What’s disintermediation?

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Disintermediation is the strategy of removing the middleman when dealing with a supply chain, market or process. The idea is that by removing the middleman from the image, it is possible to reduce the associated costs and speed up the completion of all the activities associated with the process. As a result, both the business partner and the recipient benefit from direct interaction.

The concept of disintermediation can be applied in several ways. One application that is growing in popularity has to do with the financial markets. In part, this is due to the trend of raising capital through the buying and selling of securities, rather than simply through a bank or other lender. The borrower chooses to sell securities rather than go to a bank for some type of loan arrangement. For example, the borrower can create a bond issue and sell the bonds directly to investors to raise the necessary capital. This creates a direct line of communication between the issuer and bondholders, making the need for an intermediary superfluous.

Initiating the removal of an intermediary from the retail process is also an example of how disintermediation can benefit both the producer and the consumer. Instead of selling products through wholesalers who mark the manufacturer’s extended wholesale prices at a higher retail price, the manufacturer simply extends the wholesale price directly to the consumer. The manufacturer still makes money, but doesn’t have to deal with long-term contracts with wholesalers. Consumers benefit because they have access to lower prices for desirable goods by ordering directly from the manufacturer.

Disintermediation can also be applied to arranging personal finances. For example, an investor may choose to remove assets held in a low-interest account and use the funds to purchase securities that are likely to generate a higher yield. While the investor is not likely to get involved in securities with a high rate of volatility, buying a bond issue outright tends to generate a greater return than allowing the money to be deposited into a traditional savings account .

While disintermediation has a number of positive aspects, there are situations where the presence of an intermediary is extremely beneficial. Businesses that don’t want to set aside resources to handle individual customer orders may prefer to market their products through wholesalers. Similarly, an entity that does not wish to deploy the resources necessary to establish and operate a bond issue may decide that obtaining a bank loan is the best overall means of obtaining the necessary capital.

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