What are the central functions of the financial services industry to society and it economy?

Question

it needs to be answer within 20 minutes an somebody help me out

Answer 1

The financial services industry serves two functions, it plays the matchmaker between savers and borrowers. Savers who will do nothing with their money get paid to lend it to others, and borrowers pay to use the money. It also creates money. as interest is money paid with no real cost incurred (of course with legal contracts and what not there is a cost but not a real per loan cost and people give institutions money for the purpose of making money or convienence.) It also creates money by taking existing money lending it out to someone who buy something and takes that money and puts it in a bank and that bank lends the money to someone who buys something and so on. In theory it creates money as long as no one defaults on the money.

Answer 2

All of the first answer is true (though I would put even more emphais on the creation of money), but the financial services industry does more as well.

It spreads risk - the financial services industry includes insurance companies and re-insurance companies; it includes mutual funds which let people buy small amounts of stock in many companies; etc.

It provides exchange mechanisms - in the same sense that money makes trading easier than simple barter, various financial services make investment easier than merely finding individual investors. (Consider the difference between real estate brokers and bankers. The former just bring buyers and sellers (borrowers and lenders) together, the latter fundamentally the change the nature of the transaction (from short-term deposits to long term mortgages, etc.)

It provides for disinterested third parties in financial transactions. (Recall that banks started out financing trade. One of the issues is making sure you get what you pay for and that you get paid for what you deliver. The presence of an escrow account in a bank makes this much easier. Trade is essential to the economy, and has been for thousands of years.)