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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.

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