Traditional Banking vs. Modern Banking - Essay Example

Published: 2021-08-10
1258 words
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Harvey Mudd College
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A bank can be described as an institution that is involved in money dealings, and its substitutes in the provision of various financial services. There is acceptance of deposits and organizing loans. Additionally, it derives profits from the variation in the respective paid and charged interest rates. In this essay, there will be an evaluation of the differences that exist between traditional banking and modern banking.

The functions performed in the traditional banks include the depository functions, deposits maintenance, loan making and the control of checkable deposits. This means traditional banking has three main distinct components namely capital, deposits and loans components. It was the traditional bank which acted as financial intermediaries in the provision of check accounts and management of funds circulation in the financial markets. However, traditional banking has some associated limitations, and this led to the development of modern banking (Adeniran, 2017: 2-4). One of the limitations of traditional banking is that it is prone to robberies and there is time limitation which inconveniences customers. It is also limited in the location in that customers can only complete their transactions in the specific locations. Additionally, since transactions can only be completed in the bank, customers are necessitated to spend more time in the banks. This is in comparison to modern banking which has been developed to fill the gaps left by traditional banking (Sharma, 2016: 302-304). One of the critical aspects of banking is the deposits made by the customers. This has the development of strategies that help in attracting deposits for banks thereby gaining more funds. This means modern banks have been able to institute various strategies such as the adjustment of saving's interest rates or the provision of various types of financial instruments used in funds collection. Additionally, the advancement of technology has positively impacted on the experience of bank users. Technology has seen the development of Automatic Teller Machine, online banking, mobile banking and Credit and Debit Cards (Sharma, 2016: 302-304). Other benefits have been the reduction of costs and time used making transactions has been reduced.

In conclusion, traditional banking has been critical in the provision of primary banking functions to the public. However due inadequacies of traditional banking, there have been developments in modern banking. This has seen some increased benefits to the customers and banking institutions which could not have been possible in traditional banking.

Internationally, there has been a consolidation of financial services in the industry which has seen rapid merger and acquisitions in the United Kingdom and the rest of the world. This has brought a state of uncertainty on what might happen in future. This consolidation has its effects which include enhanced market power or more organization efficiency. Other systemic implications include variations in the efficiencies of payment systems. Also, the safety and soundness of financial institutions have also change (Berger, et al., 1999: 26). Various forces have led to the transformation of financial markets and related institutions and being a representation of the increased competition in today's financial industry. The forces of change that have been experienced in the financial service industry include regulations, deregulations, and technological advancements.

Globally, there have been calls for increased regulations of banks and other financial institutions. After the consequences of the 2008 global economic crisis, there has been the emergence of global consensus for reregulation. However, it seems there is increased lack of awareness to a point there are possibilities of expansive financial services requirements through impositions by the World Trade Organization (Wood, 2016: 2). Regulation can be described as a form of supervisions in which specific requirements, restrictions, and guidelines are instituted, and financial institutions are mandated to follow them. The goal is the maintenance of the integrity of the financial system. In 2015, the financial service sector saw changes and developments in regulations. Concerning the UK, there have been regulations mostly in the area of accountability. Some of the regulatory changes in the UK financial market included the formulation of Payment Systems Regulator and economic regulations for the UK payment systems (Wood, 2016: 2-6).

Additionally, there is deregulation which can be defined as the process used in the elimination of the regulations that govern banking activities. The objective deregulation is the protection of the resources of the public and their confidence in the present financial system. The function of deregulation is to help in addressing pricing issues, making possible geographic market penetration and the ability of financial organizations to provide new products and services (Chava, et al., 2013: 2-5). For instance, in the provision of pricing regulation, deregulation can work to eliminate price controls which entail the provision of best interest rates to depositors and considerate charges for the borrowers (Berger, et al., 1999: 11-13). Deregulation has some consequences in the financial market. Some of the immediate impacts include increased competition, improve market efficiency and the enhancement of consumer choice. This concept has been critical in initiating unprecedented changes. For instance, it has led to the transformation of consumers to key players in the financial sectors instead of the traditional passive status. However, there have been suggestions that there was the institution of diverse regulations that have led to the complication of the management of financial institutions. This has been through the increment of bureaucracy and many regulations.

Lastly, there is a technological advancement which has been playing a key role in the changing environment of the financial service industry. Technology has been essential in influencing the productivity and efficiency of financial organizations. It has made of possible for a single financial service provider to handle several customers and transactions at the same time. The impact of this has been reduced cost of products and service delivery (Griffiths & Remenyi, 2003: 109-110). Technology has been beneficial in increasing the scope of financial service delivery to include the global marketplace and enhancement of competitive advantage. Due to the deregulation, financial organizations are now operating in their market and targeting a specific audience. This provision new scope has been characterized by narrower services and seeking to satisfy the unique mix of customer segmentation. The deregulation and increased used technology has required financial institutions to change their priorities shifting their objectives from rate setting and transaction processing to ensuring products and services are customer-centered. Also, the advancement in technology concerning financial services has led to increased competition among the various industry players.

In conclusion, these elements of fundamental change have led to critical effects in the way financial services are provided. They have led to the enhancement of how financial institutions function and operate. The objective of these changes has been the increment of benefits to the consumers. Some of the benefits include quality of service, reduction in service time and reduced cost of financial products and services among others. It is, however, important to note that these changes will potentially increase competition.


Adeniran, O. 2017. Historicizing African Traditional Saving System Esusu For Occupational Sustainability. European Journal of Business Management, 1(2), pp.336-355.

Berger, A., Demsetz, R. and Strahan, P. 1999. The consolidation of the financial services industry: Causes, consequences, and implications for the future. Journal of Banking & Finance, 23(2-4), pp.135-194.

Chava, S., Oettl, A., Subramanian, A. and Subramanian, K. 2013. Banking Deregulation and Innovation. SSRN Electronic Journal.

Griffiths, P. and Remenyi, D. 2003. Information Technology in Financial Services: A Model for Value Creation. Electronic Journal of Information Systems Evaluation, 6(2), pp.107-116.

Sharma, S. 2016. A detail comparative study on e- banking VS traditional banking. International Journal of Applied Research, 2(7), pp.302-307.

Wood Mallesons, K. 2016. KWM | Financial Regulation 2016 and beyond. [Online] Available at: [Accessed 17 Nov. 2017].

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