The concept of financial disintermediation presents businesses with a thorny dilemma: teach to fish or give a fish? In the financial arena, this question translates into whether public officials must foster a more transparent regulatory arena -- one in which citizens can bypass financial institutions to carry out investment activities and fulfill long-term goals.


Financial disintermediation means bank customers directly engage in financial activities without the guidance and support of bank personnel. One specific area where disintermediation has emerged is in the investment world, namely the market mechanism individuals must follow to buy, sell or hold financial products. To do so, individual investors must buy securities through financial markets, also known as securities exchanges or stock markets. Examples include physical exchanges, such as the New York Stock Exchange, the Chicago Mercantile Exchange and the Hong Kong Stock Exchange. An example of electronic exchange is the National Association of Securities Dealers’ Automated Quotations, or NASDAQ.

Financial Intermediaries

Financial disintermediation puts the spotlight on financial intermediaries, the middlemen who -- for decades -- have enabled individuals to engage in banking transactions at reasonable costs. The concept also calls for a general discussion about commercial intermediaries, who run the gamut from retailers and wholesalers to logistics and shipping companies. Financial intermediaries include any company or individual standing between a provider of financial services -- such as a bank -- and a receiver of such services, the client. Examples include brokerage companies, exchange clearinghouses, insurance salespeople, investment bankers and high-net-worth managers.

Cost-Revenue Implications

Financial disintermediation advocates the removal of all commercial layers separating a financial institution from clients willing to participate in the securities market. In other words, the concept calls for “cutting out the middleman,” with the assumption that it would be cheaper for customers to directly buy and sell financial products. If clients cannot generate savings from disintermediation, economic commentators believe it’s more efficient to keep intermediaries in place. For example, individual investors who want to purchase stocks or bonds directly on the NYSE may be unable to do so because of the prohibitive seat values the exchange asks potential members.

Financial disintermediation is gaining momentum in the modern economy. The advent of the Internet -- as well as the development of electronic exchanges -- have facilitated an efficient and effective way of buying and selling financial instruments. These phenomena also have contributed to less prominent roles for financial intermediaries in the economy. For examples, individual investors no longer need to call brokers before placing trades. They can log into a secure Web portal and make traces quickly, seamlessly and anonymously.