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. Functions of financial institutions will vary across institutions. Ultimately, financial institutions have several functions that assist the public with various needs in that sector. The ability to save money, purchase homes, support businesses are just a few essential functions that reflect the importance of financial institutions. 

Examples of Financial Institutions

Banking financial institutions are usually the first examples that people think of. There are central banks, retail and commercial banks, credit unions, savings and loan associations, brokerage firms, insurance companies and mortgage companies. Each institution offers different types of financial services that overlap. These places can be considered one of three categories of finance. There are personal finance, corporate finance and public finance. 

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. 

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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

Another function of financial institutions is to help individuals and corporations with capital management by extending credit to those with good credit. 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. Since they use your money for business endeavors, paying interest to those with money in the bank is another function of financial institutions.

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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. This is where the role of banks comes into play— these are the most common financial institutions you see today. 

Moving Financial Resources

Moving resources from place to place is one of the functions of financial institutions that you may not think about. 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.

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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 Services

Institutions of finance offer risk management among other services. 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.

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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 & Maintaining the Market

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 as one of their functions. 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.

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

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