5 Types Of Financial Intermediaries

Five Most Popular Financial Middlemen

  • Banks
  • Credit Unions
  • Pension Funds
  • Insurance Companies
  • Stock Exchanges

When it comes to financial intermediaries, there is a long list of those who qualify. Often times, people may not even realize that they are interacting with a middlemen who is just overseeing the transaction in question. Nevertheless, without these entities, the investment markets would be crippled and unable to operate.

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1. Banks

Undoubtedly, banks are the most popular financial intermediaries in the world. They come in multiple specialties that include saving, investing, lending, and many other sub-categories to fit specific criteria. The most ancient way in which these institutions act as middlemen is by connecting lenders and borrowers. For instance, when someone raises a mortgage from a bank, they will be given the money that another person deposited into that bank for saving. Similarly, large companies also use banks to help find investors. Not to mention their role as the entities that people use to receive paychecks via direct deposits.

2. Credit Unions

Similar to the aforementioned, credit unions also bring together people who need money and those who have it. For instance, they are known to offer credit terms to people by using the money that other individuals deposited into savings accounts. So, when somebody needs a loan from a credit union, they will receive it because there are funds at credit union’s disposal that someone else contributed. The main difference between these entities and typical banks, however, is their role with consumer credit. Besides lending, they also oversee many credit-related inquiries.

3. Pension Funds

Full-time employees often meet another popular financial intermediary known as a pension fund. It is what millions of workers use to save for their retirement by investing. The way it works is based on a risk factor, matching contribution, and long-term investing. For instance, when somebody signs up for a pension fund, they choose how much of their salary will be put away. Often, their employer matches that contribution to a certain extent. Then, all of that money is used to purchase assets that will grow and have a good yield. Once the employee retires, they get all the contributions alongside any interest and realized gains.

4. Insurance Companies

Although there are several different types of insurance organizations, almost all of them operate in the exact same way. First, they find a large number of customers who need to obtain coverage. Whether it is a car, home, or health policy does not matter. Once those customers purchase their insurance coverage, all of the funds are added to a large pool of money. Later on, whenever somebody needs to make a claim and use the insurance company to request a payout, the insurance provider will access that pool of money. This means that there is no net inflow of cash to the market, per se.

5. Stock Exchanges

Buying corporate stocks can be a long and tedious process. In order to simplify it, stock exchanges were invented. They act as large platforms where people can make stock orders. After paying for them, the stock exchange will use that money to buy the actual stocks from corporations. Then, the customer gets their desired assets while the corporations get funding. In the meantime, the stock exchanges facilitate the entire process and every transaction. Hence why they are seen as the financial intermediary of the investment world. As with most other similar institutions, these exchanges earn revenues by adding transaction fees and interest rates.

Ultimately, absent financial middlemen, the entire investment and financial sector would suffer. People would be unable to make daily transactions and large companies would find it hard to get funding. Hence why it is important to understand how relevant the role of common financial intermediaries is.

Source: Investopedia