Category: 

What is Disintermediation?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 September 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Roughly one-fifth of the world's stock of gold - worth over $200 billion USD - is stored under the streets of London.  more...

September 30 ,  1949 :  The Berlin Air Lift ended.  more...

Disintermediation is the strategy of removing the middleman when it comes to a supply chain, market, or process. The idea is that by removing the intermediary from the picture, it is possible to reduce associated costs and possibly speed up the completion of any tasks associated with the process. As a result, both the originator of the task as well as the recipient benefit from the direct interaction.

The concept of disintermediation can be applied in several different ways. One application that is growing in popularity has to do with financial markets. In part, this is because of the trend of raising capital through the buying and selling of securities, rather than simply going through a bank or other lending institution. The borrower chooses to sell securities rather than approach a bank for some type of loan arrangement. For example, the borrower may create a bond issue and sell the bonds directly to investors as a way of raising the needed capital. This creates a direct line of communication between the bond issuer and the bond holders, making the need for an intermediary unnecessary.

Ad

Initiating the removal of an intermediary from the retailing process is also an example of how disintermediation can benefit both the manufacturer and the consumer. Rather than selling products through wholesalers who mark up the wholesale prices extended by the manufacturer to a higher retail price, the manufacturer simply extends the wholesale price directly to the consumer. The manufacturer still makes money, but does not 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 kept in a low interest bearing account and use the funds to purchase securities that are likely to yield a higher return. While the investor is likely to not get involved with securities with a high rate of volatility, the direct purchase of a bond issue would tend to yield a greater return than allowing the money to set in a traditional savings account.

While disintermediation has a number of positive aspects, there are situations where the presence of an intermediary is extremely beneficial. Companies that do not want to set aside resources to handle individual customer orders may prefer to market their products through wholesalers. In like manner, an entity that does not wish to apply the needed resources to establish and manage a bond issue may decide that obtaining a bank loan is the best overall means of obtaining needed capital.

Ad

You might also Like

Recommended

Discuss this Article

Post your comments

exception 'Exception' with message 'error writing captcha: Duplicate entry '2147483647' for key 'PRIMARY'' in /ssd/www/wisegeek/public_html/_core/classes/public/Captcha.php:44
Stack trace:
#0 /ssd/www/wisegeek/public_html/_core/controls/public/ControlDiscussionPostBox.php(324): Captcha->createCaptcha()
#1 /ssd/www/wisegeek/public_html/framework/classes/Control.php(104): ControlDiscussionPostBox->preRender(false)
#2 /ssd/www/wisegeek/public_html/framework/classes/Control.php(149): Control->render()
#3 /ssd/www/wisegeek/public_html/tpl/default-nocustom-lu/pages/public/article/article.htm(526): Control->__toString()
#4 /ssd/www/wisegeek/public_html/framework/classes/Control.php(300): require('/ssd/www/wisege...')
#5 /ssd/www/wisegeek/public_html/framework/classes/Control.php(309): Control->requireTpl('pages/public/ar...', Object(PageArticleCom), true)
#6 /ssd/www/wisegeek/public_html/framework/classes/Control.php(131): Control->renderTpl('pages/public/ar...', Object(PageArticleCom))
#7 /ssd/www/wisegeek/public_html/framework/classes/FormDataControl.php(87): Control->renderTemplate()
#8 /ssd/www/wisegeek/public_html/framework/classes/Control.php(109): FormDataControl->renderTemplate()
#9 /ssd/www/wisegeek/public_html/framework/classes/ScriptPage.php(50): Control->render(false)
#10 /ssd/www/wisegeek/public_html/framework/classes/Control.php(149): ScriptPage->render()
#11 /ssd/www/wisegeek/public_html/framework/classes/Page.php(97): Control->__toString()
#12 /ssd/www/wisegeek/public_html/_core/classes/public/PublicFrontController.php(443): Page->processRequest()
#13 /ssd/www/wisegeek/public_html/_core/classes/public/PublicFrontController.php(7): PublicFrontController->renderPage()
#14 /ssd/www/wisegeek/public_html/index.php(11): PublicFrontController::run()
#15 {main}