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Financial Services: Getting the Goods

 

How consumers and businesses acquire financial goods such as loans and insurance

 

What is a financial service?

Among the things money can buy, there is a difference between a good (something tangible that lasts, whether for a long or short time) and a service (a job that someone performs for you). A financial service is not the financial good itself—say a mortgage loan to buy a house or a car insurance policy—but something that is best described as the process of acquiring the financial good. In other words, it involves the transaction required to obtain the financial good.

 

Intermediation

At its heart, the financial sector intermediates. It channels money from savers to borrowers, and it matches people who want to lower risk with those willing to take on that risk. People saving for retirement, for example, might benefit from intermediation. Lending and collecting payments are complicated and risky, and savers often don’t have the expertise or time to do so. Finding an intermediary can be a better route.

 

Cost of services

How people pay for financial services can vary widely, and the costs are not always transparent. For relatively simple transactions, compensation can be on a flat-rate basis (say, $100 in return for filing an application). Charges can also be fixed ($20 an hour to process loan payments), based on a commission (say, 1 percent of the value of the mortgage sold), or based on profits (the difference between loan and deposit rates, for example). The incentives are different for each type of compensation, and whether they are appropriate depends on the situation.

 

Regulation

Even relatively simple financial goods can be complex, and there are often long lags between the purchase of a service and the date the provider has to deliver the service. The market for services depends a great deal on trust. Customers (both savers and borrowers) must have confidence in the advice and information they are receiving. For example, purchasers of life insurance count on the insurance company being around when they die. They expect there will be enough money to pay the designated beneficiaries and that the insurance company won’t cheat the heirs.

The importance of financial services to the economy and the need to foster trust among providers and consumers are among the reasons governments oversee the provision of many financial services. This oversight involves licensing, regulation, and supervision, which vary by country.

 

Productive uses

Financial services help put money to productive use. Instead of stashing money under their mattresses, consumers can give their savings to intermediaries who might invest them in the next great technology or allow someone to buy a house. The mechanisms that intermediate these flows can be complicated, and most countries rely on regulation to protect borrowers and lenders and help preserve the trust that underpins all financial services.

 

     Financial Services in India

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector.  The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMG-Confederation of Indian Industry (CII).  With a combined push by both government and private sector, India is undoubtedly one of the world's most vibrant capital markets.