# Understanding Disintermediation in Business and Finance: A Comprehensive Guide

## What Is Disintermediation?

The term disintermediation refers to the process of cutting out the [financial intermediary](https://www.investopedia.com/terms/f/financialintermediary.asp) in a transaction. It may allow a consumer to buy directly from a wholesaler rather than through a retailer, or enable a business to order directly from a manufacturer rather than from a distributor. In the financial industry, it occurs when an investor buys stock directly rather than through a [broker](https://www.investopedia.com/terms/b/broker.asp) or a financial institution. The purpose of disintermediation is usually to cut costs, speed up delivery, or both.

Today, Internet platforms and even cryptocurrencies have made disintermediation easier, though companies may face new challenges such as handling shipping logistics and resource allocation themselves.

### Key Takeaways

*   Disintermediation involves eliminating intermediaries to reduce costs or speed up delivery in supply chains and transactions.
*   The Internet has enabled disintermediation, letting consumers and businesses interact directly, but new online middlemen have emerged.
*   In finance, disintermediation means bypassing banks or brokers to directly invest in financial products.
*   Cryptocurrencies exemplify disintermediation, allowing peer-to-peer transactions without banks or governmental oversight.
*   While disintermediation cuts costs, it may require businesses to handle tasks once managed by intermediaries, adding new operational complexities.

## How Disintermediation Works and Its Impact

Disintermediation is used across various industries and is able to lower the overall cost of completing a [transaction](https://www.investopedia.com/terms/t/transaction.asp). Removing the intermediary may also allow a transaction to be completed more quickly. It is now a pillar of the internet model, where it is often called the [business-to-consumer](https://www.investopedia.com/terms/b/btoc.asp) (B2C) model.

It can occur when a wholesale purchase allows an interested buyer to purchase goods, sometimes in large quantities, directly from the producer. This can result in lower prices for the buyer because the intermediary, such as a traditional retail store, is removed from the purchasing process. This saves the buyer the cost of the markup that is associated with the transition of a product from a [wholesaler](https://www.investopedia.com/terms/w/wholesaling.asp) to a retailer before it reaches a buyer.

The concept originated in the financial industry, allowing investors to buy financial products directly without an intermediary, such as a broker or a bank. The government placed a limit on bank [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) for federally insured accounts in 1967, so consumers began taking their money out of savings accounts in order to find better [returns](https://www.investopedia.com/terms/r/return.asp) by directly investing in [bonds or stocks](https://www.investopedia.com/ask/answers/advantages-and-disadvantages-buying-stocks-instead-of-bonds/).  

> **Fast Fact**
>
> Not all companies offer wholesale options directly to customers, as it requires a substantial investment in resources to fulfill and ship these orders.

## Challenges and Considerations in Disintermediation

Intermediaries often play a valuable part in the process of getting a product from the [production line](https://www.investopedia.com/terms/a/assembly-line.asp-0) to the consumer. A producer has a network of wholesalers who preorder their products and ship them for distribution. They employ sales representatives to score orders for products from retailers. A retail store is needed to showcase the products properly, get the customers through the doors, and make the sales. All of these roles must be duplicated by the producer who wants to cut out the middlemen.

Disintermediation often increases the workload for a company, as it must now manage tasks that intermediaries used to handle.

Directly dealing with buyers can raise shipping costs for companies. Specialized shipping firms use [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) to lower these costs for their clients.

## The Role of the Internet in Disintermediation

The Internet can power disintermediation by allowing consumers and small businesses to order directly from producers. However, companies like Amazon, Etsy, and eBay have become new electronic [middlemen](https://www.investopedia.com/terms/m/middleman.asp), and apps are often sold through Google Play or Apple's App Store.

### Real-World Examples of Disintermediation

The rise of online intermediaries may have been inevitable. Few producers can devote the resources to developing a retail platform and interface that could rival those of Amazon, eBay, or Etsy, and fewer still have the means to develop a professional marketing plan to promote their products.

Still, some products have been able to skip at least one intermediary—the retailer. Electronics [manufacturers](https://www.investopedia.com/terms/m/manufacturing.asp) such as Apple, Google, and HP are prime examples. Cosmetics brands, once sold only in [department stores](https://www.investopedia.com/department-store-stocks-may-not-survive-the-pandemic-4801501), now sell directly to consumers via their websites. Many small local businesses thrive by promoting their wares on their own websites and on social media. These products are often sold on retailers' websites too.

### Niche Markets Embracing Disintermediation

Some Internet giants have embraced niche disintermediation. Google's AdSense allows businesses to control their messaging, while Meta (formerly Facebook) enables local businesses to directly engage with and promote products to customers.

This potential was realized to some extent, particularly by small independent businesses and website operators. But online marketing specialists soon emerged to manage the message for businesses eager to outsource the work. This process is sometimes called reintermediation.

## The Impact of Cryptocurrencies on Disintermediation

The strategy of disintermediation is key to the development of decentralized cryptocurrencies that rely on [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) technology, such as Bitcoin. One feature of these systems is that users transact on a [peer-to-peer](https://www.investopedia.com/terms/p/peertopeer-p2p-service.asp) (P2P) basis directly with one another, without having a bank or a monetary authority facilitate or validate the transactions.

Instead of relying on a trusted third party, blockchain systems employ a distributed consensus mechanism such as [proof of work](https://www.investopedia.com/terms/p/proof-work.asp) (PoW) or [proof of stake](https://www.investopedia.com/terms/p/proof-stake-pos.asp) (PoS). These mechanisms rely on cryptographic functions and algorithmic processing to maintain security and fidelity.

> **Important**
>
> Disintermediation is a critical component of the cryptocurrency business. Banks and governments are cut out. Transactions are peer to peer.

## Disintermediation in the Travel Industry

The travel industry has been transformed by disintermediation, mostly through the internet.

The process began when American Airlines introduced direct flight bookings on its Sabre Global Distribution System (now Travelocity) and made the service available on early online sites including PRODIGY and CompuServe.

The travel agent now has to struggle to compete for consumers who can book hotel rooms, cruises, rental cars, and flights directly from the providers or through a travel site that allows them to compare an exhaustive list of options.

Online travel booking is not, however, a perfect example of disintermediation. A site such as Expedia is essentially an intermediary. It buys hotel bookings in bulk at a discount and resells them to consumers, earning [revenues](https://www.investopedia.com/terms/r/revenue.asp) on the [markup](https://www.investopedia.com/terms/m/markup.asp).

## How Do Consumers Benefit From Disintermediation?

In theory, consumers get a better price for a product when a step in its [supply chain](https://www.investopedia.com/terms/s/supplychain.asp) is eliminated. In practice, steps in the supply chain that are necessary still have to be done by someone. Businesses and their customers benefit from disintermediation if the necessary tasks can be done as efficiently and more cheaply without the services of an intermediary.

## When Does Disintermediation Occur?

Disintermediation occurs whenever a step in the supply chain is eliminated. A consumer calls a hotel directly to make a reservation rather than booking through a website or a travel agent. A retailer orders directly from a manufacturer rather than a sales representative for a distributor.

Or, on a vastly larger scale, Amazon builds up its shipping network in order to deliver directly to consumers rather than relying on FedEx or UPS.

## What Is Disintermediation in Ecommerce?

From its beginnings, the internet has been seen as an ideal platform for disintermediation. It has the potential to remove the intermediary and allow consumers and businesses to deal directly with producers and wholesalers. But it hasn't quite worked out that way. Most consumers most of the time go to new intermediaries such as Amazon in order to get a broad array of choices, customer service, and fast delivery all in one place.

## The Bottom Line

Disintermediation removes middlemen so producers and consumers can deal directly, often to save money and speed up delivery. It's especially important in finance, where it lets investors buy directly without brokers.

The rise of the Internet and cryptocurrencies has made this shift even faster, though it can add challenges for companies, like managing shipping and logistics themselves. In many cases, new intermediaries eventually emerge, think Amazon or Google, offering bundled services that keep the process simple for consumers.

> **Article Sources**
>
> 1.  Federal Deposit Insurance Corporation (FDIC). "[Annual Report of the Federal Deposit Insurance Corporation](https://www.fdic.gov/about/financial-reports/reports/archives/fdic-ar-1967.pdf)," Page xi.