Financial Intermediaries (What are, Types and Functions)

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

They usually raise funds in the short term (through deposits, checking accounts, among others), and transfer 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, as they provide good guarantees to borrowers and savers. Of course, intermediaries benefit from the operation, thanks to the margin of difference between the interest rate offered by savers, and that requested by borrowers.

It is also important to keep in mind 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 we can find, which are banking and non-banking.

Bank intermediaries

It is made up of private institutions (banks) and savings banks. Although they have expanded their functions today, these traditional services basically offer fund raising or deposit services, and loan approval.

Non-bank intermediaries

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

These functions are also occasionally carried out by banks, directly or through third parties belonging to their group. For example, a bank owns an insurer, its pension funds and its own investment funds.

What functions do financial intermediaries perform?

As expected, the most important function that a financial intermediary fulfills is 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, could not come into contact and do business with borrowers, or at least not with the necessary guarantees, that do not represent any risk.

The intermediaries channel and direct the operation, favoring investment towards financial products, which investors can use to take advantage of their money.

Let’s see in more detail all its functions:

  • They offer personalized services to each client, providing an investment alternative that is adequate and optimal for each profile. This considering 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 as much as possible the investment risk of each client.
  • They attract short-term resources and transfer them in the long term, moving funds from savers who need to invest their money, and borrowers who need financing funds.

What requirements are needed 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 at the time of registration must be met.

Some of the institutions that can be financial intermediaries are:

  • The professional advisors.
  • Private companies
  • Credit institutions, such as banks or savings banks.
  • The stock market.
  • Insurance companies
  • Institutions or collective investment societies.

Finally, it should be noted 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 needs to adjust prices to make them more competitive, because there is a high supply in the market. In these cases, the profit margin is usually high, allowing the realization of bidding to make the product more attractive.