Outcome B Flashcards
What are financial institutions?
A company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments and currency exchange. They may also offer advice on both business and personal financial matters
Types of financial Institutions
Bank of England
Banks
Building societies
Credit unions
National savings and investments
Insurance companies
Pension companies
Pawnbrokers
Payday loans
Bank of England
The UK’s central bank that ensures the financial stability of the UK. It sets interest rates for the country, prints bank notes and stores over 400,000 gold bars. It does not lend to the general public
Advantages of BOE
Protect the financial stability of the UK economy - The Bank of England oversees and regulates major financial institutions like banks, building societies, and insurers to ensure they operate safely and responsibly. This reduces the risk of financial failures that could harm the economy
Lend to banks - The Bank’s lending helps ensure that payments and transactions between banks continue to operate smoothly, which is crucial for both businesses and individuals relying on financial services
Set interest rates -
Disadvantages of BOE
Do not lend to the general public - people and businesses must depend on commercial banks for credit. This can result in higher borrowing costs, as commercial banks add their own profit margins to interest rates
Can raise interest rates making borrowing such as mortgages more expensive - For those looking to purchase a home, higher mortgage rates can make monthly repayments unaffordable, reducing affordability and access to the housing market
Banks
handles financial transactions and stores money on behalf of the general public. They allow individuals and businesses to make payments, access credit and save
Advantages of banks
Secure place to store money - Banks provide digital platforms, such as online and mobile banking, that allow customers to access their money securely without the need to carry cash. This reduces the risk of theft and fraud
Pays interest on savings - By depositing money into a savings account, customers earn interest over time without having to actively manage their funds. This provides a simple and secure way to grow wealth passively
Variety of services - Banks provide secure options for saving money, including basic savings accounts, fixed deposits, and current accounts. These services help individuals and businesses manage their funds safely while earning interest
Disadvantages of banks
Savings only protected to £85,000 if the bank goes bankrupt- can reduce public confidence in banks, especially during economic uncertainty or financial crises
Owned by shareholders therefore are designed to make profit - To maintain or increase profits, banks may introduce or raise fees for services such as account maintenance, overdrafts, or foreign transactions, which can affect customers with lower incomes
Building societies
Similar to banks, these provide financial services to the public such as day to day banking, mortgages and credit. The key difference is that building societies are owned entirely by their members which means they can set rates that benefit their members and not shareholders
Advantages of building societies
Owned by members - Building societies often emphasize community and member engagement, leading to a more personalized customer experience compared to larger, shareholder-owned banks
Variety of services - Building societies provide a range of savings accounts, including easy-access accounts, fixed-term savings, and ISAs, allowing members to choose options that align with their savings goals and financial needs
Pay interest on savings - By depositing money into a savings account, customers earn interest over time without having to actively manage their funds. This provides a simple and secure way to grow wealth passively
Disadvantages of building societies
May lack business drive if commercial banks as banks are profit driven - They may take longer to respond to changes in market trends or customer demands
Savings only protected up to £85,000 - can reduce public confidence in building societies, especially during economic uncertainty or financial crises
Credit unions
A member owned financial cooperative, controlled by its members and operated on the principle of people helping people, providing its members credit at competitive rates as well as other financial services.
Advantages of credit unions
Variety of services - Some credit unions provide affordable insurance products, including life, auto, and home insurance, often at better rates than traditional insurers
Owned by members - leading to a more personalized customer experience compared to larger, shareholder-owned banks
Offer additional benefits to the community and charities - Because credit unions are not driven by profit, they can offer lower interest rates on loans, higher rates on savings, and fewer fees. This allows members to retain more money, which can then be reinvested in the community
Disadvantages of credit unions
May lack business drive if commercial banks as banks are profit driven - They may take longer to respond to changes in market trends or customer demands
Savings only protected up to £85,000 - can reduce public confidence in credit unions, especially during economic uncertainty or financial crises
NS&I
A gov backed organisation that offers a secure savings option. It offers a range of options including ISA’s, premium bonds and guilts
Advantages of national savings and investments
Savings are 100% secure as its gov backed - Savers can be assured that their funds are completely secure, even during economic uncertainty
Various ways to save such as premium bonds - this is where savers have the chance to win tax-free prizes in a monthly lottery instead of earning interest. This makes saving more exciting, with the potential for large cash prizes, including a £1 million jackpot
Disadvantage of NS&I
Variable rates - making it harder for savers to predict the future value of their investments, complicating budgeting and long-term financial planning
Lack a high street presence - The absence of a physical presence might lead some customers to feel less secure or less confident about the reliability of NS&I compared to traditional banks with visible, established branches
Usually need to give notice on withdrawals - If you have your money locked in an NS&I product with a notice period and a better investment opportunity arises, you may not be able to take advantage of it until the notice period is over
Insurance companies
These are for profit businesses that protect people against loss in return for a monthly premium
Advantages of insurance companies
Protect against unexpected losses/events - Knowing that you have coverage in case of an emergency or unforeseen event helps reduce anxiety and allows you to go about your daily life with more confidence
Cover available on a variety of things - Many insurance companies provide international options, such as travel insurance or global health coverage, ensuring protection even when policyholders are abroad
Pay monthly so easier to budget - Regular monthly payments create a predictable expense, making it easier for individuals to plan and track their finances over time
Disadvantages of insurance companies
Premiums assessed on risk and the higher the risk the higher the premium - The risk-based pricing model can feel unfair to individuals who have limited control over certain risk factors, such as genetics (in health insurance) or natural disasters (in property insurance)
Owned by shareholders therefore need to make a profit - To meet shareholder expectations for profits, insurance companies may charge higher premiums, making coverage more expensive for customers
Pension companies
Sells policies to individuals or companies that enable themselves or their employees to save for future retirement. Pension companies usually invest the money deposited by the individual in hopes of growing it for future use
Advantages of pension companies
Structured way to plan for retirement- Pension companies provide a structured mechanism to convert savings into a steady income during retirement, offering financial security and peace of mind for retirees
Matched contributions by employer - Knowing that your employer will match your contributions can encourage you to save more towards your pension, ensuring better financial security in retirement
Tax benefits - When you retire, most pension schemes allow you to take up to 25% of your pension pot as a tax-free lump sum, giving you access to a significant amount of money without paying tax
Disdvantages of pension companies
Poor investment decisions may mean a poor return on investment - Pension holders usually have little to no control over how their funds are invested. They rely entirely on the expertise and decisions of the pension company, leaving them vulnerable to poor strategies
Cannot access money until the agreed term - For individuals facing financial difficulties, the inability to withdraw money early can create significant hardship, forcing them to rely on loans or other savings to cover immediate needs
Pawnbrokers
Loan money to individuals and secure this loan against an asset. The most well known asset that is pawned is jewellery. If the item is not brought back then the pawnbroker will sell the asset to recoup the cost of the loan
Advantages of pawnbrokers
Quick way of acquiring cash - Pawnbrokers are widely available, and the process is straightforward. This convenience makes them an attractive option for those who need cash quickly without complicated procedures
Interest not charged - The simplicity of a pawnbroker loan ensures there are no surprise charges or complicated repayment structures. As long as you repay the loan within the agreed time, no further costs are incurred
Buy back pawned asset -The ability to retrieve your asset is not influenced by your credit score or financial history, making it an accessible option for individuals who may not qualify for traditional loans
Disdvantages of pawnbrokers
Amount given for the asset is much lower than what it’s worth - Pawnbrokers often set strict terms for the loan amount offered, leaving little room for customers to negotiate for a fairer value
Asset will be sold on loan if not repaid - If you fail to repay the loan, the interest and fees can accumulate quickly, further complicating the situation and making it harder to recover the asset
Payday loans
Short term loans that are intended to bridge the gap between one payday to another in the case of an emergency. Interest rates are extremely high and payday loans should be avoided where possible due to this.
