructurings.

Among the most familiar non-bank financial institutions are insurance companies. Providing insurance, whether for individuals or corporations, is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.

Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services. They also provide access to investment products that may range from stocks and bonds all the way to lesser-known alternative investments, such as hedge funds and private equity investments.

The early 21st century has seen an explosion in online banks that maintain no physical branches, and in non-bank financial firms that provide niche financial services such as personal loans, money transfers, debit cards and specific investments.

RELATED TERMS
  1. Commercial Bank

    A financial institution that provides services, such as accepting ...
  2. Financial System

    A financial system can be defined at the global, regional or ...
  3. Insured Financial Institution

    Any bank or savings institution that is covered by some form ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, ...
  5. Asset Management

    1. The management of a client's investments by a financial services ...
  6. Nonbank Banks

    Financial institutions that are not considered full-scale banks ...
Related Articles
  1. Personal Finance

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  2. Investing

    What's a Commercial Bank?

    A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes business, personal and mortgage loans; and offers basic financial products ...
  3. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  4. Insurance

    Federal Deposit Insurance Corporation (FDIC)

    The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrift institutions.
  5. Insights

    Financial Regulations: Glass-Steagall to Dodd-Frank

    Here are some of the most important financial regulations that have been established.
  6. Insurance

    Insurance Companies Vs. Banks: Separate And Not Equal

    Insurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
  7. Investing

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  8. Personal Finance

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  9. Personal Finance

    Find the Best Savings Account Rates

    You know how to spot the highest interest rate, but how do you really get the best deal on savings accounts?
RELATED FAQS
  1. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  2. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector. Read Answer >>
  3. What distinguishes the financial services sector from the banks?

    Learn about the difference between the banking industry and the financial services sector and how to distinguish financial ... Read Answer >>
  4. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
  5. What are the Federal Reserve's guidelines on demand deposit accounts?

    Read about some of the Federal Reserve's requirements and guidelines regarding the treatment, safeguarding and processing ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center