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. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Non-Objecting Beneficial Owner ...

    A beneficial owner who gives permission to a financial intermediary ...
  3. Peer-To-Peer Lending (P2P)

    A method of debt financing that enables individuals to borrow ...
  4. Clearing

    The procedure by which an organization acts as an intermediary ...
  5. Choice Market

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

    A class of financial intermediary that hires professional investment ...
Related Articles
  1. Personal Finance

    What is an Investment Bank?

    An investment bank is a financial intermediary that performs a variety of services.
  2. 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.
  3. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  4. 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.
  5. Investing

    Scoring Fund Investment Quality

    Learn some background on mutual funds and what factors can be used to assess their investment quality.
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. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  4. 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 >>
  5. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... 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. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  2. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  5. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
Trading Center