A financial institution is an enterprise, either for non-profit or profit, responsible for taking money from investors, then placing those funds in different investment channels for the profit of both the organization and the investor. These finance Institutions deal with monetary and financial transactions such as loans, deposits, currency exchange, and investments.

Examples of financial institutions include insurance companies, which guarantees to pay the investor some amount of money if an occurrence insured even occurs. Retail banks, is another example, which loans money to other clients, money that has been deposited for safekeeping. Other examples include trust companies, investment dealers, and brokerage firms. 

Financial Institutions and Their Classification

Financial institutions deal with a variety of products and services for commercial and individual clients. The services offered differ between different classifications of financial institutions.

Depositary Finance Institution
These types of institutions are allowed to accept money deposited by clients legally. They include credit unions, savings and loan associations, saving banks, and commercial banks.

Credit Unions
This is an example of a non-profit organization’s financial organization. The credit unions are created, owned, and operated by voluntary investors, who save and, in turn, lend to members of the union only. They delight in a tax-exempt status. 

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Saving Banks
Their function is to accept the client’s savings and lending to other customers.

Savings and Loan Association
They lend money collected from many small savers to borrowers and homeowners. They specialize in financing people to acquire residential mortgages.

Mortgage Firms
These are institutions that fund mortgage loans. Most mortgage firms target individual consumers, while others lend to commercial real estate only.  

Commercial Banks

Most people do their financial transactions here, as opposed to an investment bank. It is a financial institution that offers checking account services, accepts deposits, makes personal mortgage and business loans. It also provides essential financial products such as savings accounts and actual financial products such as deposits of deposits (CDs) to small businesses and individuals. 

 Credit unions, thrifts, and banks offer the frequently used and commonly recognized financial services. These services include loans for commercial and retail customers, home mortgage, and saving and checking accounts. The banks are also used as payment proxies via wire transfers, credit cards, and currency exchange.

Non-Depository Financial Institutions

A non-depository financial institution does not accept deposits, but acts as an agent, providing the link savers and borrowers.  These type of institutions lend to the public through insurance policies, bonds, or selling securities. Examples include finance companies, mutual funds, pension funds, and insurance companies. 

Insurance Firms

They are among the most recognized non-financial institutions. One of the oldest financial services includes providing insurance for corporates or individuals. Protection against financial risk, protection of assets, secured through product insurance, is an essential service that facilitates corporate and individual investments that influence economic growth. Companies and individuals are insured against accidents, disability, property damage, financial loss due to death, and other calamities.

Investment Banks

They specialize in providing services intended to aid in business operations, such as equity offering and capital expenditure financing, not forgetting initial public offerings (IPOs). Investment banks also act as market makers for trading exchanges, offer investors brokerage services, and manage corporate restructurings, acquisitions, and mergers.

Pension Funds

The funds are set up by governments, companies, and labor unions. Employers and employees contribute towards the funds from their payrolls. The funds are then invested to earn profits that will be used to pay out benefits based on projections at a set time. Both the returns and collected funds are tax-deferred.  

Brokerage/Securities Firms

These include Brokerages and investment companies such as exchange-traded funds, and mutual fund major in investment services such as financial advisory and wealth management services. These institutions also offer various investment products ranging from bonds to stocks, including even the little known investment alternatives, such as private equity investment and hedge funds. These institutions assist firms and individuals in buying and selling securities. 

Finance Companies

They acquire money through the sale of securities to other businesses in the money market. They then lend to companies or individuals at a rate higher than what they pay for the securities. 

Three Types of Finance Companies

  • Small loan companies are also known as direct loan companies. These loan money to individuals.
  • Sales finance companies, also known as acceptance companies, buy wholesale and retail.  
  • Commercial finance companies, also referred to as commercial credit companies. They lend money to wholesalers and manufacturers secured by borrowers’ account equipment, receivables, or inventory.  

Financial institutions are organizations where clients can successfully manage their earning and become financially stable. By knowing the core features of a financial institution, clients can make an informed choice.  

Chris Douthit
Chris Douthit

Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon.