Definition
Disintermediation is a finance term that refers to the withdrawal of funds from intermediary financial institutions, like banks and savings and loans, to invest them directly. Generally, disintermediation occurs when investments or savings vehicles offer higher returns elsewhere, therefore investments are moved from lower yield accounts to higher yield ones. It can also refer to the bypassing of traditional intermediaries in a transaction, creating a direct connection between parties.
Key Takeaways
- Disintermediation is a finance term that refers to the removal of intermediaries, such as banks or brokers, in a supply chain or transaction. This process allows companies or individuals to interact directly rather than through a third-party intermediary.
- This practice is frequently facilitated by the internet and digital technologies which provide platforms for direct interaction. It is often seen in industries like finance, where digital platforms enable direct peer-to-peer lending, bypassing traditional bank loans.
- While disintermediation can lower costs and increase efficiency, it may also come with risks such as lack of expert guidance and increased exposure to financial risks, as the responsibility shifts from the intermediary to the parties involved in the transaction.
Importance
Disintermediation is an important concept in finance because it refers to the removal of intermediaries in a supply chain or between a producer/service provider and consumers.
This process cuts costs and enables companies to have direct communication and transactions with their customers, leading to improved efficiency.
In the finance sector, it often occurs when investors choose to invest directly in markets such as bonds or stocks, rather than through a bank or other financial institution.
Disintermediation can also result in better interest rates for savers and more competitive prices for borrowers.
It essentially changes the traditional banking landscape, forcing institutions to adapt their services and strategies to stay relevant in the rapidly shifting financial world.
Explanation
Disintermediation plays a significant role in the financial world, helping to streamline processes and reduce costs. The primary purpose of disintermediation is to remove the involvement of intermediaries in a transaction, allowing for direct dealings between parties.
In finance, these intermediaries often come in the form of banks, brokers, or other financial institutions, which facilitate transactions between savers and borrowers. By bypassing these intermediaries, individuals and companies can often achieve higher returns or lower costs.
This process is most commonly used in the context of investment, where disintermediation can allow investors to buy securities directly from the company that issues them, forgoing brokerage fees or commissions from financial institutions. It also applies to online marketplaces or peer-to-peer lending platforms, where individuals can directly lend to or borrow from each other.
Overall, disintermediation aims to enhance efficiency, offering potential benefits to both parties involved in the transaction.
Examples of Disintermediation
Online Direct Lending: In the past, if someone needed to take out a personal loan or a mortgage, they would typically go through a bank. However, with the advent of the internet, numerous online lending platforms have emerged to essentially eliminate the need for banks. Platforms like Lending Club, for instance, allow borrowers to seek loans directly from individual investors.
Peer-to-Peer Payments (P2P): Services like PayPal, Venmo, and Cash App allow individuals to transfer money directly to each other without the need for a bank. Here, technology has disintermediated the financial system, making transactions faster, more convenient, and often cheaper.
Crowdfunding: In the past, start-ups and businesses seeking investments would have to go through venture capitalists or banks. Now, there’s Kickstarter, GoFundMe, and Indiegogo, among others, which allow businesses to raise capital directly from individual investors. This is another example of disintermediation, as it cuts out traditional intermediaries such as investment banks and brokers.
FAQs about Disintermediation
What is disintermediation?
Disintermediation refers to the process in which funds are invested directly into the market such as stocks and bonds, bypassing intermediaries like banks, broker, or third parties.
What is an example of disintermediation?
An example of disintermediation is when consumers go directly to the manufacturer or supplier to purchase goods or services, bypassing the traditional retail outlets, dealers, or brokers.
How does disintermediation affect the banking industry?
Disintermediation negatively affects the banking industry as it involves the withdrawal of funds from traditional financial institutions to invest directly in securities, resulting in lower deposits and lending capacity.
What are the benefits of disintermediation?
It results in the reduction of costs as intermediaries who charge fees for their services are cut out. It also fosters competition and promotes the efficiency of transactions.
What is the connection between disintermediation and reintermediation?
Reintermediation is the exact opposite of disintermediation. It refers to the reintroduction of the middleman or intermediaries into transactions that were previously disintermediated. These two often occur together in ongoing cycles within the financial industry.
Related Entrepreneurship Terms
- Direct Financing
- Interest Rates
- Financial Intermediaries
- Peer-to-peer Lending
- Investment
Sources for More Information
- Investopedia – an online resource providing definitions and explanations for many financial terms and concepts including disintermediation.
- Corporate Finance Institute (CFI) – a professional training organization that covers numerous topics in finance.
- The Balance – a personal finance website that provides comprehensive information about financial topics.
- Britannica – a reputable online encyclopedia that covers a wide range of topics, including finance.
