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The financial services industry can be divided into two sectors viz, the retail and the wholesale sector.
On one hand, there is the retail sector, which provides a wide variety of deposit-taking and loan-related financial services to the common people.
On the other hand, there is the wholesale sector that provides services to institutions.
These institutions could also be the ones that actually provide retail financial services to individuals. Therefore, it is important for an individual to understand the various types of financial markets and financial products which exist in the world.
In this article, we will have a detailed look at the wholesale financial markets and the different kinds of products that are offered in the wholesale markets.
For instance, banks need not wait until maturity to get repaid for their loans. They can sell these loans to third parties and obtain the cash immediately. This immediate cash can then be used to fund a different class of assets.
It can, therefore, be said that the existence of secondary markets leads to an increase in liquidity in the primary market itself. This mechanism has been used by many countries to increase the flow of funds to sectors of the economy, which the government considers being a priority.
Services like bills discounting and factoring, which help companies unlock their receivables and deploy the additional cash in business, can also be included in this category of products.
Transaction processing can be defined as executing the orders to debit or credit an account given by the owner of that account. The technology required to debit or credit loan accounts is the same as the one required to credit or debit deposit accounts.
This technology is extremely complex and requires a lot of funds to build. This is the reason why most banks and financial services do not build this technology on their own. Instead, they borrow this technology from third party institutions who specialize in it.
There are two types of processing products, one which enables retail institutions to deal with retail customers. The second type allows institutions to deal with each other. Both these types of products are provided by the wholesale financial services system.
For instance, before a corporation gives credit to another corporation, it would want to know whether the counterparty is creditworthy. There are specialized financial institutions that provide this kind of information. They collect a wide variety of data pertaining to the creditworthiness of individuals and corporations. Then they process the data and sell the same to companies who want to make decisions related to credit.
There are different types of data services that are offered. In some cases, the data is already analyzed by preprocessed models, and only the result is provided to the buyer. In other cases, the buyer is provided with all the data as well as the tools which may be required for modeling the data as per their requirements.
Wholesale financial markets are vital because they indirectly allow the efficient functioning of the retail financial markets. Since services that require a lot of infrastructure investment are provided by these wholesale providers, the need for capital investment in retail operations reduces drastically.
Also, expenditure on tasks such as collating information is not duplicated by different players across the supply chain. All this enables a high degree of competition in the retail market. This competition is good for the consumer since they get the best products and services at the lowest price possible.
It is wholesale financial markets which have ensured that banking services are not dominated only by, too big to fail, vertically integrated behemoths. Smaller companies that are more effective at providing specialized services, also flourish thanks to wholesale banking.
It would, therefore, be fair to say that even though consumers do not directly interact with wholesale financial markets, they still consume a lot of their services. Wholesale financial markets, therefore, are vital to the functioning of the financial system as a whole.
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