Disadvantages of Traditional Banking

In a previous post, I discussed some of the advantages of traditional banking but in this one, we are going to discuss the disadvantages of traditional banking.

In doing this I will try to compare them to “new kids on the block” i.e. online banks. These online banks have revolutionized the banking sector by taking advantage of some of these disadvantages or cons of traditional banks.

But before we go deeper into this I wanted to define what I mean by traditional banking or traditional banks.

disadvantages of traditional banking

What Is Traditional Banking/Bank?

Traditional banks or banking are banks that offer brick and mortar bank branches where customers can physically go to process some of their transactions like deposits, withdrawals, etc. This is unlike online banks that do not offer the chance of face to face meetings as they are only conducted online.

Related Posts: Advantages of Traditional Banking

Disadvantages of Traditional Banking

I am a big fan of traditional banking and our economies would not be where we are today without them. They have provided the financing which has acted as the fuel to drive forward most of our industries.

However, I would be putting my head in the sand if I failed to see some of the weaknesses of traditional banking. Online banks have exploited these weaknesses in recent years to get their own piece of the pie.

Below are some of those weaknesses of traditional banking.

Disadvantages of Traditional Banking

1. Low Interest Rates

Perhaps one of the biggest weaknesses or disadvantages of traditional banks is the low interest that one can earn on their savings. This has been exacerbated by the financial crises we have faced in recent years as central banks reduced their interest rates to rock bottom rates.

In some cases, this has meant that if you keep your money in the bank it would in real terms lose its value as inflation rates are higher than the interest rates.

As a result, many pensioners have been forced to reinvest their savings in other risky investments such as private sector bonds. Others have ended up trusting fraudsters like Bernie Maddoff who defrauded investors of billions of dollars.

Bernard Madoff run what has been called the largest Ponzi scheme in history, moving funds around to hide the huge losses in his fund. All this came to light in 2008 as one of the biggest securities and investment fraud in America.

I would, therefore, urge all intending to reinvest their savings to spread the risk and not trust one fund. Otherwise, you could find yourself in a situation where you lose all your life savings like in the Maddoff case.

2. High Bank Charges

Another weakness of big traditional banking that has been exploited by online banks is the issue of high bank charges. Big banks are notorious for charging high bank charges for anything from overdraft fees, monthly operating fees, etc.

In some cases, the regulatory authorities have had to come in to bring some sanity to the banking sector. Banks if left to their own devices would easily exploit the common man in the street.

I remember a few years ago there was a payment protection insurance scandal in the United Kingdom. In this scandal, the authorities ordered banks to pay back billions in payment protection insurance they had unnecessarily encouraged borrowers to take.

With pressure coming from online banks that are charging low to no charges, the big banks may be forced to rethink their fees.

3. Reduction in Number of Bank Branches

Over the past few years, there has been a significant reduction in bank branches as big banks try to reduce their operating expenses. While this is good for them it has meant that the common man now has to travel further to access banking services.

This is really a big problem for businesses and persons that have no choice but to go to a bank for some services such as to make cash deposits. And we all know how criminals are attracted to cash and traveling long distances will increase the chances of one being robbed.

I hope that banks will reconsider these moves in the interest of their customers. Whether we like it or not people still use cash in spite of the rapid rise of debit cards and other electronic payment systems.

4. Reduction In The Number of Automated Cash Machines

With the reduction of bank branches has also the reduction of cash machines or ATMs. This has really inconvenienced many customers who now have fewer available sources of cash.

I remember a couple of days ago I needed some cash and was forced to use a cash machine that charges exorbitant fees for the services. I had to use this cash machine as my bank’s cash machine was moved a few months ago in my area.

A couple of years ago almost everywhere I went I could easily find a cash machine from my bank and other big banks, Now that space is being taken by companies that want to make a little cash from those transactions. Soon we won’t no fees cash machines around.

5. Slow Service

Because of the consolidation in bank branches, it is now taking longer to be served. This is because the queues are long and they are now fewer and fewer bank tellers around.

It is really frustrating sometimes to be forced to queue for at least 30 minutes during lunch hour when you are supposed to be resting from work. Meanwhile the last time I checked the banks were still making millions in profits.