Understanding the key differentiating factors between a financial services institution and a bank primarily involves, considering the distinction between the provision of a ‘good’ and the intermediation of a ‘service’. As much as Banking exists as a subset of the financial services sector, it is equally true that not all bank services are strictly defined as financial services.
As per the International Monetary Fund’s (IMF) guidelines, 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 and debit cards, checks and electronic funds transfers.
The same would go for let us say, a financial advisor. The advisor manages assets and offers advice on behalf of a client. By the same virtue, the advisor does not directly provide investments or any other product. Instead, he or she facilitates the movement of funds between savers and the issuers of securities and other instruments. This service is defined as a temporary task rather than a tangible asset.
Similarly, financial goods are not tasks but rather, tangible ‘things’. A mortgage loan for example may seemingly appear to be a service, however, it is actually a product that extends well beyond its initial provision. Other examples of financial goods include stocks, bonds, loans, commodity assets, real estate and insurance policies.
The Difference Between Banks and the Financial Services Sector
In their standard practices, traditional banks offer both financial services and financial goods. An average consumer might open a savings account, wire funds and/or take out a car loan all from the same bank. In this respect, the bank is considered to be both a provider of financial services, as well as part of the financial services sector.
There are however many members within the financial services sector, that cannot simply be categorised as banks. Investment agencies and stock market brokers for example are not banks, yet they do provide financial services. Their services are in fact only intermediate services as opposed to end goods.
This distinction follows the principles economists tend to employ to distinguish between capital goods and consumer goods, i.e., 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.
As a rule of thumb, the banking industry mostly focuses on its role as a direct savings or lending provider; while the financial services sector incorporates investments, insurance, the redistribution of risk, and numerous other financial activities. Fundamentally, the revenue channels for each sector also hugely differ. Banks earn their revenue primarily on the difference in the interest rates charged for credit accounts and the rates paid to depositors; while revenue for financial services institutions tends to flow via fees, commissions, and other methods.