Financial Services: Background
Industry Composition:
The financial services industry is comprised of a variety of businesses providing services broadly related to insurance, accounting, banking, brokerage, real estate, risk analysis, asset management, and investment.
- Insurance firms either provide insurance themselves as insurance carries or sell the services of others as insurance brokers.
- Banks can be commercial or private, on the global, national, regional, or community level, and offer the safekeeping and lending of money as their primary services.
- Brokerage firms act as intermediaries between buyers and sellers for a variety of things, such as securities, equities, and other investment offerings.
- Real estate firms provide services such as buying, selling, developing, operating, and managing real estate.
For globalEDGE’s purpose, all work related to money or asset management that a business needs done is filed under Financial Services, while all of the other miscellaneous help a business may need is classified under Business Services.
History:
The financial services industry is relatively new, but certain parts of it, such as insurance coverage, go very far back in history. Insurance was officially born in 1680, when the first insurance was offered to insure brick and frame homes by The Insurance Office founded by Nicholas Barbon. This was a result of the devastation of the Great Fire of London in 1666.
The more recent historical events of interest involving financial services would be the Gramm-Leach-Bliley Act, enacted in the late 1990s in the U.S., which repealed the Glass-Steagall Act, by allowing a bank to offer investment, commercial banking, and insurance services. Also, financial deregulations in global markets lead to an automated quotation system for the stock exchange. The deregulations also lead to the creation of multi-service financial conglomerates which provided many services to customers, including 401(k)s, insurance, investment offerings, and mortgages. Driven by profits, the financial service industry helped to finance the home buying craze in the 1990s by offering subprime and adjustable rate mortgages. When the housing market collapsed in 2007, the subsequent defaults on mortgages almost caused a collapse of the financial services market in 2008.
Leaders:
The financial service industry has undergone a massive shake-up in the past couple of months. The dust is almost settled after the credit crunch and near collapse of the entire financial service industry. Many firms are gone including: Lehman Brothers, Merrill Lynch, Wachovia, and Washington Mutual. Some of the major firms that still remain are Goldman Sachs, Bank of America, and J.P. Morgan Chase.
The Big Four hold a large position in the accounting sector and focus on audit services. Deloitte Touche Tohmatsu, Ernst & Young, KPMG, and PricewaterhouseCoopers are huge, with annual revenues in the billions and tens of thousands of employees.
Trends:
Technology, specifically the internet, has drastically effected on the way companies do business; clients can check their bank accounts online at any time, companies can pay employees through direct deposit, operations in the securities industry have become almost completely automated, and insurers can look up information such as a credit report on potential subscribers more quickly. Computer technology is also used in many other ways as these firms are dependant on computer generated models to help them analyze markets and create investment strategies.
The cleaning up of the industry is an effort to make sure financial organizations are operating in ways that benefit customers or stockholders instead of managers, specifically through consolidation and regulation. Since 1995, more than 200 large and small makes have merged, creating huge economies of scale. Consolidation is forcing layoffs, but also creating more opportunity. The Glass-Steagall Act was the basis of financial regulation, but during the late 90’s this act was repealed, creating opportunities for small and large banks alike. With the market collapse in 2008, there have been many more buyouts. These are due to both banks trying to eliminate bad, or “toxic” assets, and the banks trying to have enough assets to be able to absorb these losses and still survive. Banks are also being accused of misleading the general public in order to drive up their profit margins and are the subject of much scrutiny and debate about increased regulation due to this.
Future Outlook:
The financial services industry has been considerably shaken up by deregulation, globalization, scandals, and other recent events including the market collapse. The recent subprime mortgage crisis in the United States, triggered by foreclosures, has resulted in the near collapse of the entire market and potentially a complete overhaul of the industry from a political standpoint, with increased regulation and government-owned companies a possibility for the future.
The financial service industry’s future outlook is pretty grim for now, with many banks being accused of improper behavior and misleading customers. There is a heated political debate going on about whether the government should increase regulation of the industry. Despite all of this, the stock market is rebounding from its low in 2008 which shows promise for the industry in the future. There are just too many factors at play to determine how the industry will recover from the collapse right now.