Financial Service Providers Why Financial Services Are Not Supposed to Be Covering All Risks

Alternative financial service providers such as payday loans, check cashers and even pawn shops exist for a very good reason. They often have short term uses, require little documentation of employment or credit history, and don't run credit checks or income verification. If you can find one of these financial services, by all means do it. However, there are some downsides. Below is an explanation of several that may be of interest to you.

First, there are the bad financial services. These include check cashing and pawn shop operations. While these businesses are legitimate, they are most definitely not for everyone. They require a fairly substantial amount of capital to open, operate and maintain. Also, they typically don't accept customers from all the areas of the financial markets.

The second category of bad financial service providers is those that operate outside the US financial sector. While this does include a number of "non-US" providers, it also includes banks, brokerages, corporate brokerage firms, financial institutions and sometimes individual homeowners. Digital Waves take on people with bad credit, although they are not always legally required to do so. The difference is that they don't have federal deposit insurance, which protects both borrowers and lenders. With that said, these lenders are not as prevalent as the other financial services providers.

Lastly, there are the bad service providers with little regulation. These include online brokerages, high interest loan companies and even loan sharks. Brokers typically cover risk by acting as a go between for borrowers and financial sector professionals. However, in order to get a loan from these brokers, borrowers often need to put up their home as collateral and even then, they usually only receive a fraction of the total value of the home.

In short, it's not that the financial sector doesn't provide credit to borrowers. Rather, it's that the current system that the financial service providers currently use to determine who is at high risk and who is low risk requires lenders to take on a lot of risk themselves. In a system where the risk taken on by lenders is so great, there is very little protection for the consumer or the borrower.

This means that those in the financial sector aren't necessarily covering all of their risk at all. They are simply passing it on to the customers that they serve. This makes sense when you think about it. While the US government has regulated the banking industry since the passage of the Fed Act, the way in which financial services works today is significantly different than it was just a few decades ago.

Let's look at an example of financial services are credit unions. Credit unions are essentially cooperatives. The members all have a common financial interest in seeing that the costs of running the institution are kept as low as possible. Because of this, the members have an interest in regulating the costs of credit unions as well as ensuring that any member that wants to borrow money can do so without having to take on too much risk themselves. By providing a source of capital that is backed by a mutual agreement amongst the members, it becomes possible to provide affordable financing to almost everyone in the US.

Another example of financial services are insurance companies. Insurance companies are generally quite regulated, as well. However, they rarely have the level of capital that some banks have. That means that most insurance companies are able to offer competitive rates to borrowers, which allows them to make money even if they aren't taking on as much risk as their less-regulated competitors.