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Disintermediation

What is Disintermediation?

Disintermediation refers to the removal of intermediaries (middlemen) in a supply chain, transaction, or process. In finance, it means bypassing traditional financial institutions, like banks or brokers, to directly connect borrowers with lenders, or investors with investment opportunities.

In Simple Terms

Disintermediation occurs when individuals or businesses go directly to the source—for example, when a company raises money directly from investors rather than through a bank or investment bank.

Examples in Finance

1. Peer-to-Peer Lending (P2P)

Borrowers take loans directly from individual lenders via online platforms, avoiding banks.

2. Direct Stock Offerings (DSOs)

Companies raise funds directly from the public, without underwriters or investment banks.

3. Mutual Fund Investments Online

Investors use platforms to buy mutual funds directly, skipping agents and brokers.

4. Cryptocurrencies & DeFi (Decentralized Finance)

Users transact or invest without banks, using blockchain-based protocols.

Drivers of Disintermediation

  • Technology: Online platforms make direct connections easy.
  • Cost Saving: Reduces fees and commissions paid to intermediaries.
  • Transparency: Direct interaction often offers more control and visibility.
  • Speed: Faster processing without waiting for institutional approvals.

Benefits

  1. Lower transaction costs
  2. Faster and more efficient processes
  3. Greater choice and flexibility
  4. Improved returns for both borrowers and investors

Risks and Challenges

  1. Lack of due diligence:** Intermediarie**s often provide checks and expertise.
  2. Higher default or fraud risk:** Withou**t banks or brokers, there may be fewer safeguards.
  3. Regulatory gaps: Not all disintermediated models are well regulated.
  4. Overload of options: Investors may face decision fatigue or lack guidance.

Disintermediation in the Indian Context

  • Platforms like Zerodha, Groww, and Coin have enabled investors to buy mutual funds and stocks without intermediaries.
  • RBI-regulated P2P lending platforms like Faircent and LenDenClub have facilitated loans without banks.
  • UPI (Unified Payments Interface) is an example of disintermediation in payments, allowing direct bank-to-bank transfers without payment gateways or card networks.