Professor Vipin 2014
Unit 5
Financial Services
Meaning
Financial services are the economic services provided by the finance industry, which encompasses a
broad range of organizations that manage money, including credit unions, banks, credit card companies,
insurance companies, accountancy companies, consumer finance companies, stock brokerages,
investment funds, real estate funds and some government sponsored enterprises.
Definition
Financial services can be defined as the products and services offered by institutions like banks of
various kinds for the facilitation of various financial transactions and other related activities in the world
of finance like loans, insurance, credit cards, investment opportunities and money management as well
as providing information on the stock market and other issues like market trends
Features of Financial Services
1. Customer-Specific: Financial services are usually customer focused. The firms providing these
services, study the needs of their customers in detail before deciding their financial strategy,
giving due regard to costs, liquidity and maturity considerations. Financial services firms
continuously remain in touch with their customers, so that they can design products which can
cater to the specific needs of their customers. The providers of financial services constantly
carry out market surveys, so they can offer new products much ahead of need and impending
legislation. Newer technologies are being used to introduce innovative, customer friendly
products and services which clearly indicate that the concentration of the providers of financial
services is on generating firm/customer specific services.
2. Intangibility: In a highly competitive global environment brand image is very crucial. Unless the
financial institutions providing financial products and services have good image, enjoying the
confidence of their clients, they may not be successful. Thus institutions have to focus on the
quality and innovativeness of their services to build up their credibility.
3. Concomitant: Production of financial services and supply of these services have to be
concomitant. Both these functions i.e. production of new and innovative financial services and
supplying of these services are to be performed simultaneously.
4. Tendency to Perish: Unlike any other service, financial services do tend to perish and hence
cannot be stored. They have to be supplied as required by the customers. Hence financial
institutions have to ensure a proper synchronization of demand and supply.
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5. People based services: Marketing of financial services has to be people intensive and hence it’s
subjected to variability of performance or quality of service. The personnel in financial services
organisation need to be selected on the basis of their suitability and trained properly, so that
they can perform their activities efficiently and effectively.
6. Market Dynamics: The market dynamics depends to a great extent, on socioeconomic changes
such as disposable income, standard of living and educational changes related to the various
classes of customers. Therefore financial services have to be constantly redefined and refined
taking into consideration the market dynamics. The institutions providing financial services,
while evolving new services could be proactive in visualising in advance what the market wants,
or being reactive to the needs and wants of their customers.
Types of Financial Services
Factoring
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount. A Business will sometimes Factor
its Receivable Assets to meet its present and immediate Cash needs. Forfaiting is a Factoring
arrangement used in International Trade Finance by Exporters who wish to sell their receivables to a
forfaiter.
Leasing
A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an
asset.
The narrower term rental agreement can be used to describe a lease in which the asset is tangible
property. Language used is that the user rents the land or goods let or rented out by the owner. The
verb to lease is less precise as it can refer to either of these actions.
Examples of a lease for intangible property are use of a computer program (similar to a license, but with
different provisions), or use of a radio frequency (such as a contract with a cell-phone provider).
Venture Capital
Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup
companies. The venture capital fund earns money by owning equity in the companies it invests in, which
usually have a novel technology or business model in high technology industries, such as biotechnology
and IT. The typical venture capital investment occurs after the seed funding round as the first round of
institutional capital to fund growth (also referred to as Series A round) in the interest of generating a
return through an eventual realization event, such as an IPO or trade sale of the company. Venture
capital is a type of private equity.
In addition to angel investing and other seed funding options, venture capital is attractive for new
companies with limited operating history that are too small to raise capital in the public markets and
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have not reached the point where they are able to secure a bank loan or complete a debt offering. In
exchange for the high risk that venture capitalists assume by investing in smaller and less mature
companies, venture capitalists usually get significant control over company decisions, in addition to a
significant portion of the company's ownership (and consequently value).
Consumer Finance
Consumer finance has to do with the lending process that occurs between the consumer and a lender. In
some instances, the lender may be a bank or financial institution. At other times, the lender may be a
business that offers in house credit in exchange for the business of the consumer. Consumer finance can
include just about any type of lending activity that result in the extension of credit to a consumer.
Housing Finance
It is a type of seller financing in which a firm extends customers a loan, allowing them to purchase its
goods or services. In-house financing eliminates the firm's reliance on the financial sector for providing
the customer with funds to complete a transaction.
The automobile sales industry is a prominent user of in-house financing. Many vehicle sales rely on the
buyer taking a loan, in-house financing allows the firm to complete more deals by accepting more
customers. Whereas banks or other financial intermediaries might turn down a loan application, car
dealerships can choose to lend to customers with poor credit ratings.
Vehicle Finance
Vehicle financing is the fastest and easiest way to buy a new automobile. This way allows you to buy
your new automobile by paying only a small down payment up front and the rest in monthly
installments.
Therefore, instead of a one-time immense expense which is hard to attain, the vehicle payments
becomes an integral part of your monthly expenses.
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