Question

How do banks reduce transaction costs and facilitate diversification?

Answer 1

Transaction costs are referred to the costs which are noticed at the time of the purchase or sale of any product or service. These costs are mainly linked with the search of a moneylender and taker for the amount. Financially, there are different kinds of transaction costs such as the commission of the broker, and the cost of search and information. Banks generally tend to reduce these costs by taking the advantage of the economies of scale while managing the transaction costs and collecting information. The not-so-big shareholders can make use of the mediators in order to merge their purchases. Banks tend to be the financial mediators and facilitate diversification by reducing the cost of transactions. Banks not only focus on reducing the costs and letting the transactions become easier but they also create more money. Banks also reduce the cost of transactions with the help of the skill and command and provide liquidity favours to its shareholders.