Disintermediation

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.

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

### Which of the following best describes disintermediation? - [ ] The increase in the number of intermediaries in financial transactions. - [ ] Adding more layers of regulation in financial markets. - [x] The removal of intermediaries from financial transactions. - [ ] The increase in the use of physical currency for transactions. > **Explanation:** Disintermediation refers to the process of removing intermediaries, such as brokers and banks, from financial transactions. ### What key factors contribute to disintermediation? - [x] Technology, deregulation, and globalization. - [ ] Increased bureaucracy, higher taxes, and inflation. - [ ] Reduced consumer demand, limited market access, and protectionism. - [ ] Strengthened trade unions, higher labor costs, and deflation. > **Explanation:** Technology, deregulation, and globalization are the main factors driving disintermediation in financial markets. ### Which risk is most associated with disintermediation? - [ ] Currency risk - [ ] Operational risk - [x] Credit risk - [ ] Market risk > **Explanation:** Credit risk generally increases with disintermediation since traditional intermediaries that assess and mitigate this risk are removed. ### Give an example of disintermediation in stock trading. - [x] The use of trading apps like Robinhood. - [ ] Employing more brokers to handle trades. - [ ] Investing through mutual funds. - [ ] Using financial advisors for stock picks. > **Explanation:** Trading apps like Robinhood allow investors to directly trade stocks without using brokers, exemplifying disintermediation. ### How does deregulation facilitate disintermediation? - [ ] By increasing regulatory barriers. - [ ] By increasing government oversight. - [x] By reducing restrictions and barriers. - [ ] By maintaining the status quo in financial services. > **Explanation:** Deregulation reduces the barriers for new entrants in financial services, making it easier for entities that disintermediate to operate. ### What is a primary benefit of disintermediation? - [x] Reduction of transaction costs. - [ ] Increase in transaction times. - [ ] Expansion of intermediary roles. - [ ] Higher commission fees for brokers. > **Explanation:** One primary benefit of disintermediation is the reduction of transaction costs, including commissions and fees charged by intermediaries. ### In which sector outside finance is disintermediation also common? - [ ] Manufacturing - [x] E-commerce - [ ] Agriculture - [ ] Construction > **Explanation:** Disintermediation is common in e-commerce, where companies sell products directly to consumers through online platforms, bypassing physical retail intermediaries. ### What is the role of technology in disintermediation? - [ ] Adding complexity to the transaction process. - [x] Enabling direct interaction between transaction parties. - [ ] Increasing need for intermediaries. - [ ] Reducing market reach for small businesses. > **Explanation:** Technology enables direct interactions between parties involved in a transaction, thus facilitating disintermediation. ### How does globalization contribute to disintermediation? - [ ] By reducing overall market size. - [ ] By limiting cross-border transactions. - [x] By increasing interconnectedness of markets. - [ ] By increasing regional regulation. > **Explanation:** Globalization drives disintermediation by enhancing the interconnectedness of markets and enabling direct cross-border transactions. ### What oftentimes offsets the savings from disintermediation? - [ ] Decreased liquidity. - [ ] Higher commissions. - [x] Increased credit risk. - [ ] Longer transaction times. > **Explanation:** While disintermediation saves on transaction costs, these savings may be offset by an increase in credit risk, because intermediaries that previously managed this risk are removed.

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