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What Is Bank Diversification?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 20 November 2016
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Bank diversification is the provision of more products and services by a financial institution. Historically, regulations have restricted banking activities to protect consumer safety and the economy. The level of restriction in a given nation can vary, and is subject to change over time as people responsible for economic policy make adjustments to adapt to new circumstances. There are risks and benefits to bank diversification which need to be considered when making business decisions. This is particularly important for publicly traded firms, which have a responsibility to their shareholders.

In an example of bank diversification, a savings and loan that offered opportunities to start savings accounts and take out loans could start providing credit card services. This could also expand into things like mutual fund investments for customers. Diversification can include expanding the number of fee services, like issuing cashier’s checks or handling wire transfers. These can all generate revenue for the bank.

The clear benefit to bank diversification is higher revenues. Banks can increase earnings from existing customers by providing them with more services, and may also enhance customer loyalty. Customers may be pleased that they can use the bank for a variety of services, rather than having to go through several intermediaries. This can build up a more committed customer base of people who will stay with the bank and recommend it.

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Diversified financial institutions can also be more competitive when it comes to attracting new customers. People considering moving their banking services or opening a bank account for the first time may consider the available products and services. Bank diversification can appeal to these customers by providing them with an incentive to switch. Older adults interest in retirement advice, for example, might be convinced to work with a specific bank because it offers this service to customers, along with products tailored to their needs like reverse mortgages.

This can also carry some risks. More diversification exposes financial institutions to new areas of risk, like defaults on credit card debt for a bank that historically didn’t handle such accounts. This can increase operational expenses, as banks may need more analysts and a larger fund to cope with defaults. There can also be a risk if the bank focuses on selling services to the exclusion of supporting customers. Bank representatives, for example, might be less willing to negotiate on a failing loan when they’re thinking about how to sign up customers for new services.

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