What is "disintermediation"

n. 1 (context banking finance economics English) The removal of funds from a financial institution such as a bank for direct purchase of financial instruments. 2 (context business English) The removal of an intermediary from a commercial transaction.

In economics, disintermediation is the removal of intermediaries from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediary (such as a distributor, wholesaler, broker, or agent), companies may now deal with customers directly, for example via the Internet.

Disintermediation may decrease the total cost of servicing customers and may allow the manufacturer to increase profit margins and/or reduce prices.

Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers may choose to bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer.

However manufacturers will still incur distribution costs, such as the physical transport of goods, packaging in small units, advertising, and customer helplines, some or all of which would previously have been borne by the intermediary.

To illustrate, a typical B2C supply chain is composed of four or five entities (in order):

• Supplier
• Manufacturer
• Wholesaler
• Retailer
• Buyer

It has been argued that the Internet modifies the supply chain due to market transparency:

• Supplier
• Manufacturer
• Buyer