Definition of Disintermediation
Disintermediation is the process by which intermediaries such as brokers, banks, or agents are removed from financial transactions between two parties. The advent of new technologies, deregulation in financial markets, and globalization have significantly contributed to this phenomenon. While disintermediation can lead to lower transaction costs by eliminating commissions and fees associated with middlemen, it often brings about an increase in credit risk since the third-party verification and guarantees that intermediaries provide are also removed.
Examples of Disintermediation
- Peer-to-Peer (P2P) Lending Platforms: These platforms connect borrowers directly with lenders, bypassing traditional banking institutions. Examples include Prosper and LendingClub.
- Stock Trading Apps: Applications like Robinhood have facilitated a trend where retail investors trade stocks without the need for brokers, resulting in lower fees.
- Direct Online Sales: Companies such as Dell and Tesla sell their products directly to consumers through their websites, eliminating the need for physical retail intermediaries.
Frequently Asked Questions (FAQs)
What are the benefits of disintermediation?
The primary benefits include cost savings on commissions and fees, faster transaction processing, and better transparency in the transaction process.
What are the risks associated with disintermediation?
The main risks involve increased credit risk since traditional intermediaries often provide a layer of risk assessment and mitigation. There’s also the potential for reduced liquidity and higher price volatility.
How has technology contributed to disintermediation?
Technology has created platforms that facilitate direct transactions, such as P2P lending sites, online trading applications, and e-commerce websites, making intermediaries less necessary.
What role does deregulation play in disintermediation?
Deregulation has reduced the barriers for new entrants in various financial services, allowing for alternative business models that bypass traditional intermediaries.
Can disintermediation occur in non-financial sectors?
Yes, disintermediation can occur in any sector where intermediaries between goods or service providers and consumers can be eliminated through direct interaction.
Related Terms with Definitions
- Intermediation: The process of involving intermediaries to facilitate transactions between parties.
- Credit Risk: The risk of a borrower defaulting on a loan, which can increase when intermediaries are removed.
- Globalization: The increasing interconnectedness of markets and economies across the world, contributing to the ease of bypassing intermediaries.
- Peer-to-Peer Lending: A financial model where individuals lend and borrow money directly from each other without a financial institution.
- Deregulation: The reduction or elimination of regulatory restrictions in a particular industry, often facilitating new business models that bypass traditional intermediaries.
Online Resources
Suggested Books for Further Studies
- “The End of Banking” by Jonathan McMillan
- “Making Markets: How Firms Can Design and Profit from Online Auctions and Exchanges” by Peter Cramton, Yoav Shoham, and Richard Steinberg
- “Disruptive Innovation: The Christensen Collection” (The Innovator’s Dilemma, The Innovator’s Solution, The Innovator’s DNA, and Harvard Business Review Articles) by Clayton Christensen
Accounting Basics: Disintermediation Fundamentals Quiz
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