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what is a financial institution

A financial institution is an entity that engages significantly in finance-related activities. These activities include such easily recognized examples as taking deposits and making loans as well as less-obvious ones like collecting debts and keeping records of consumers’ credit histories. A wide range of people and organizations can be considered financial institutions according to various definitions. The list can include banks, insurance companies, stock brokers, mutual funds, IRA custodians and even casinos. Financial advisors are among those recognized as financial institutions.

Connecting with a financial advisor will help you navigate the maze of financial services and service providers.

Financial Institutions Defined

The distinguishing trait of a financial institution is that it performs activities related to finance. The first financial institution that comes to mind at mention of the term may be the local bank that accepts deposits to savings and checking accounts and makes loans to businesses and individuals. However, that is just the tip of the iceberg. In its broadest interpretations, “financial institution” may include an expansive variety of people and organizations performing many different functions across a wide array of fields.

Some of the most inclusive definitions come from government agencies charged with protecting financial institution customers as well as the public against illegal activities. These include overseers of the way institutions handle customer data, such as the Federal Trade Commission, as well as agencies that root out money laundering and similar activities, such as FinCen, the Financial Crimes Enforcement Division of the U.S. Treasury Department.

Financial Services

The activities that are included as finance-related services can include just about any action involving financial assets. Lending, borrowing and insuring are covered. So are advising, safekeeping, facilitating, transmitting and exchanging financial assets.

Drilling down more precisely, being involved in a real estate closing can be seen as a financial activity. So can selling a money order, making a payday loan and even selling a car or diamond necklace.

Types of Financial Institutions

what is a financial institution

Some of the entities identified as financial institutions may seem odd choices. Their inclusion often depends on the purpose of the list maker. For instance, federal authorities charged with uprooting money laundering recognize that real estate transactions and purchases of high-value items such as precious gems can be used to disguise the origins of ill-gotten gains. So, they include people involved in real estate closings as well as jewelers among the financial institutions that are asked or required to report suspicious transactions.

Similarly, some businesses that don’t seem to be heavily involved in finance actually have lending and similar activities at the center of their business model. Examples of this include auto dealers, who may generate more profits from financing vehicle sales than they do from marking up their inventory.

A comprehensive list of financial institutions would include the following:

  • Banks
  • Credit unions
  • Savings and loan associations
  • Insurance companies
  • Financial advisors
  • Investment companies
  • Brokerages
  • Debt collectors
  • Finance companies
  • Mortgage lenders
  • Mortgage brokers
  • Credit card companies
  • Payment processors
  • Transaction processors
  • Consumer reporting agencies
  • Casinos
  • IRA custodians
  • Investment banks
  • Trust companies
  • Check cashing businesses
  • Payday lenders
  • Pawnshops
  • Real estate agents and brokers
  • Title companies
  • Escrow companies
  • Money changers
  • The United States Postal Service
  • Automobile, boat and aircraft dealers
  • Travel agencies
  • Jewelers

What all these have in common is that they touch financial assets as facilitators of transactions of some sort. Credit reporting agencies, for instance, don’t actually handle funds for customers of other financial institutions. They do, however, inform decisions to grant credit by lenders and others. That is why they are included on the FTC’s roster of financial institutions that have to safeguard consumer data.

While this list may seem exhaustive, it can be expanded, according to the rules of the government agencies that use the widest interpretation of what constitutes a financial institution. As new technologies, processes and service are introduced, creating additional ways to interact with financial assets, the idea of what constitutes a financial institution is likely to become even broader in the future.

The Bottom Line

what is a financial institution

A financial institution may include nearly any person, business, non-profit organization government agency or other entity that is significantly engaged in activities relating to finance. Those activities can cover lending, borrowing, brokering, transferring, exchanging, or facilitating actions involving financial assets of any kind. A comprehensive list of financial institutions according to the broadest definitions contains obvious examples such as banks and insurance companies as well as real estate agents, pawnbrokers and even travel agents.

Banking Tips

  • A financial advisor can assist you to prepare a financial plan to direct your own finance-related activities. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Not every entity that touches a financial transaction will always be considered a financial institution. For instance, while FinCen specifically states that real estate agents, title companies and escrow companies are financial institutions because they are present at real estate closings, individual homebuyers and sellers are specifically exempted.

Photo credit: ©iStock.com/olaser, ©iStock.com/Liudmila Chernetska, ©iStock.com/Jirapong Manustrong

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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