Final answer:
Banks reduce transaction costs by centralizing financial transactions (choice B), providing a convenient platform for savings and loans and thus facilitating easier exchange of goods and services for financial assets.
Step-by-step explanation:
The question relates to how banks manage to lower transaction costs. One key way they achieve this is by centralizing financial transactions. This convenience is offered as opposed to individuals having to find lenders or borrowers on their own, which involves significant effort and expense. By being intermediaries, banks reduce these costs for individuals and businesses, streamlining the process of lending and borrowing money, thereby enhancing overall economic efficiency.
Answer choice B, 'By centralizing financial transactions', correctly explains how banks reduce transaction costs. Diversifying investment portfolios, increasing interest rates on loans, or offering fewer financial services are not direct methods for reducing transaction costs in the context of banking operations.