Many financial institutions have evolved into institutional conglomerates that provide an array of services from investment advisory work to banking. There are, however, some non-banking financial institutions that focus on a single business line or are simply more dedicated to other financial services beyond banking. Non-banking institutions are not legally permitted to accept deposits from customers. They can, however, advise on how to invest assets, execute buy and sell orders on behalf of investors, or provide research on the financial markets, the economy, or individual investments. Some non-banking financial entities are traditional finance companies, while others are corporations that evolved into offering financial services.
In developed economies, non-banking financial institutions still must adhere to some regulation. While these firms are not legally banking institutions and do not hold banking licenses, financial transactions outside of deposits still occur. As a result, there still must be accountability to a regulatory body, even if it's local, and certain guidelines must be followed, such as maintaining minimum capital requirements or financial reserves.
Non-banking financial institutions can be found in some unlikely places, including the automotive industry. In addition to manufacturing and selling vehicles, some auto companies decide to capitalize on the fact that most customers need a loan to buy an automobile and subsequently expand into the financing business. Loans may be extended to customers from the financing arm of the auto company. This financial division does not accept customer deposits but does receive payments with interest on the loans offered. In addition to loans, this type of non-banking institution may offer leasing services and insurance products to customers.
Investment banks are another type of non-banking financial institution. Firms dedicated to investment banking may strictly provide advisory services to clients. This could be in the form of advising a company on a merger or acquisition or in recommending a transaction in which the client could raise money in the financial markets. Also, investment banks provide underwriting services to corporations. These non-banking institutions may take the lead on selling a company's equity or debt to the public.
A non-banking financial institution may not be able to accept cash deposits from customers, but it still must raise money somehow to keep up with minimum capital requirements. As a result, these firms may raise money by issuing bonds in the debt market. This is a way for the financial institution to raise money to bolster the value of a balance sheet and have additional cash to use to perform business activities.
