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. Intermediary Clause

    An intermediary clause is a provision that identifies the individuals ...
  4. Secondary Liquidity

    A form of liquidity that is part of an initial public offering ...
  5. Zero Basis Risk Swap - ZEBRA

    A swap agreement between a municipality and a financial intermediary. ...
  6. Finder's Fee

    A commission paid to an intermediary or the facilitator of a ...
Related Articles
  1. 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.
  2. Trading

    Fund Costs and Expenses

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

    This is Where Most Pension Funds Invest

    Pension funds have moved beyond traditional investments in bonds and stocks. The new order includes private equity and alternative investment pools.
  6. Investing

    Introduction To Institutional Investing

    Investopedia explains: Learn about institutional investing and all of the major players in this field.
  7. Investing

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What Distinguished 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 >>
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center