Disintermediation

Disintermediation is the removal of intermediaries from a process, supply chain or market. The disintermediation of capital markets is particularly important in an investment context.

Disintermediation of capital markets

Disintermediation has become increasingly important in financial markets, largely as a result of the increasing use of securities to raise capital from capital markets, rather than from banks.

Banks usually act as financial intermediaries for debt, borrowing from depositors and lending to borrowers. By selling securities such as bonds, instead of borrowing, a borrower can borrow directly from investors, by-passing the banks. The greater use of a wider range of financial instruments such as asset backed securities and convertibles (in addition to the traditional types of security such as bonds and debentures) has encouraged this.

More disintermediation reduces the amount of business available for commercial banks. It also increases the size of capital markets and generates more business for investment banks (advising on the issue of securities) and, indirectly, for other investment businesses (brokers, fund managers, stock exchanges etc.).

Borrowers can hope to borrow at lower cost as a result of disintermediation. Investors lose the safety of bank deposits but the they also should get better rates of return. Investors take on some extra risk which can be controlled through the usual mechanisms of diversification and the selection of appropriate investments. At the same time disintermediation eliminates the banks' interest margin and this benefit is shared by investors, borrowers and investment market intermediaries and advisors.

Supply chain disintermediation

An example of supply chain disintermediation is a manufacturer selling directly to retailers, rather than indirectly through wholesalers.

The advantage of disintermediation is obviously the greater efficiency and lower cost achieved by reducing the number of transactions and processes involved, however disintermediation may not always be easy to achieve as there is often a reason why the intermediaries existed in the first place, for example, wholesalers who sell the products of many manufacturers may achieve economies of scale that a single manufacturer's distribution system can not replicate.

New technology has had a significant impact on supply chain disintermediation by opening new sales channels (internet sales for example) and by allowing better tracking of stocks.

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