What is 'Disintermediation'

Disintermediation, in finance, is the withdrawal of funds from intermediary financial institutions, such as banks and savings and loan associations, to invest them directly. Generally, disintermediation is the process of removing the middleman or intermediary from future transactions. Disintermediation is usually done to invest in instruments yielding a higher return.

BREAKING DOWN 'Disintermediation'

The goal of disintermediation is to lower the overall cost involved in the completion of transactions. Removing the intermediary may also allow a transaction to go through more quickly.

Wholesale Versus Traditional Retail

One common example of disintermediation occurs when a wholesale purchase allows an interested buyer to purchase goods, sometimes at quantity, directly from the producer. This can result in lower prices for the buyer since the intermediary, a traditional retail store, has been removed from the purchasing process. This saves the buyer from the markup cost generally associated with the transition of a product from a wholesale to a retail environment.

Not all companies choose to offer wholesale options directly to customers, as it often requires a bigger investment in resources to process and ship these orders. It does, however, have some benefits to the company if it wants to limit the number of long-term wholesale contracts in use with retailers; working directly with customers bypasses a segment of the traditional retail market.

Disintermediation and Bonds

One use of disintermediation involves the securing of additional financial support through a bond issuance. The borrower, in this case, chooses to create a bond issue in lieu of other capital building options, such as a traditional loan. By working directly with interested buyers, the borrower can secure funding without an intermediary.

Risks of Disintermediation

Disintermediation is often associated with an increased burden on the company using the strategy. Since it removes an intermediary from the process, the company may have to dedicate more internal resources to cover the services that were previously handled elsewhere. When associated with issuing bonds, the company will have to dedicate more time and personnel to the management of the funds. In regards to wholesaling, this could include shipping products directly to consumers instead of just supplying retail outlets.

In terms of investing, disintermediation puts a heavier burden on investors, as they are personally responsible for all actions and decisions. This can lead to higher levels of research being necessary on their part, as well as additional time and dedication to complete any transactions. Some investors may find these aspects more challenging, depending on the nature of their investments and personal strategy.