Financial Intermediaries: Definition, Types, Role & Advantages Video

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  • 0:01 Financial…
  • 0:52 Borrowers & Savers
  • 1:56 Examples
  • 2:54 Advantages
  • 4:04 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, you'll understand the process of financial intermediation. We'll also discuss the players in the process, the types of financial intermediaries as well as the advantages of financial intermediation.

Financial Intermediation Defined

Suppose you want to start a computer repair business and, at the same time, a woman named Susan, who lives in another state, has money to invest in a start-up business. If you and Susan could somehow cross paths, she could invest in your business and you could fulfill your dream of entrepreneurship. Since you probably would never find Susan on your own because she lives in another state, there's a process called financial intermediation that can ensure both of you meet your goals.

Financial intermediation connects borrowers with savers; these intermediates help channel funds from one person, or entity, to another. In this lesson, we'll describe the players in this process - borrowers and savers - explain the different types of financial intermediaries, and discuss the advantages of financial intermediation.

Borrowers and Savers

There are two main roles in the financial intermediation process: borrowers, also known as spenders and savers, also called lenders. Let's look at borrowers first. Borrowers need money for various reasons: to purchase a home, start a business, pay for business expenses and fund programs. They need money to spend. Borrowers include individuals, companies and the government. All three have a need to borrow money.

The second role in the process is savers. Savers have money, which is why they're also called lenders. They have the money to lend. Savers not only have money in savings accounts, they have money deposited in other interest earning products, such as retirement accounts and certificate of deposits. Savers include individuals, companies and the government.

That's right, individuals, companies and government can be both borrowers and savers. They all do both; they both borrow and save money. Now, let's look at who channels these monies back and forth between borrowers and savers.


If someone asked you to name a financial intermediary that helps move funds from lenders to spenders, you probably would say a bank. And you would be correct. A bank is considered a depository financial intermediary, where savers deposit money and spenders borrow that money.

Another type of financial intermediary is a non-depository institution, such as an insurance company. Insurance companies collect premiums for various types of coverages: auto, home and liability.

They do not immediately pay out all of the premiums in losses. They invest the money, channeling funds from spenders, the people who they collected the premiums from.

The last type of financial intermediary is an investment intermediary, such as an investment bank. They take in money from investors and spenders and invest the monies in interest and profit-earning products.

Now that you understand the three types of intermediaries, let's review the advantages of the intermediation process.

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