What is disintermediation

Disintermediation is the process of removing the intermediary or the intermediary from future transactions. In finance, disintermediation consists of withdrawing funds from intermediary financial institutions, such as banks and savings and credit associations, to invest them directly.

Key points to remember

  • Disintermediation involves removing intermediaries from a supply chain or decision-making process.
  • In financial terms, it is the removal of banks, brokers or other intermediaries to invest directly.
  • Disintermediation can reduce costs and increase efficiency, but it generally requires more due diligence.

Understanding disintermediation

Disintermediation can also reduce the overall cost of executing transactions. Removing the intermediary can also allow a transaction to proceed more quickly.

Disintermediation can occur when a wholesale purchase allows an interested buyer to buy goods, sometimes in quantity, directly from the producer. This can lead to lower prices for the buyer because the intermediary, a traditional retail store, has been removed from the purchasing process. This saves the buyer from the markup cost typically associated with transitioning a product from a wholesale environment to a retail environment.

Not all companies choose to offer wholesale options directly to customers, as this often requires a greater investment of resources to process and ship these orders. However, it has certain advantages for the company if it wishes to limit the number of long-term wholesale contracts in force with retailers; working directly with customers bypasses a traditional retail market segment.

Disintermediation and obligations

One of the uses of disintermediation is to obtain additional financial support through the issuance of bonds. The borrower, in this case, chooses to create a bond issue instead of other capital building options, such as a traditional loan. By working directly with interested buyers, the borrower can obtain financing without an intermediary.

Disintermediation risks

Disintermediation is often associated with an increased burden on the business using the strategy. Since it removes an intermediary from the process, the company may need to devote more internal resources to cover the services that were previously handled elsewhere. When associated with the bond issue, the business will need to devote more time and staff to managing the funds. In the case of wholesale trade, this could include shipping products directly to consumers rather than simply providing retail outlets.

In terms of investment, disintermediation weighs more heavily on investors because they are personally responsible for all actions and decisions. This can result in higher levels of research on their part, as well as additional time and dedication to complete all transactions. Some investors may find these aspects more difficult, depending on the nature of their investments and their personal strategy.

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