Analysis of Finance Companies and Commercial Banks: Differences

This report provides a comparative analysis of finance companies and commercial banks within the context of financial markets and institutions. It outlines the types of customers served by each entity, differentiating between commercial and individual clients. The report highlights the advantages of finance companies over commercial banks, such as less stringent regulations, the ability to offer a wider variety of financial products, and a willingness to take on riskier customers. It also explains why finance companies are less regulated, primarily due to their non-acceptance of deposits, which reduces the need for regulators to assess potential financial safety risks. The report references several academic sources to support its findings, offering a comprehensive overview of the operational and regulatory differences between these two types of financial institutions.

Running head: FINANCIAL MARKETS AND INSTITUTES
Financial Markets and Institutes
Name of the Student
Name of the University
Author’s Note

1FINANCIAL MARKETS AND INSTITUTES
Types of Finance Company Types of Customers They Serve Example
Insurance Companies
The main customers of finance companies
are all kinds of businesses, employers,
commercial as well as personal vehicle
owners, home builders, renters, home
owners, victims of tech crimes and anyone
who makes mistake
State Farm
Investment Companies
The main customers of investment
companies are private persons, small firms,
large companies and others.
American Century
Commercial Banks
Two types of customers of commercial
banks can be seen; they are corporate
customers and individual customers.
Corporate customers include small
companies, large business corporations,
partnership companies, investment
companies and others. On the other hand,
the individual includes home owners,
renters, common people and others.
Bank of America
Advantages of Finance Companies over Commercial Banks
In this context, it needs to be mentioned that there are certain differences between the
business operations of the finance companies and the commercial banks. For this reason, the
finance companies are able in providing some major advantages over the commercial banks and
they are discussed below:
 It needs to be mentioned that the finance companies are subjected to less regulation; and
for this reason, they have less restrictions on their products and service offerings. In the

2FINANCIAL MARKETS AND INSTITUTES
presence of less restriction and regulations, the financial companies are able to provide
their customers with more variety financial products and services in order to fulfill their
needs (Kidwell et al., 2016).
 One major aspect of financial companies is that they do not have the rule to accept
deposits. For this reason, the presence of less regulatory monitoring can be seen for these
finance companies. In the presence of less severe monitoring, the finance companies are
able in providing more suitable products to cater to the needs of the customers (Valdez &
Molyneux, 2015).
 It can be seen in most of the cases that the commercial companies are the subsidiaries of
large industrial companies. For this reason, they are able to provide large variety of
financial products and services.
 It needs to be mentioned that the finance companies are willing to take on riskier
customers while the commercial banks do not take on riskier customers. This is a major
advantage of the finance companies (Jones 2014).
 In the finance companies, the presence of lower overheads can be seen as compared to
the commercial banks. In the presence of less overhead, they can invest more for the
development of new products and services.
Reason why Finance Companies are Less Regulated
It can be seen that the finance companies are less regulated than the commercial banks and
there is a reason behind it. The above discussion shows that the finance companies do not accept
deposits. For this reason, there is the elimination of the need for the financial regulators for the
evaluation of potential adverse financial safety related to the failure of the financial companies in
the economy. In the presence of this reason, the financial regulators do not have to put more

3FINANCIAL MARKETS AND INSTITUTES
focus on these finance companies (Balling, Hennessy & O'Brien, 2013). This aspect leads to the
less regulated nature of the finance companies as compared to the commercial banks.

4FINANCIAL MARKETS AND INSTITUTES
References
Balling, M., Hennessy, E., & O'Brien, R. (Eds.). (2013). Corporate governance, financial
markets and global convergence (Vol. 33). Springer Science & Business Media.
Jones, F. M. (2014). Foundations of financial markets and institutions. Pearson Education.
Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial institutions,
markets, and money. John Wiley & Sons.
Valdez, S., & Molyneux, P. (2015). An introduction to global financial markets. Macmillan
International Higher Education.