Financial services

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Financial services refers to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States.^[1]

[edit] History of financial services

[edit] In the United States

The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies in the US financial services industry to merge.^{[citation needed]} In the USA almost every company now which previously described themselves as a bank, insurance company, or brokerage house, now describes themselves in some way as a financial services institution.

Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S., e.g., in Japan, non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc.

In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company.

[edit] Banks

Main article: Bank

A "commercial bank" is what is commonly considered a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

[edit] Banking services

The primary operations of banks include:

Keeping money safe while also allowing withdrawals when needed
Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
Provision of loans and mortgage loans (typically loans to purchase a home, property or business)
Issuance of credit cards
Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
Facilitation of standing orders and direct debits, so payments for bills can be made automatically
Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.
Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
Provide a cheque guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.

[edit] Top ten banking groups in the world ranked by tier 1 capital

Top ten banks in the world (as at end-2006) according to The Economist:^[2]

Rank	Company	Tier 1 Capital (US$ billions)	Country
1.	Bank of America	91	US
2.	Citigroup	90	US
3.	HSBC	88	UK
4.	Credit Agricole Group	85	France
5.	JPMorgan Chase	81	US
6.	Mitsubishi UFJ Financial Group	69	Japan
7.	ICBC	59	China
8.	Royal Bank of Scotland	59	UK
9.	Bank of China	52	China
10.	Banco Santander	47	Spain

[edit] Private banking

The term private bank is simply a marketing term for a bank or a division of a financial services company targeted towards wealthy individuals. Often it is used to describe specifically the lending services targeted towards this group, such as large margin loans.

This table displays the results of the Ultra high net worth (US$30m+) category of the 2006 private banking awards:^[3]

Rank 06	Company	Rank 05
1.	JPMorgan Private Bank	1
2.	Goldman Sachs	3
3.	UBS	2
4.	Citigroup Private Bank	4
5.	Credit Suisse Private Banking	5
6.	HSBC Private Bank	7
7.	Pictet & Cie	6
8.	Merrill Lynch	n
9.	Rothschild	8
10.	ABN Amro Private Banking	10

Ranking: 'n' denotes 'nominated'

[edit] Capital market banks

Capital market banks underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products. Prominent amongst them include:

Barclays Capital
Bear Stearns
Citigroup Global Markets (formerly Salomon Brothers)
Credit Suisse First Boston
Goldman Sachs
ING
JPMorgan Chase
Lehman Brothers
Merrill Lynch
Morgan Stanley
Nomura
UBS
Gleacher Shacklock
D.A. Davidson & Co.

See also: Mergers & acquisitions

[edit] Bank cards

Bank cards include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.^{[citation needed]}

[edit] Credit card machine services and networks

Companies which provide credit card machine and payment networks call themselves "merchant card providers". These include:

[edit] Investment services

[edit] Asset management

Main article: Investment management

Asset management is the term usually given to describe companies which run collective investment funds.

The following is Global Investor’s 2005 ranking of the top 10 investment managers by assets under management:^[4]

Rank	Company	Assets under management (US$million)	Country
1.	Barclays Global Investors	1,400,491	UK
2.	State Street Global Advisors	1,367,269	US
3.	Fidelity Investments	1,299,400	US
4.	Capital Group Companies	1,050,435	US
5.	The Vanguard Group	852,000	US
6.	Allianz Global Investors	790,513	Germany
7.	JPMorgan Asset Management	782,646	US
8.	Mellon Financial Corporation	738,294	US
9.	Deutsche Bank Asset Management	723,366	Germany
10.	Northern Trust Global Investments	589,800	US

[edit] Hedge fund managers

[edit] Custody services

Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004.^[5] Firms engaged in custody services include:

[edit] Insurance

Main article: Insurance

[edit] Insurance brokerage

Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Significant companies in this sector of the financial services market include:

[edit] Insurance underwriting

Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Some well known insurers include:

[edit] Reinsurance

Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses. Firms in this sector include:

See also: Underwriting

[edit] Intermediation or advisory services

[edit] Stock brokers (private client services) and discount brokers

Stock brokers assist people in investing, online only companies are called 'discount brokerages', companies with a branch presence are called 'full service brokerages' or 'private client services. Some of these are:

Ameritrade IZone - a subsidiary of Ameritrade

Other low-cost brokerages that function in a similar way to a dividend reinvestment program include:

BUYandHOLD
Edgar, Dunn & Company (Edgar, Dunn & Company is a financial services consultancy)
FolioFN
General Electric (GE is one of the largest financial companies)
Sharebuilder

[edit] Conglomerates

A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, .....

A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

[edit] Financial Crime

[edit] UK

Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn is laundered by British institutions.^[6]

[edit] Market share

The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share.^[7]

In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32 % market share, etc. Despite this fragmentation, financial service companies as a group are by far the most profitable in the world, and if any grew to the same market share percentages as any other retail industry, the potential profit would be large.

[edit] 2004

S&P 500 index market capitalization in 2004:^[8]

Financial Services: 20.30%
(Computer hardware & software: 15.30%) (as comparison to 1999)
Healthcare: 13.40%
Industrial Materials: 12.20%
Hardware (computer hardware): 10.80%
Consumer Goods: 9.70%
Consumer Services: 8.80%
Energy: 6.50%
Software: 4.50%
Business Services: 3.90%
Media: 3.90%

[edit] 1999

S&P 500 index (500 large American companies) market cap in 1999:^[9]

Technology (hardware, software): 29.8%
Financial: 13.1%
Consumer Staples: 11%
Consumer Cyclicals: 9.2%
Healthcare: 9%
Capital Goods: 8.4%
Communication Services: 8%
Energy : 5.5%
Basic Materials: 3%
Utilities: 2.3%
Transportation: 0.7%

[edit] Brand equity

Each year, BusinessWeek and Interbrand publish their 100 Best Global Brands study, ranking the financial value of brands. The following are the financial services companies in this list, ranked by this study for 2006:^[10]

Rank	Brand	Brand value (US$billion)	Annual change	2005 Rank	Country of origin
11	Citigroup	21.46	7%	12	U.S.
14	American Express	19.64	6%	14	U.S.
21	Merrill Lynch	13.00	8%	25	U.S.
28	HSBC	11.62	11%	29	U.K.
33	J.P. Morgan	10.21	8%	34	U.S.
36	Morgan Stanley	9.76	0%	33	U.S.
37	Goldman Sachs	9.64	13%	37	U.S.
42	UBS	8.73	15%	44	Switzerland
87	ING	3.47	9%	87	Netherlands

[edit] Glossary

Glossary for reading financial services reports:

Asset sensitive - a financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive.
Charge-offs - written off debt
Cost of funds - the cost of loan capital, the cost of funding assets; free liabilities include interest free checking accounts
Liability sensitive - the inverse of asset sensitive.
Operating leverage - a simple indication of a firm' s earnings strength; usually measuring the operating income as a percentage of gross income

[edit] Acronyms

NCL - net credit losses - cost of charge-offs, written off debt^[11]
NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid^[12]
NII - net interest income - interest income less interest cost
NIM - net interest margin - margin between interest income and interest cost
NPA - non performing assets - interest bearing assets not paying interest

[edit] See also

[edit] Notes

^ Contrary Investor
^ The Economist: The world's biggest banks, List of the world's ten largest banks by tier 1 capital at the end of 2006
^ Euromoney
^ Barclays Global Investors
^ Prudential: Securities Processing Primer
^ "Watchdog warns of criminal gangs inside banks", Guardian. Retrieved on 2007-11-30.
^ The Opportunity: Small Global Market Share, Page 11, from the Sanford C. Bernstein & Co. Strategic Decisions Conference - 6/02/04
^ Street Authority
^ Contrary Investor
^ BusinessWeek/Interbrand 2006 Global Brand Survey
^ CardReport: Charge-off
^ The Street

[edit] References

Porteous, Bruce T.; Pradip Tapadar (2005). Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0.

Wengler, C.; Cornelia Gerster (2004). European Banking and Financial Services Law. Kluwer Law International. ISBN-10: 9041122990. de:Finanzdienstleistung

fr:Secteur financier id:Jasa keuangan no:Finansielle tjenester pl:Usługa finansowa ru:Финансовые услуги zh:金融服务业

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