Financial Intermediary

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DEFINITION of 'Financial Intermediary'

An entity that acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer including safety, liquidity and economies of scale.

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BREAKING DOWN 'Financial Intermediary'

Financial intermediaries encompass a wide range of entities in terms of size and scale of operation, ranging from a small insurance brokerage, to giant global institutions that provide a complete range of financial services including commercial banking, investment banking and asset management.

In certain areas such as investing, advances in technology threaten to eliminate the (financial) intermediary, a phenomenon known as disintermediation. For example, the advent of online brokerages has resulted in millions of active investors bypassing traditional full-service brokerages and investing directly in the markets. Disintermediation is much less of a threat in other areas of finance such as banking and insurance.

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