Loading the player...

What is a 'Financial Intermediary'

A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking and asset management. Although in certain areas, such as investing, advances in technology threaten to eliminate the financial intermediary, disintermediation is much less of a threat in other areas of finance, including banking and insurance.

BREAKING DOWN 'Financial Intermediary'

A non-bank financial intermediary does not accept deposits from the general public. The intermediary may provide factoring, leasing, insurance plans or other financial services. Many intermediaries take part in securities exchanges and utilize long-term plans for managing and growing their funds. The overall economic stability of a country may be shown through the activities of financial intermediaries and growth of the financial services industry.

Functions of Financial Intermediaries

Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate and other assets. Banks connect borrowers and lenders by providing capital from other financial institutions and from the Federal Reserve. Insurance companies collect premiums for policies and provide policy benefits. A pension fund collects funds on behalf of members and distributes payments to pensioners.

Mutual Funds as Financial Intermediaries

Mutual funds provide active management of capital pooled by shareholders. The fund manager connects with shareholders through purchasing stock in companies he anticipates may outperform the market. By doing so, the manager provides shareholders with assets, companies with capital and the market with liquidity.

Example of a Financial Intermediary

In July 2016, the European Commission took on two new financial instruments for European Structural and Investment (ESI) fund investments. The goal was creating easier access to funding for startups and urban development project promoters. Loans, equity, guarantees and other financial instruments attract greater public and private funding sources that may be reinvested over many cycles as compared to receiving grants.

One of the instruments, a co-investment facility, provides funding for startups to develop their business models and attract additional financial support through a collective investment plan managed by one main financial intermediary. The European Commission projected the total public and private resource investment at approximately $16.5 million per small- and medium-sized enterprise.

RELATED TERMS
  1. Disintermediation

    1. In finance, withdrawal of funds from intermediary financial ...
  2. Investment Securities

    Securities that are purchased in order to be held for investment. ...
  3. Middleman

    A slang term for an intermediary in a transaction or process ...
  4. Choice Market

    A market in which the spread between the bid and the ask for ...
  5. Manager Of Managers - MOM

    A class of financial intermediary that hires professional investment ...
  6. Brokered Market

    A marketplace where buyers and sellers are brought together by ...
Related Articles
  1. Investing

    What Does a Financial Intermediary Do?

    A financial intermediary is an institution that acts as a go-between in a financial transaction.
  2. Personal Finance

    What is an Investment Bank?

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

    Scoring Fund Investment Quality

    Learn some background on mutual funds and what factors can be used to assess their investment quality.
  5. Investing

    Savings Accounts Not Always The Best Place For Cash Assets

    Money market funds may be all that stands between you and increasing your wealth.
  6. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  7. Investing

    Introduction To Institutional Investing

    Investopedia explains: Learn about institutional investing and all of the major players in this field.
RELATED FAQS
  1. What is the difference between a correspondent bank and intermediary bank?

    Read about the differences between intermediary banks and correspondent banks, why their role is necessary, and where the ... Read Answer >>
  2. Why are insurance companies and pension funds considered financial instruments?

    Find out why insurance companies and pension funds are considered carriers of financial instruments, and what role they play ... Read Answer >>
  3. What percentage of asset management firms are privately held and not publicly traded?

    Explore asset management firms, a major part of the financial services sector, and learn about the respective markets served ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. How do investment banks help the economy?

    Learn more about the functions of investment banks in a modern economy and how investment banks have been treated differently ... Read Answer >>
Hot Definitions
  1. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  2. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  5. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  6. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
Trading Center