What is a financial intermediary
A financial intermediary is an entity that acts as an intermediary 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 advantages to the average consumer, including the security, liquidity and economies of scale involved in commercial banking, investment banking and asset management. Although technological advances threaten to wipe out the financial intermediary in some areas, such as investment, disintermediation is much less threatening in other areas of finance, including banking and insurance.
BREAKDOWN OF FINANCIAL INTERMEDIATES
A non-bank financial intermediary does not accept deposits from the general public. The intermediary may provide factoring, leasing, insurance or other financial services. Many intermediaries participate in stock exchanges and use long-term plans to manage and grow their funds. The overall economic stability of a country can be demonstrated by the activities of financial intermediaries and the growth of the financial services industry.
Functions of financial intermediaries
Financial intermediaries transfer the funds of the parties with excess capital to the parties in need of funds. The process creates efficient markets and lowers the cost of doing business. For example, a financial advisor communicates with clients by purchasing insurance, stocks, bonds, real estate and other assets. Banks link borrowers and lenders by providing capital from other financial institutions and the Federal Reserve. Insurance companies collect premiums for policies and provide benefits. A pension fund collects funds on behalf of members and distributes payments to retirees.
Mutual funds as financial intermediaries
Mutual funds provide active management of the capital pooled by shareholders. The fund manager communicates with shareholders by buying shares in companies that he believes could outperform the market. In doing so, the manager makes available to shareholders assets, companies with capital and the market with liquidity.
Benefits of financial intermediaries
Thanks to a financial intermediary, savers can pool their funds, which allows them to make large investments, which in turn benefits the entity in which they invest. At the same time, financial intermediaries pool risks by spreading funds across a wide range of investments and loans. Loans benefit households and countries by allowing them to spend more money than they currently have.
Financial intermediaries also offer the advantage of reducing costs on several fronts. For example, they have access to economies of scale to expertly assess the credit profile of potential borrowers and maintain records and profiles at lower cost. Finally, they reduce the costs of the many financial transactions that an individual investor would otherwise have to make if the financial intermediary did not exist.
Example of financial intermediary
In July 2020, the European Commission adopted two new financial instruments for European Structural and Investment Fund (ESI) investments. The objective was to facilitate access to funding for startups and promoters of urban development projects. Loans, equity, guarantees and other financial instruments attract more sources of public and private funding that can be reinvested over several cycles compared to receiving grants.
One of the instruments, a co-investment facility, was to provide financing to startups to develop their business models and attract additional financial support through a collective investment plan managed by a main financial intermediary. The European Commission has forecast total investment in public and private resources at around $ 16.5 million per small and medium-sized enterprise.