Intermediation involves the "matching" of lenders with savings to borrowers who need money by an agent or third party, such as a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

.''The Theory of Financial Intermediation''
by Franklin Allen and Anthony M. Santomero If this matching is successful, the lender obtains a positive rate of return, the borrower receives a return for risk taking and

entrepreneur Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values th ...

ship and the

er receives a return for making the successful match. If the

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

's speculative play with the funds provided by the bank does not pay off, the bank can face significant losses on its loan portfolio, and if the bank fails its

depositors A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...

can lose some of their money if the deposits are not insured by a third party. The skill of identifying potential successful new

s who can take market share off competitors or develop whole new markets is one of the most vital (and intangible) skills any banking system can possess. An unexpected form of entrepreneurship, and

unintended consequence In the social sciences, unintended consequences (sometimes unanticipated consequences or unforeseen consequences) are outcomes of a purposeful action that are not intended or foreseen. The term was popularised in the twentieth century by Ameri ...

of microfinance initiatives, can be informal intermediation. That is, some entrepreneurial borrowers become informal intermediaries between microfinance initiatives and poorer micro-entrepreneurs. Those who more easily qualify for microfinance split loans into smaller credit to poorer borrowers. Informal intermediation ranges from casual intermediaries at the good or benign end of the spectrum to 'loan sharks' at the professional and sometimes criminal end of the spectrum.

Disintermediation Disintermediation is the removal of intermediaries in economics 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 h ...

occurs when potential lenders and borrowers interact more directly in the

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...

s, avoiding the intermediation of banks.

References

{{Reflist Banking