What is Finance And Insurance?

Financial services is a term used to refer to the services provided by the finance industry. Financial services is also the term used to describe organizations that deal with the management of money and includes merchant banks, credit card companies, consumer finance companies, government sponsored enterprises, and stock brokerages. Financial services is the largest industry (or industry category) in the world, in terms of earnings; as of 2004, the industry represents 20% of the market capitalization of the S&P 500.^[1]

History of financial services

United States: Gramm-Leach-Bliley Act

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. Critics of this act say the term financial services attempts to make the unison of these operations sound natural, ignoring the history of problems that have arisen from combining them, such as conflicts of interest and monopolization . Others, noting that many of the restrictions abolished by the Gramm-Leach-Bliley Act had never existed in other countries or had been abolished earlier than in the US, say the term financial services is a natural one, in long term use, which means nothing more than its constituent words .

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. Allstate Insurance, for example, now provides CDs and investment brokerage services. Bank of America offers full-featured brokerage products, while E*TRADE has expanded into offering bank accounts and loans. 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. This is essentially the style of Citigroup and JP Morgan Chase.

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. This is the style of Washington Mutual and Wells Fargo.

Banking services: What do banks do?

Main article: Bank

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.

Commercial 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). Major commercial banks include:

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]

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]

Ranking: 'n' denotes 'nominated'

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

See also: Mergers & acquisitions

Bank cards

Bank cards include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.

• American Express
• Barclaycard
• Capital One
• Discover Card
• HSBC
• Intelligent Finance
• MasterCard
• Washington Mutual
• VISA

Credit card machine services and networks

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

• BA Merchant Services (Bank of America)
• First Data Corporation
• Heartland Payment Systems
• US Bank

Investment services

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]

Hedge fund managers

• Andor Capital Management
• BlackRock, Inc.
• Cargill
• Citadel Investment Group
• Greenlight Capital
• Man Group
• Mellon Financial Corporation
• Mizuho Holdings
• Pequot Capital Management
• RAB Capital
• Renaissance Technologies
• Soros Fund Management
• UBS Investment Bank

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:

• State Street Corporation
• The Bank of New York
• Mellon Financial Corporation
• Investors Bank and Trust
• JPMorgan Chase
• PNC Financial Services Group

Insurance

Main article: Insurance

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:

• Aon Corporation
• Marsh & McLennan Companies
• Wachovia
• Wells Fargo
• Willis

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:

• Allianz
• Allied Insurance
• Allstate
• AIG
• AXA
• Berkshire Hathaway
• Chubb Corporation
• CGNU
• Independent Order of Foresters
• Geico
• MetLife
• Mutual of Enumclaw
• New York Life
• Safeco
• Scor
• State Farm
• Zurich Financial Services

Reinsurance

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

• Berkshire Hathaway
• Lloyd's of London
• Munich Re
• Swiss Re

See also: Underwriting

Intermediation or advisory services

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:

• A. G. Edwards
• Ameritrade

* Ameritrade IZone - a subsidiary of Ameritrade

• Charles Schwab
• E*TRADE
• Edward Jones
• Merrill Lynch
• Morgan Stanley
• Smith Barney

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

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.

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.^[6]

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.

2004

S&P 500 index market capitalization in 2004:^[7]

• 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%

1999

S&P 500 index (500 large American companies) market cap in 1999:^[8]

• 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: 3.00%
• Utilities: 2.3
• Transportation: 0.7

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:^[9]

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

Acronyms

• NCL - net credit losses - cost of charge-offs, written off debt^[10]
• NCL rate - net credit loss rate - the percentage of the lending portfolio that is not expected to be repaid^[11]
• 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

Companies

• CitiGroup
• Primerica Financial Services
• Ameriprise Financial, Inc.
• American International Group
• Fidelity Investments
• The Hartford
• Prudential
• Kaupthing Bank
• Linsco/Private Ledgers
• Merrill Lynch
• Metlife
• World Financial Group

See also

• Accounting scandals
• BFSI
• European Financial Services Roundtable
• Financial analyst
• Financial markets
• Government sponsored enterprise
• International Monetary Fund
• Investment management
• Misleading financial analysis
• Thomson Financial League Tables

Notes

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.