In simple words, disintermediation means removal of the intermediaries or middlemen from a supply chain (sales) or transaction (finance). These intermediaries include brokers, agents, wholesaler, distributor, banks and other finance houses.
Disintermediation in Finance
In finance, investment companies, banks, and savings and loan associations are the intermediaries between the supplier and the user. A saver or investor invests their funds in such institutions and borrowers receive the funds. Disintermediation is withdrawing the funds from banks and other financial institutions and investing them directly in mutual funds or in securities. It is generally done to get more return. It also eases the process of the transaction and makes it quick.
The companies often issue bonds to secure additional financial support. It supplements the traditional ways of collecting capital, and a company directly works with the buyers of the bond omitting the intermediary.
Disintermediation in Distribution Channels
Traditionally, producers distribute their goods to intermediaries (generally, distributors). These intermediaries supply those to the end customers. In a disintermediated system, the consumer directly deals with the producer, thus removing the intermediaries or middlemen from the supply chain. There may be more than one level of intermediaries in a supply chain.
In a traditional retail system, the retail stores work as the intermediaries. They purchase the products from the producers and sell those to the end customers. In other situations, buyers can directly buy the products from the producer. When these middlemen are removed from this supply chain and the manufacturers directly deal with the customers, it is an example of disintermediation.
Disintermediation often results in lowering the prices of the products as the middlemen are removed from the distribution channel. Customers often share in the lower cost structure. It also helps in increasing the profit margin of the producing company in long run. Unfortunately for consumers, all companies do not opt for disintermediation as it involves more investment in resources for distributing the products.
A Little More About Disintermediation
Disintermediation often reduces the price of the products. Online shopping is one such system where the consumers buy directly from the company’s website. In the retail market, it is commonly known as “factory direct”, where the consumer receives the goods directly from the factory or company’s warehouse.
In finance, the investors may withdraw their funds from the intermediary financial institutions like banks or other savings and loan association and may invest the money directly to a company’s bond and equity shares. It is done in an attempt to receive a higher return.
Advantages of Disintermediation
This system is considered to have many advantages for both the producers and customers. As direct communication can be established with the customers formulating a better marketing strategy becomes easier. As the producer is directly interacting with the consumers, it eases the process with a lesser number of transactions between them. It may also help in developing a better understanding of the demands of the customers. The customers can report issues regarding a product or service directly to the service provider or manufacturer and may register their dissatisfaction or appreciation. This process saves money, time and energy of both the parties.
Why Does the Disintermediated System Remain?
Even after all these advantages, many companies, as well as customers, still prefer the traditional system of distribution and investment. Removing the intermediaries puts an extra burden on the manufacturing companies. They may need to invest more money and manpower in-house to run the supply system without intermediaries. It also means much more responsibilities which are otherwise taken care of by the middlemen. Investors often find it more comfortable and safer to invest their money in banks and other financial houses. Investing money directly into the market needs skill and more research. One needs to plan their investment thoroughly in order to get a guaranteed and higher return.
Problems with Disintermediation
Removing the intermediaries from the supply chain causes more burden on the internal resources of the company. In a traditional system, the intermediaries take care of several services. After disintermediation, the companies need to handle those services. To do so, the companies need to invest more money and manpower to run the system efficiently. In wholesaling, they need to send the products directly to the individual customers instead of sending them to the retail outlets.
In the context of finance, managing funds becomes more complicated (requiring more expertise and time from the investor). For the investors, it poses new challenges as they need to take every decision on their own. They need to invest more cautiously as they are responsible for every transaction made. Further, they need to be more aware of the market scenario at all times to strategize their investments properly.
This system also poses some challenges in the economy as removing the middlemen leads to job loss. It may also lead to lack of transparency in the market and arbitrary price hike by the producers.