Everywhere we go, we are surrounded by elements of financial services. We buy and sell things every day, and we make investment decisions - no matter how small. All of these are facets of the same industry, and it is perhaps the largest in the entire world.

Considering how important money and financial services are to our lives, it is important to understand what they are and how they affect us in diverse ways.

What Are Financial Services?

Simply put, financial services are anything that helps with making, managing, and investing money. They cut across countries and entities, and both individuals and organizations can engage in financial service offerings. If a bank helps you with saving and putting money away for a rainy day, that is a financial service rendered to you. If the same bank acts as a stockbroker and purchases stocks on behalf of its clients, that is a financial service rendered to those clients.

It is also worth noting that financial services are interwoven. For instance, a bank is a place where individuals and corporations put money for safekeeping. The same bank uses this money and lends it to people who need it - maybe other people who want to buy homes or other companies that want to expand and make investments. The borrower pays the money back plus interest, and you can go to the bank any day to get your money.

This cycle shows that financial services are truly interwoven and complementary.

An Interwoven Industry

As expected, the importance of financial services can’t possibly be overstated. Everyone - from individuals to private companies to public corporations and even governments - needs money. At the same time, everyone wants to find ways to manage and grow their wealth appropriately. So, it goes without saying that financial services will come in handy in ensuring that they achieve their objectives.

Beyond just storing money, financial services focus on any activity that can help people and organizations to make money if possible. So, a company can employ another to provide financial services consulting to help them examine possible investments and avenues for doing business.

Another company can hire a hedge fund to help them invest some of their disposable profits to grow them. Even governments use financial services these days - sovereign wealth funds are given to big investment banks as capital and a means of investing wealth, and so on.

Competition in the Financial Services Sector

Over the past few decades, the financial services sector has grown to become perhaps the most valuable in the world. The most successful financial services companies make billions of dollars in profits yearly, and they handle assets worth trillions.

Even in times of financial uncertainty, these companies are almost insulated. They are seen as too connected and too large to fail, so they are the first to get help when they need it.

But, this has also led to the rise of incredible competition in the industry. Today, there are several giants in each financial services sector. When you think of hedge funds, you think of names like Bridgewater Associates and Blackstone Capital. When you think of venture capitalists, you think of names like Andreessen Horowitz and Kleiner Perkins. If it’s banks, names like JPMorgan and Goldman Sachs come to mind.

Competition like this has led to many of these firms branching out and testing new sectors as well. So, a bank that starts out serving just retail clients can soon branch out and become an investment bank. A company that starts with giving financial advice to individuals can soon start offering investment consulting to big banks and large corporations.

This competition has made it much easier for everyone. Companies can branch out and innovate in different fields, while customers also have options when it comes to who to work or do business with. Of course, additional benefits like increased employment and economic prosperity are also present.

The Importance of the Financial Services Sector

It is almost impossible to overstate how important the financial services sector is. Financial services drive the economy of the nation. When the sector prospers, the country’s economy does the same. Companies in this sector can also manage their investments and examine risk more efficiently.

The financial services sector is also important for optimizing the prosperity potential of the people in a country. When the sector is strong, customers can earn more - thus bolstering their purchasing power and financial confidence. If people or companies need to borrow money, they are more confident to go to financial services companies and od that.

But, this importance can also be detrimental. If there’s a shift in the negative direction, the entire economy could collapse. This can lead to a recession that will affect one country after another. Soon enough, the entire global financial system will suffer.

We saw this happen back in 2008 when the mortgage market went under. People had purchased homes without being able to pay, and they were now starting to default. Mortgage-based investment products soon took hits, and people who had invested in them were affected significantly.

Soon enough banks themselves were facing liquidity crises. From one bank to the other, many began to either go under or seek outside investment. From the United States, it became a crisis for the entire world to manage.

A failure in the financial sector can drag an entire country’s economy down. And, if the country's financial sector is also integral (say, the United States or China), the region or the entire world could be affected. Capital markets will start to dry up, and economies will sputter to a halt. Companies will be unable to make bill payments and go under, leading to a rise in unemployment.