What Is Disintermediation?

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What Is Disintermediation?

Let me explain disintermediation directly: it's the process where you cut out the financial intermediary in a transaction. This means you, as a consumer, can buy straight from a wholesaler instead of going through a retailer, or a business can order directly from a manufacturer rather than a distributor. In finance, it happens when an investor purchases stock without a broker or bank involved. The main goals here are to lower costs, speed things up, or achieve both.

Key Takeaways

Disintermediation involves removing one or more middlemen from a transaction, supply chain, or decision-making process. You do this typically to cut costs or boost delivery speed. In finance, it means bypassing banks, brokers, or other third parties so individuals can transact or invest directly. Cryptocurrencies take this further by disintermediating the financial sector and governments from monetary exchanges. Keep in mind, though, that this process doesn't always succeed because it demands extra staffing and resources to replace what the intermediary provided.

Understanding Disintermediation

You'll find disintermediation applied in many industries, and it can lower the overall cost of a transaction. By removing the intermediary, you often complete deals faster too. It's become a core part of the internet's business-to-consumer (B2C) model. For instance, when a buyer makes a wholesale purchase, they get goods directly from the producer, sometimes in bulk, leading to lower prices since there's no retail markup. This skips the step where a product moves from wholesaler to retailer before reaching you.

Origins in Finance

The concept started in the financial industry, where investors could buy products directly without brokers or banks. Back in 1967, when the government capped interest rates on federally insured accounts, consumers pulled their money from savings to invest directly in bonds or stocks for better returns.

Special Considerations

Intermediaries often add real value in getting a product from production to you, the consumer. Producers rely on wholesalers for preorders and distribution, sales reps to secure retail orders, and stores to display and sell products. If a producer wants to eliminate these middlemen, they have to handle all that themselves, which increases their internal burden. Shipping, for example, can cost more without the economies of scale that specialized companies offer. Not every company provides direct wholesale options, as it requires significant resources for fulfillment and shipping.

Disintermediation and the Internet

The internet serves as a powerful tool for disintermediation, letting consumers and small businesses order directly from producers in theory. In reality, new intermediaries like Amazon, Etsy, and eBay have stepped in as electronic middlemen. Even apps go through stores like Google Play or Apple's App Store.

Disintermediation at Work

The growth of online intermediaries was probably inevitable. Most producers can't build a retail platform to match Amazon or eBay, nor can they afford professional marketing. Still, some skip the retailer: think electronics from Apple, Google, or HP, or cosmetics brands selling via their sites. Small local businesses often succeed by promoting on their websites and social media, though many products are also on retailer sites.

Niche Disintermediation

Other internet players handle disintermediation in specific areas. Google's AdSense lets businesses control their own advertising directly. Meta provides a platform for local businesses to reach customers without traditional middlemen. This works well for small independents, but many outsource to online marketing specialists, which is essentially reintermediation.

Cryptocurrencies and Disintermediation

Disintermediation is central to decentralized cryptocurrencies like Bitcoin, built on blockchain. Users transact peer-to-peer without banks or authorities validating deals. Instead, systems use mechanisms like proof of work or proof of stake, relying on cryptography and algorithms for security. This cuts out banks and governments entirely from transactions.

Example of Disintermediation

Take the travel industry: it's been reshaped by disintermediation through the internet. It started with American Airlines offering direct bookings via systems like Sabre, available on early online platforms. Now, travel agents compete with consumers booking directly from providers or sites that compare options. Sites like Expedia act as intermediaries, buying in bulk and reselling with a markup.

How Do Consumers Benefit From Disintermediation?

In theory, you get better prices by eliminating a supply chain step. But necessary tasks still need doing, so benefits come if they're handled more efficiently and cheaply without the intermediary.

When Does Disintermediation Occur?

It happens whenever a supply chain step is removed. You might call a hotel directly for a reservation instead of using a site or agent. A retailer could order from a manufacturer, skipping the distributor. On a larger scale, Amazon builds its own shipping to deliver directly, avoiding FedEx or UPS.