Financial intermediaries and its Types

The financial intermediaries are specialized operators in investments for third parties in the financial market in exchange for a fixed fee or a percentage of the investment value. Financial intermediaries facilitate the meeting between demand and supply of capital. Credit institutions, banks, leasing companies, factoring companies, mutual funds, etc. belong to the category of financial intermediaries. Financial intermediaries perform the following functions:

Savings mobilization

A financial intermediary carries out passive fundraising operations by operators with a financial surplus that is, with savings greater than investments (e.g., savers) and uses the financial resources collected through active transfer operations to operators in financial deficit.

Diversification

Financial intermediaries can manage a greater amount of financial resources than individual operators; therefore, they have a greater possibility of diversifying investments and thus reducing the average risk of the portfolio.

Employment operations

Some financial intermediaries may carry out loan operations with a longer maturity than that indicated in a financial asset, effectively modifying the maturity of the financial asset itself. 

There are different types of financial intermediaries, and each type has specific characteristics and functions. For example, banks also perform the monetary function by using their liabilities as a means of payment. 

The main types of financial intermediaries:

1: Banks and credit institutions

 They are financial intermediaries operating in the credit sector and also have monetary functions. Banks and credit institutions that carry out a banking business belong to this category. Banks are the only financial intermediary authorized to perform both the fundraising and savings function directly from the public and the function of disbursing credit. Banks can also carry out financial leasing, factoring (assignment of corporate loans), financing in the consumer credit sector, the acquisition of equity investments in companies, the underwriting and placement of securities, the trading of securities on their own account o on behalf of third parties, individual savings management, collection and payment services and, if necessary, the offer of payment instruments.

2: Business banks

Business banks are financial intermediaries that operate exclusively in venture capital financing and investment. They have no public fundraising operations and, therefore, do not have bank branches. However, they may carry out subscription and placement of securities. Debt transactions are reserved for large companies. Investment banks are known internationally as merchant banks. They can take holdings in the share capital.

- IMEL 

IMELs are electronic money institutions that issue electronic money. IMELs are companies other than banks. Electronic money consists of a credit to the issuer, issued upon receipt of funds of no less value, stored on an electronic / IT device, and accepted as a means of payment by subjects other than the issuer.

- Leasing company

Leasing companies assist companies in purchasing capital goods with financing and financial leasing services. They carry out financial leasing activities.

- Factoring company

Factoring companies buy companies' credit from customers. They carry out business assignment activities.

3: Insurance companies

They are financial intermediaries who take the risk of their customers against paying a premium. They make patrimonial investments. They operate in the insurance market in the life and pension insurance branch and in the non-life insurance branch.

- Consumer credit company

Consumer credit companies provide loans to consumers to finance the purchase of consumer goods.

- SIM

SIMs (brokerage firms) are financial intermediaries authorized to provide investment services or activities and provide professional investment services to the public. They can carry out underwriting and placement of securities, securities trading operations on their own account or on behalf of third parties and individual savings management operations. The SIMs has its registered office and general management in Europe.

- Investment firms

Investment firms provide services similar to SIMs, are authorized to provide investment services or activities to the public, but have their registered office and general management in another state, EU or non-EU, other than European countries such as Italy.

- Mutual fund management company

These companies are characterized by passive fundraising operations in a collective way, which they then invest by investing in securities or real estate.

- Credit card companies

This type of company specializes in offering payment instruments such as credit cards.

- Collection and payment companies

They are financial intermediaries authorized to perform collection and payment services.

- Financial participation

 The holding financial companies carry out holding activities in the capital of companies like the banks and investment banks. 

4: SICAV

SICAVs are investment companies with variable capital that provide collective savings management services. In the SICAVs, the participants pay their own share, becoming members of the same, and participate in the appointment of the top management of the administrative bodies to which the task of managing the investment of the corporate assets in transferable securities is entrusted.

- SGR

The asset management companies are asset management companies. Like SICAV, the SGR companies also operate in the sector of collective savings management and individual savings management.

- Pension funds 

Pension funds manage the savings provided by their customers, generally by workers, in order to pay a stipend or to return the amount of capital at the end of the work activity or upon reaching a specific age. They operate in the life and pension insurance market.

- Financial companies, trust companies, and stockbrokers

These intermediaries occupy a marginal position compared to the previous ones. They can only provide some investment services. Financial intermediaries registered in a special list provided for by the Consolidated Law on banking and credit matters are included in this category.

- Financial intermediaries in trading

The customers of the financial intermediaries are the investors who decide which securities to buy or sell, by transmitting the order to the financial intermediary; the latter undertakes to carry out the operation on the market. In these areas, the financial intermediary does not take an active part in the transactions and operates mainly as a credit intermediary. With the online automation of exchanges (online trading), financial intermediaries have expanded the offer of intermediation to consultancy services and portfolio management, within limits and in the manner prescribed by law.

- Obligations and controls of financial intermediaries

The behavior of the financial intermediary is subject to control to avoid any conflicts of interest in portfolio management or poor transparency of the communication of information and investment risks. Intermediaries are also required to use clear and not misleading advertising and promotional communication.

Author: Vicki Lezama