Financial Intermediaries (What are they, Types and Functions)

The Financial intermediaries They are specialized institutions that serve as a bridge in financial operations. As its name implies, its main function is to be intermediaries between two parts of the market, those who want to save their funds and invest them, and those who want to apply for a loan.

They tend to collect short-term funds (through deposits, checking accounts, among others), and assign them in the long term (through obligations, acquisition of shares, loans, etc.).

It is likely that many people go to acquaintances to apply for a loan, but this work is facilitated thanks to financial intermediaries, since they provide good guarantees to borrowers and savers. Of course, the intermediaries benefit from the operation, thanks to the margin of difference between interest rate offered by savers, and requested by borrowers.

It is also important to note that the functions of financial intermediaries have become increasingly complex. We invite you to take a look and learn more about everything they have to offer.

What are the types of financial intermediaries?

To understand the functions of financial intermediaries, it is important to know the two types that we can find, which are the banking and non-banking.

Bank intermediaries

It is made up of private institutions (banks) and savings banks. Although nowadays they have expanded their functions, these traditional services basically offer services of raising funds or deposits, and the approval of loans.

Non-bank intermediaries

Non-bank intermediaries are more varied, insurance companies, mutual savings banks, investment banks, credit companies, among others, are appreciated. Some issue assets other than money, providing services beyond banking.

These functions are also occasionally performed by the bank, directly or through third parties belonging to your group. For example, a bank owns an insurer, its pension funds, and its own mutual funds.

What functions do financial intermediaries fulfill?

As expected, the most important role that a financial intermediary fulfills is the mediation. It is nothing more than an important commercial action, in which it functions as a means of communication between both interested parties.

Without the financial intermediary, savers looking to activate their market and invest their money, would not be able to enter in contact and doing business with borrowers, or at least not with the necessary guarantees, who do not represent any risk.

The intermediaries channel and direct the operation, favoring investment towards financial products, which investors can use to get their money's worth.

Let's see in more detail all its functions:

• They offer personalized services to each client, providing an investment alternative that is appropriate and optimal for each profile. This taking into account that each investor is different.
• Financial intermediaries fulfill the function of channeling and directing savings operations towards investment.
• They provide follow-up services to each client, with personalized, safe and reliable attention.
• They reduce the investment risk of each client as much as possible.
• They capture resources in the short term and assign them in the long term, moving funds from savers who need to invest their money, and borrowers who need financing funds.

What requirements do you need to be a financial intermediary?

To be a financial intermediary, it is necessary to request authorization from the Bank of Spain and the CNMV. All requirements and criteria stipulated must be met at the time of enrollment.

Some of the institutions that can be financial intermediaries are:

• Professional advisers.
• Private companies.
• Credit institutions, such as banks or savings banks.
• The stock market.
• Insurance companies.
• Collective investment institutions or companies.

Finally, it is worth noting that the cost of the service is usually high, since it is a profit that is distributed between the issuing entity and the financial intermediary.

The cost may vary depending on the service in question, for example, an insurance company requires adjust prices so that they are more competitive, because there is a high supply in the market. In these cases, the profit margin is usually high, which allows making offers to make the product more attractive.