It's understandable that people often use the terms "bank" and "financial services" interchangeably. Though there is some legitimacy to this practice, there are some important distinctions that differentiate the two.
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 a banking service, you may want to think of the distinction between the provision of a good and the intermediation of a service.
Another way to look at it is that financial services are interested in managing a customer's money through investments, insurance, and other facilities, where banks take deposits and provide loans. Banks are also typically divided into retail banks, which provide the deposits and loans, and investment banks, which perform large scale activities, such as securities underwriting and initial public offerings. Banks can only offer some of the products and services available in the financial services sector.
The following is a discussion on some of the differences between banks and the financial services sector that highlight their differences and similarities.
- The financial sector is made up of a vast swath of economic entities, from retirement and investment companies, mortgage brokers, and banks.
- Banks themselves are typically divided into retail banks and investment banks.
- Banks are financial institutions that are licensed to provide loan products and receive deposits; non-banking institutions cannot do this.
- Financial services include insurance, the facilitation of payments, wealth management, and retirement planning.
- Though banks can provide some products offered by other financial service institutions, they cannot provide all.
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Financial Goods vs. Financial Services
According to the Finance and 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 cards and debit cards, checks, and electronic funds transfers.
Consider a financial advisor. The advisor manages assets and offers advice on behalf of a client. The advisor does not directly provide investments or any other product. Instead, the advisor facilitates the movement of funds between savers and the issuers of securities and other instruments.
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.
Are Banks a Financial Services Sector?
Traditional banks offer both financial services and financial goods. A saver might open a savings account, wire funds, and/or 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.
The Bottom Line
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 financial activities.
Banks earn revenue primarily on the difference in the interest rates charged on loans or other forms of borrowing and the rates paid to depositors. Financial services primarily earn revenue through fees, commissions, and other methods.