Difference Between Banking and Finance

Banking and finance are two different matters of subject, collectively referring to the services provided by banking and non-banking financial institutions. The two terms are easily confused as the same thing but are quite distinct in terms of the content of the services provided by banking and non-banking financial institutions. The following article will provide the reader a clear understanding of these differences.

Banking

Many of us require the services of a bank in conducting our day-to-day transactions, which is also the case for small businesses and large firms that also obtain the services of the banking system. The two types of banks include commercial banks and investment banks. The services provided by a commercial bank are called banking services, which include obtaining deposits from customers and providing loans. The mechanism under which commercial banks operate is simply explained as follows. The bank will obtain deposits from those customers that need a safe place for the surplus funds. The banks use funds to provide loans to the rest of the bank’s customers that have funding shortages, for a fee known as an interest payment. The services obtained from investment banks include helping firms to raise capital in the stock markets by undertaking to value the company stock, provide underwriting services, conducting road shows to stimulate potential buyer interest and help sell shares to the public.

Finance

Non banking financial institutions include a number of companies that provide financial services, which include insurance companies, financial research firms, venture capital firms, brokerages, investment funds, pension funds, private equity firms, and so on. The services provided by these firms differ from each other but are collectively referred as financial services. The main function of the financial services firms is managing investor’s money and assets by predicting the movements and changes in the market and making investments that increase the investor’s return on investment and help accumulate wealth. Examples of services provided by some of these financial firms are as follows. Insurance companies – provide coverage against a predicted future crisis for a fee known as premium. Hedge funds – Pools of money collected from wealthy investors that are managed in a manner that increases investor wealth. Financial research firms – provide large corporations analysis and insight into investment decisions.

What is the difference between Banking and Finance?

The services provided by the banking sector and non-banking sector both involve providing investors avenues for managing their wealth in a manner that involves lower risk. The main difference between banking and non-banking financial institutions is that non-banking financial institutions cannot take deposits from customers like traditional banks do. Banks provide services that include accepting deposits, giving loans, and securities underwriting and offering shares to the public. Finance companies provide a much larger range of services than banking institutions, which include asset management services, insurance services, financial research facilities etc. The institutions under the banking industry are subject to much more stringent regulations compared to the financial services firms.