The Financial Services Sector Explained
The financial services sector brings financial services to people and corporations. In this video, you’ll learn a simple way to understand this concept through an easy and brief explanation. Companies in the financial services industry manage money. That group includes banks and lenders, investment and finance firms, real estate brokers, tax and accounting professionals, credit and debt companies, and insurance companies. If a sector fails, it can drag a country’s economy down.
Fact checked by Suzanne KvilhaugReviewed by Robert C. KellyFact checked by Suzanne KvilhaugReviewed by Robert C. Kelly
It’s difficult to know the precise size of the global financial services sector. This is a large group of industries related to banking, lending, and the management of wealth and funds. However, there are few comprehensive metrics for the size of the entire sector. The World Bank itself only collects data from 189 countries and estimates the rest. Meanwhile, the definition and scope of industries that fall within the financial services sector are not consistent among data sources.
Furthermore, reporting is not that readily available on a regular basis or compiled on a global scale in specific financial sector terms. Without a doubt, determining what numerical measurement is the best way to represent the size of a sector has been a subject of much debate.
The following are some ways to measure the size of the financial services sector.
Key Takeaways
- The financial sector involves a large group of industries associated with banking, lending, insurance, investment, and other business activities related to the allocation of wealth and money.
- There are few comprehensive metrics on the global finance sector, and the only way to measure its size is through estimation.
- Financial services are a bedrock for many other industries that rely on loans and credit in order to operate.
- There are several different metrics for estimating the size of the finance sector, such as by Assets under Management (AUM), the market capitalization of financial companies, or the size of the market.
- Although results vary, most estimates place the financial services sector at around 20-25% of the world economy.
A Growing, Shifting Sector
Market estimates project that by the end of 2021, the financial services market is likely to reach $22.5 trillion, growing at a rate of 9.9% from the previous year. This is lower than previous projections, due to the recession caused by the coronavirus pandemic. With global GDP expected to reach $93 trillion in the same year, that would mean that financial services comprise about 24% of the world’s economy.
This represents a significant improvement over the financial sector of 2010, which was then struggling to recover from the Great Recession. The sector is expected to grow and shift to mobile and online banking as Millennials and Generation Z become more economically powerful. This growth has led to an increase in funding for startups and fintech companies looking to compete for a share of that business.
Banking and Investment
Another way to estimate the size of the financial services sector is by measuring the banking sector. The global banking sector had an estimated market capitalization of 7.3 trillion euros in the first quarter of 2021, equivalent to $8.58 trillion. As of 2022, global market capitalization, or the combined value of every listed company on every stock exchange in the world, is estimated to be over $92 trillion. Using these metrics, the banking sector accounts for 14% of the global economy.
However, this is an incomplete measurement because it only measures banks whose shares are publicly traded. It will not include information on private banks, government-owned banks, or fintech companies.
Another statistic worth assessing is assets under management (AUM). AUM is a figure that captures the total amount of assets managed by an investment company for its clients. In 2020, global AUM reached $103 trillion, according to Boston Consulting Group. With total global wealth estimated at $431 trillion, that means that the banking and investment sector accounts for just under a quarter of the world’s assets.
Note
Financial services are the backbone of the world economy, since most companies rely on credit or loans in order to operate.
Insurance Sector
Another important leg of the financial sector is the insurance industry, which helps companies moderate their business risks. Insurance companies have continued to see growth, particularly in the Eastern part of the world. It is expected that by 2029, Asia-Pacific will account for 42% of global premiums, with China making up 20% of that figure. As of 2020, the U.S. made up 29% of world premiums and China made up 11%.
Worldwide, gross written premiums were projected to reach $5.8 trillion by 2020. With global GDP estimated at around $84.5 trillion for that year, this means that the insurance industry accounts for an additional 6.8% of all economic activity.
The Bottom Line
Although it is difficult to obtain specific figures, the financial services sector is a major building block of the world economy. It consists of banks, investment firms, and insurance companies, all of which play a large role in the workings of the market.
There are several different ways to measure the size of the financial services sector in relation to the world economy. While these estimates vary, most put the financial services sector at around a quarter of the world’s economy.
Read the original article on Investopedia.