Pros and Cons of Diversification in Banking

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Diversification is the process of ensuring that a financial institution spreads its risks by targeting various geographical and psychological markets. It also involves the design of certain goods and services that target various types of customers. The banking structures in the modern world have, and innovation that has been facilitated by technology have been key in facilitating the diversification of financial markets as discussed in this paper.

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First, financial institutions wish to remain in the market, by avoiding losses as well as increasing their customer base. As such, they have to design new products that suit their new customers is part of their diversification strategies. In the modern world, globalization has increased competition between financial institutions, and this means that companies have to serve more customers, in new geographical areas so that they can remain relevant in the industry.

Diversification is also crucial in ensuring that the customers are satisfied. There are various groups of customers in the society, and financial institutions are motivated to have various products so that the various customers can choose the products meet their needs in the best way based on their financial situation, their religion and other special characteristics that they may have.

The banking structures tell where banks are concentrated and how the concentration changes with time. In addition to this, it tells how these organizations design their presence to reduce the costs of their operations. An example is the use of technology to facilitate banking activities which also reduces the costs that banks would have incurred in hiring employees to serve the people. Such banking structures are in line with ensuring that the risks that an organization faces are eliminated.

The innovation and globalization has been of benefit to various financial institutions since they have been able to serve more customers hence generate more profits. On the other hand, many people have benefited from the financial products that have been designed by various financial institutions. On the other hand, some banking institutions have faced stiff competition, and this has worsened their performance. The success of the financial institutions is based on whether they are able to be ahead of others in terms of innovation, so as to better satisfy their needs and ensure that it attracts a greater customer base.

From another point of view, innovation and globalization has posed great challenges and risks to the global market. Innovations such as bitcoins and other money transfer forms are not easy to regulate. Governments now face challenges associated with money laundering and theft, considering that various central banks are not able to regulate these banks. In cases of financial crisis, its contagion is likely to be realized faster than before because of these forms of innovations.

In conclusion, diversification is a key success strategy for every organization, and financial institutions are not an exception. Technological innovations and globalization have helped companies engage in diversification and many financial institutions as well as customers have benefited from the same. However, there have been challenges in the same because the risk of the financial crisis has increased considering that regulating the financial sector is becoming difficult every day. The implication of the situation is that governments should come up with policies that regulate online transactions and products that the financial institutions offer. This is not an easy task, and the expectation is that banks will have to invest in technology experts.

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