Financial services is a catch‐all term for all those institutions that provide services in the realm of finance to their customers, whether those customers are individuals or companies, and whether the latter are a small SME or a large multinational corporation, or some other entity like, for example, an investment fund. Within financial services there exist a number of segments (see also Figure 4.1):

• Classic and Corporate Banking
• Specialised Lending
• Investment Banking and Advisory
• Payments
• Asset Management
• Brokerage and Transaction Services
• Insurance
• Others.

I'll go through these different sectors in turn. It is important to understand, though, that this is a somewhat artificial split. There are numerous business models in financial services, and many of them are either ultra‐specialised within one of the segments above, or they straddle multiple segments at once.

4.1 Classic and Corporate Banking

Classic and corporate banking is about the core banking business of gathering deposits, making loans, and moving money around, both for individuals and for companies. Often those institutions offer ancillary products, eg brokerage and custody, asset management, or even insurance. There are a large number of business models in this space, which differ in size, and product and customer specialisation.

Banks also have a number of ownership models: the large majority (by aggregate size) issue equity to shareholders, and are listed on a stock exchange. There is also a large mutual sector (eg building societies, Volksbanken) where the banks are owned by their customers, and finally there is a large state‐owned/state‐sponsored sector (eg savings banks, Sparkassen, cajas). Many of the institutions in the mutual and state‐sponsored sectors are small, sometimes tiny. In this case they often form associations that operate under the same branding, and that join forces on central services such as IT to save cost. Institutions within the same association often do not compete with each other, eg by restricting themselves to a single geographic area.

The most common business model in this space (by aggregate size) is the universal bank that covers all customer segments (retail, mid‐market, corporate) and that offers a wide range of products, including corporate banking and investment banking. If it also provides insurance services that are sometimes referred to as bancassurer.

As the companies in the mutual bank and state‐sponsored savings banks sectors are smaller, they typically only serve the lower‐sized end of the market, ie they serve retail customers and small to medium‐sized businesses. In some instances they can also serve larger corporates, typically through specialised institutions that are part of a larger associative group and that do not serve the group's core markets of retail and small business customers. There are also institutions that focus on a single customer segment, eg medical professionals, or shipping companies.

Sometimes banks are associated to large industrial companies. For example in the Korean chaebol model, each of those chaebol industrial groups has an associated bank that serves it, and that is also open for external business. In the West, many large manufacturers—auto manufacturers in particular—have associated banks or finance companies that provide financing to their customers, and that I'll briefly discuss in the section on specialised finance providers.

4.2 Specialised Lending

Whilst a lot of lending is done via banks, there is a segment of financial service providers who lend money or provide credit protection, but who are not banks. The most important distinction in this respect is that they do not take customer deposits.

The first big sub‐segment here is that of leasing companies (captive or not) or vendor finance providers. They all lend against capital assets—typically moveable assets that can be repossessed if need be—starting from office equipment (phones, computers, even furniture), via cars, heavy machinery, turbines, and all the way up to aircraft and comparably priced assets. Captive companies are associated to specific manufacturer, and they only provide financing for purchases of the assets produced by the manufacturer. An important representative of this particular segment are auto banks, who are often proper banks—they take deposits—and who are associated with the large car manufacturers. Non‐captive finance companies tend to focus on one or a few verticals, eg office equipment, or furniture, or certain types of cars.

The second big sub‐segment here is factoring and more generally working capital finance. Factoring businesses—also known as invoice financing businesses—lend only against accounts receivable, ie unpaid invoices. Working capital lenders are also lending against other portions of a company's working capital, most often inventories of raw materials or finished goods.

Another important segment is trade finance. Banks often operate in this area, as do government‐sponsored entities. Trade finance can have a working capital finance aspect—financing goods whilst they are in transit for example—but often it is a mere credit guarantee where the trade finance provider indemnifies the seller against a default of the purchaser. In this sense this is similar to regular credit insurance, where an insurer indemnifies a creditor if there is a default, again something often provided by banks. In the trade finance area, however, the credit aspect is less important than the fact that the trade finance provider has the capability to pursue a claim in a foreign jurisdiction, something which is very difficult and costly for smaller businesses to do.

A specialised form of credit insurance which is unrelated to trade are the monoline insurers. They provide credit guarantees for securities, notably US municipalities, and structured finance instruments. However, their importance has decreased markedly since the financial crisis.

Last but not least, I want to mention mortgage originators and mortgage servicers. The former are originating loans—mostly mortgage loans because those are the easiest to underwrite—and they either sell those loans to interested investors like insurance companies, or they have a warehousing agreement with an investment bank who eventually securitises them. The buyers can typically not service them, meaning they are not in a position to communicate with the borrowers, receive and reconcile payments, and foreclose on the mortgage if need be, which is where the servicers come in. This so‐called ‘originate‐to‐distribute’ model was particularly popular with subprime mortgages, and after the crisis it has lost much of its volume.

4.3 Investment Banking and Advisory

The term ‘investment banks’ describes companies engaging in a wide range of loosely related business activities that are connected to the financial markets. The two major business lines are the advisory business, which is mostly advisory on mergers and acquisitions, and the markets business.

Within the markets business there is the capital markets segment, which is usually separated into equity capital markets, which deals with primary issuance of equity securities; debt capital markets, which does the same for debt securities; and securitisation, which securitises assets, ie packages them into stand‐alone special‐purpose companies that are financed by issuing a range of securities, both debt‐ and equity‐like. Another important area here is the syndicated loans business, which deals with tradeable loans to large companies, the latter often owned by private equity companies, and of sub‐investment‐grade credit quality.

Also within markets is the sales and trading business, which covers secondary trading of securities—ie the trading of securities that are owned by someone else than the issuer—as well as derivatives trading. The securities business is often referred to as broker/dealer business because the institution sometimes serves as broker, where they are intermediating between clients without taking a position, and sometimes as dealer where they are buying and selling securities on their own account to facilitate customer business (see the section on brokers for more details). Derivatives trading in this context is always a dealer‐style business, ie the institution acts as a counterparty for the trade (eg a swap or option trade) for the whole lifetime of the trade.

4.4 Payments

In the payments space there are a large number of specialised service providers that are competing with the banks, as well as a number of IT infrastructure providers that are dealing with the backend of the payment systems.

To use the terminology of the Payment Services Directive, there are the following, not mutually exclusive, distinctions:

• payment institutions
• payment service providers
• single payment service providers
• payment initiation services and account information services
• three‐ and four‐party card schemes.

Payment institutions (PIs) is a catch‐all term for institutions that fulfil services in the payments space, and that are not banks; for example, they can run payment accounts, operate payment networks, access the standard payment systems, provide fx services, etc. Because they only operate in the payments space they are more lightly regulated than banks, making their establishment easier.

Payment service providers or PSPs are companies that serve as a payment gateway for their customers, especially for online merchants. They allow those customers to accept payments from different sources (eg different cards, direct debit, possibly payment vouchers) via a single API, so the merchants don't have to worry about connecting to all the different payment sources. They can also run payment accounts for customers, in which case they are also referred to as account servicing PSPs.

PSPs should not be confused with single payment service providers (SPSPs), which are fully integrated payment providers running their own payment infrastructure, eg remittance and money transfer businesses, or bill payment services allowing one to pay bills from, say, supermarkets or corner shops.

Card schemes are the well‐known credit‐ and debit card networks; three‐party schemes are vertically integrated, ie the whole operation is run by one institution, whilst four‐party schemes include a bank, and the credit card company acts as a partner and service provider to the issuing bank.

Payment initiation service providers (PISPs) are providers that allow customers to initiate payments that are then either executed via PIs or banks; their purpose is to provide a better and possibly more specialised user experience in the payments space. Account information service providers (AISPs) are similarly single‐purpose institutions. The service they provide is to retrieve account data from one or several of a customer's payment accounts, and analyse it or present it in a better way. Typically AISPs could also offer PISP services, but not necessarily vice versa.

4.5 Asset Management

This segment groups all financial service providers who are dealing with investing other people's money. To look at the big picture first, there are discretionary managers, where people—or algorithms—decide where assets are invested, and there are index managers, where investment is determined by an index (eg, S&P 500) and all the manager does is implement this strategy as efficiently as possible. Funds can come in an open‐ended fund structure where the funds continuously accept new money and offer redemptions—possibly through an exchange‐traded ETF structure, where investments and redemptions are dealt with through a clever structure on an exchange—or they can come in a closed‐ended structure, where units can be traded on the market, but additional funds cannot be accepted nor can units be redeemed during the lifetime of the fund. Related is the certificate business, where certain investment strategies, typically derivative‐based, are repackaged into tradeable securities.

Coming back to the discretionary managers, there are a number of different types. The most common one is the mutual fund, which purchases securities, typically equities or bonds, depending on the mandate. There are also hedge funds, who are given more freedom in what kind of strategies to engage in; in particular, they can short securities, meaning they profit when securities fall; they can employ leverage, meaning they can borrow additional money to invest in a larger securities portfolio then their invested funds would allow; and they can engage in derivative trading strategies.

There are also the private equity (PE) and venture capital (VC) areas, which mostly invest into the equity of unlisted companies. The difference between them is that private equity invests in large mature businesses that might have been publicly listed at one point, and that benefit from the high leverage and investor focus that private equity can provide. Venture capital funds, on the other hand, invest in start‐up companies, and there are funds that focus on the different stages of the company development. Part of that space are also angel investors, who invest at a very early stage, even ahead of the VC funds.

Lastly, one should mention private banking and family offices here. The former is banking for rich people, and whilst it is a full banking relationship, the focus tends to be on managing the clients' significant assets. A family office is similar, except that in this case a client—or a group of connected clients—employs a dedicated personal asset manager.

4.6 Brokerage and Transaction Services

This segment groups all financial service providers that are dealing with buying, selling, and holding securities and other financial instruments.

4.7 Insurance

Insurance companies are pooling and distributing risk among their customers. For example, in the property & casualty insurance segment, clients who face a specific risk—eg that their home is broken into, or destroyed by fire—pay an insurance premium. Those customers where the risk materialises are then made whole by the insurance company.

Some insurance companies provide ancillary services, most importantly those in the health insurance market, where insurers not only provide indemnification but often are in a position to provide services more cheaply, for example because they are in a position to provide those services themselves, or because they have significant purchasing power in that market.

Another important insurance segment is that of life insurance, which deals with the risk of either dying prematurely, and therefore leaving dependents without the necessary means, or living too long, and therefore using up all one's assets. Especially the latter insurance is usually paired with an asset management business, so that people pay into insurance plans throughout their lives to reap the benefits during retirement.

Finally there are reinsurance providers, who insure insurance companies against excessive losses, eg because of a large natural event like a hurricane that affects a lot of the primary insurance's customers at the same time.

4.8 Others

There are a number of financial services providers that don't fit into the categories above. For example, there are rating agencies, who assess the credit quality of borrowers. They are similar to the research functions mentioned above, except that they provide letter ratings for the creditworthiness of securities (‘AAA’, ‘AA’, etc.). Those ratings are in practice very important, eg for regulatory purposes, or to define fund management mandates for bond investors.