Login

Financial Intermediaries: Definition, Types, Role & Advantages

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: GATT: Definition, History, Purpose & Members

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 Financial…
  • 0:52 Borrowers & Savers
  • 1:56 Examples
  • 2:54 Advantages
  • 4:04 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

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.

Examples

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.

Advantages

There are several advantages of the financial intermediation process. However, there are three main advantages we'll discuss for the purposes of this lesson. The first is a reduction in costs. In the example at the beginning of the lesson, it would be expensive if everyone who was interested in starting a business had to seek out single investors, rather than going to an intermediary.

A second advantage is an increase in efficiency. A bank has the capability to assess an entrepreneur's risk more so than a single investor. It would be difficult for a single investor to gather all the necessary information to make a solid decision on investing in entrepreneurial ideas.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support