What Are the Functions of Financial Institutions?

By Staff WriterLast Updated May 27, 2020 7:32:47 PM ET
What Are The Functions Of Financial Institutions
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Financial institutions provide services to individuals and consumers to help them with their monetary needs. These institutions include banks, credit unions, brokerage firms, and insurance companies. Financial institutions have several functions that assist the public with various needs in that sector.

Directing the Payment System

One of the primary ― and most public ― functions of financial institutions is managing the payment system. That phrase refers to everyday commercial transactions that involve individuals and businesses. 

Financial institutions keep the payment system in motion through checking and savings accounts, credit cards, and wire transfers. These methods of exchange allow Americans to handle their financial transactions on a daily basis.

Assisting With Resources and Capital

Financial institutions help individuals and corporations with resources and capital management by extending credit to those who can pay it back. Banks and other institutions can pool resources together to allow others to borrow money. Loans and credit cards allow families and companies to borrow funds and pay them back on a regular schedule.

Acquiring capital for a new or existing business or personal project can be difficult, so financial institutions allow people and businesses to have access to the capital they need to be successful.

Moving Financial Resources

Another important function of financial institutions is the moving of resources around from place to place. These institutions assist with larger transfers of funds like corporate investments, purchases of real estate, and construction loans, as well as other larger transactions, such as paying annuities.

Financial institutions can transfer resources from one party to another more easily and with more flexibility than individuals or corporations can, which makes this function so crucial.

Risk Management

Financial institutions manage risk and uncertainty for companies and families. Insurance companies and other portions of the financial sector allow large numbers of people to pool and share the risk, making it easier to handle accidents and other difficulties that occur in business or personal life.

If you’ve ever received a check that covers repairs from a car accident or seen how your health insurance pays for a medical procedure, you’ve experienced this function of the financial system for yourself.

Informing Financial Decisions

If you’ve ever had to make a large scale monetary decision, you realize how important it is that financial institutions provide key information that makes such decisions easier. Rather than having to wait on a central authority to give you information about factors like interest rates, you can visit your local bank branch or call your investment advisor.

The information that financial institutions provide allows individuals and corporations to make educated and secure decisions in real-time. 

Maintaining the Market

Financial institutions also make it possible for individuals and other entities to invest in the stock market. Investors can make long-term or short-term ventures into the market for the promise of a greater return.

Institutions like brokers and stock exchanges allow companies to issue stock to have more cash flow based on investors purchasing stock. Often, the stock market drives the pulse of the financial sector as a whole.

An Interdependent Financial System

These functions of American financial institutions work in tandem with each other to create a fully interdependent financial system. When each function performs healthily, the other purposes work well, and the monetary system as a whole is more stable. Problems with one function can reflect on the other capacities of the financial system as well. The health of the financial sector rests on a delicate balance between the various functions of financial institutions.