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What Are the Different Types of Non-Banking Financial Institutions?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 03 October 2014
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Many financial institutions have evolved into institutional conglomerates that provide an array of services from investment advisory work to banking. There are, however, some non-banking financial institutions that focus on a single business line or are simply more dedicated to other financial services beyond banking. Non-banking financial institutions are not legally permitted to accept deposits from customers. They can, however, advise on how to invest assets, execute buy and sell orders on behalf of investors, or provide research on the financial markets, the economy, or individual investments. Some non-banking financial entities are traditional finance companies, while others are corporations that evolved into offering financial services.

In developed economies, non-banking financial institutions still must adhere to some regulation. While these firms are not legally banking institutions and do not hold banking licenses, financial transactions outside of deposits still occur. As a result, there still must be accountability to a regulatory body, even if it's local, and certain guidelines must be followed, such as maintaining minimum capital requirements or financial reserves.

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Non-banking financial institutions can be found in some unlikely places, including the automotive industry. In addition to manufacturing and selling vehicles, some auto companies decide to capitalize on the fact that most customers need a loan to buy an automobile and subsequently expand into the financing business. Loans may be extended to customers from the financing arm of the auto company. This financial division does not accept customer deposits but does receive payments with interest on the loans offered. In addition to loans, this type of non-banking financial institution may offer leasing services and insurance products to customers.

Investment banks are another type of non-banking financial institution. Firms dedicated to investment banking may strictly provide advisory services to clients. This could be in the form of advising a company on a merger or acquisition or in recommending a transaction in which the client could raise money in the financial markets. Also, investment banks provide underwriting services to corporations. These non-banking financial institutions may take the lead on selling a company's equity or debt to the public.

A non-banking financial institution may not be able to accept cash deposits from customers, but it still must raise money somehow to keep up with minimum capital requirements. As a result, these firms may raise money by issuing bonds in the debt market. This is a way for the financial institution to raise money to bolster the value of a balance sheet and have additional cash to use to perform business activities.

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bagley79
Post 2

For many years I worked in the investment department of a major bank. Even though our services were offered through the bank, the non banking financial services we provided were different than the bank services.

When someone deposits money in bank products, you know how much interest you will be receiving, and the principle amount of money you invest will not decrease.

Banking products are also regulated by the FDIC. The financial products and services we provided were regulated by the SIPC and NASD.

We sold stocks, bonds, mutual funds and annuities, which are not the same as CD's or money market accounts.

When someone invested money in the financial services we provided, they had to know the risks that were involved. Because of the nature of these products, they could end up having less money depending on what the market did.

honeybees
Post 1

The first thing I think of when reading about a non banking finance company, is a car dealership.

I have a friend who is a salesman at a used car lot, and part of their services offered is financing through them.

I really don't know how it all works, but there are incentives for them if they get their financing through their place of business.

This is something I have never done so I don't know what the interest rates compare to. I am sure it depends on your credit, but how do these rates compare to banks and credit unions?

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