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THE Evolution of the Financial Services Industry

Until recently, the phrase “financial services” was simply an umbrella term commonly used to refer to loosely-related services or businesses. Each involved personal or business finance, but the different functions were performed by separate institutions such as banks, insurance companies, or stockbrokers.

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However, government deregulation of financial industries began in earnest during the 1980s and ‘90s, allowing institutions to perform many of those functions concurrently. That has led to today’s very different understanding of the term “financial services company,” since large firms now often offer a long list of financial products to their customers.


Throughout history, there have been clearly delineated lines between banks, insurance companies, and other financial specialists. Each field developed independently and the functions were performed by very different types of companies, groups or organizations.

There is a great deal of evidence that rudimentary banks operated in ancient civilizations, but most historians believe the period around 2000 B.C. is when actual “banking” began, with merchant banks issuing loans, changing money and taking deposits. “Modern banking” took shape during the Middle Ages and Italian Renaissance with constant refinements since then, such as the issuance of banknotes backed by precious metals in the 1600s, the creation of central banks in the 18th and 19th centuries, and the development of retail banking (including the proliferation of ATMs) in the 20th century.

Insurance was first issued by the Babylonians to protect shipments travelling through the Mediterranean, as shown in the Code of Hammurabi. Property insurance as we now understand it was created following the Great Fire of London in 1666, with business insurance appearing around the same time, and life insurance first being sold a few decades later, all sold by companies solely dedicated to insuring clients. Many new products (such as credit and liability insurance) have been introduced and numerous refinements have been made by the insurance industry since then.

Stock exchanges and markets have been around since the 13th century, so stock traders and stockbrokers date back to that same period. Brokerage firms later arose, to allow the management of large numbers of accounts and clients, and large securities firms developed new types of investment instruments, particularly in the late 20th century. Large and specialty brokers kept pace and traded all of those instruments on behalf of their customers.


Financial services firms were largely prohibited from “crossing lines” into each others’ business arenas in most countries; in the United States, legislation such as the Bank Holding Act and the Glass-Steagall Act ensured those bright lines. A push to lessen regulation across a wide range of industries gathered steam in the 1980s and 1990s, and a landmark law known as the Gramm-Leach-Bliley Act (also called the Financial Services Modernization Act) was passed in 1999. That legislation removed all major restrictions on the consolidation of banks, insurance companies, and investment and securities firms. This deregulation not only freed major financial institutions to merge and enter previously forbidden lines of business, it also freed them to join in the growing market for “alternative” financial services which were beginning to enjoy widespread popularity, particularly in the United States and United Kingdom.

Alternative Financial Services (AFS)

Among the most common forms of alternative financial services available today are payday loans, currency exchange and non-bank check cashing services. They were first developed in the 1990s, primarily because larger banks were refusing to loan money to smaller businesses and poorer customers. Their increasing popularity has been largely due to the fact that they provide financial services quickly, with a minimum of paperwork, documentation or financial resources required. Interest rates are usually higher for alternative financial services, but the people who use them are willing to pay higher rates either because they can’t get better rates at traditional financial institutions, or because the loans are easy to obtain (with payday loans even available online).

Some companies already operating in the financial space now had the freedom to move into the alternative financial services arena, while others such as Axcess Financial have developed an entire business model operating stores and websites offering alternative services. There have been a number of efforts to more strictly regulate these businesses as a result of claims that they take unfair advantage of lower-income customers. However, at this point alternative financial services seem to be firmly entrenched in the financial sector, and are more likely to evolve than disappear.

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