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Disintermediation is the removal of
intermediaries An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In la ...
in
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
from a
supply chain In commerce, a supply chain is a system of organizations, people, activities, information, and resources involved in supplying a product (business), product or service (business), service to a consumer. Supply chain activities involve the transfo ...

supply chain
, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional
distribution channels Distribution (or place) is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for the consumer or business user who needs it. This can be done directly by the producer or service pro ...
, which had some type of
intermediary An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In law ...
(such as a
distributor A distributor is an enclosed rotating used in s that have mechanically timed . The distributor's main function is to route secondary, or high voltage, from the to the s in the correct , and for the correct amount of time. Except in system ...
,
wholesaler Wholesaling or distributing is the sale of goods or merchandise Merchandising is any practice which contributes to the sale of products to a retail consumer A consumer is a person or a group who intends to order, orders, or uses purchased ...
,
broker A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a :wikt:princip ...
, or
agent Agent may refer to: Espionage, investigation, and law *, spies or intelligence officers * Law of agency, laws involving a person authorized to act on behalf of another ** Agent of record, a person with a contractual agreement with an insuran ...
), companies may now deal with customers directly, for example via the
Internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a ''internetworking, network of networks'' that consist ...

Internet
. Disintermediation may decrease the total cost of servicing customers and may allow the manufacturer to increase
profit margins Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue In accounting, revenue is the income or increase in net assets that an entit ...
and/or reduce
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

price
s. Disintermediation initiated by consumers is often the result of high
market transparency In economics, a market is transparent if much is known by many about: What products and services or capital assets are supply (economics), available, market depth (quantity available), what price, and where. Transparency is important since it is on ...
, 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. These are the
supplierSupplier may refer to: *Manufacturing, Manufacturer, uses tools and labour to make things for sale *Process manufacturing, Processor (manufacturing), converts a product from one form to another *Packaging and labeling, Packager (manufacturing), encl ...
,
manufacturer Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector ...

manufacturer
,
wholesaler Wholesaling or distributing is the sale of goods or merchandise Merchandising is any practice which contributes to the sale of products to a retail consumer A consumer is a person or a group who intends to order, orders, or uses purchased ...
,
retailer Retail is the sale of goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or p ...
and
buyer Procurement is the process of finding and agreeing to terms, and acquiring goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distri ...
.


History

The term was originally applied to the
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
ing industry in 1967; disintermediation occurred when consumers avoided the
intermediation:''For the religious term, see Intercession Intermediation involves the "matching" of lenders with savings to borrowers who need money by an agent or third party, such as a bank.
of banks by investing directly in
securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication o ...
(government and private bonds,
insurance companies Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...
,
hedge fund A hedge fund is a pooled investment fund Image:Financial info.jpg, The values and performance of collective funds are listed in newspapers. An investment fund is a way of investment, investing money alongside other investors in order to benefit ...
s,
mutual fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...
s and
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
s) rather than leaving their money in
savings account A savings account is a at a . Common features include a limited number of withdrawals, a lack of cheque and linked facilities, limited transfer options, and the inability to be overdrawn. Traditionally, transactions on savings accounts were w ...
s. The original cause was a U.S. government regulation (
Regulation QRegulation Q (Title 12 of the Code of Federal Regulations, 12 CFR]217 is a Federal Reserve Board of Governors, Federal Reserve regulation which sets out Capital requirement, capital requirements for Banking in the United States, banks in the United S ...
) which limited the
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
paid on interest bearing accounts that were insured by the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losse ...
. It was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized.


Impact of Internet-related disintermediation upon various industries

It has been argued that the Internet modifies the supply chain due to market
transparency Transparency, transparence or transparent most often refer to transparency and translucency, the physical property of allowing the transmission of light through a material. They may also refer to: Literal uses * Transparency (photography), a sti ...
. Disintermediation has acquired a new meaning with the advent of the virtual marketplace. The virtual marketplace sellers like
Amazon Amazon usually refers to: * Amazons In Greek mythology, the Amazons (Ancient Greek: Ἀμαζόνες ''Amazónes'', singular Ἀμαζών ''Amazōn'') are portrayed in a number of ancient Greek, ancient epic poems and legends, such as the ...
are edging out the middlemen. Direct sellers and buyers connect with each other because of the platform created by the virtual marketplace vendor. There is
quid pro quo Quid pro quo ('what for what' in Latin Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the ...
for the vendor for the use of the platform, else it would make no business sense to create such a platform. If the buyer, having connected with the seller, circumvents the platform and talks to the seller and does her deal directly with the seller, then the platform owner is unlikely to get her revenue share. This may be considered a new form of disintermediation.


Discussion

In the non-Internet world, disintermediation has been an important strategy for many big box retailers like
Walmart Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational Retail companies, retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United ...

Walmart
, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for
inventory Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
removes one function of an intermediary. The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of
Japan Japan ( ja, 日本, or , and formally ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
and
Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin Berlin (; ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3,769,495 inh ...

Germany
in the 1990s. However, Internet-related disintermediation occurred less frequently than many expected during the
dot com boom The dot-com bubble (also known as the dot-com boom, the tech bubble, and the Internet bubble) was a stock market bubble caused by excessive speculation of Internet-related companies in the late 1990s, a period of massive growth in the use and ado ...
. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than
shipping Freight transport is the physical process of transport Transport (in British English), or transportation (in American English), is the Motion, movement of humans, animals, and cargo, goods from one location to another. In other words, ...

shipping
them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as bricks and clicks.


Reintermediation

Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first. At the start of the Internet revolution,
electronic commerce E-commerce (electronic commerce) is the activity of electronically The field of electronics is a branch of physics and electrical engineering that deals with the emission, behaviour and effects of electrons using electronic devices. Electronic ...
was seen as a tool of disintermediation for cutting operating costs. The concept was that by allowing consumers to purchase products directly from producers via the Internet, the product delivery chain would be drastically shortened, thereby "disintermediating" the standard supply model middlemen. However, what largely happened was that new intermediaries appeared in the digital landscape (e.g., 
Amazon.com Amazon.com, Inc. ( ) is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational ...
and
eBay eBay Inc. ( ) is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational sta ...
). Reintermediation occurred due to many new problems associated with the e-commerce disintermediation concept, largely centered on the issues associated with the direct-to-consumers model. The high cost of shipping many small orders, massive customer service issues, and confronting the wrath of disintermediated retailers and supply channel partners all presented real obstacles. Huge resources are required to accommodate presales and postsales issues of individual consumers. Before disintermediation, supply chain middlemen acted as salespeople for the producers. Without them, the producer itself would have to handle procuring those customers. Selling online has its own associated costs: developing quality websites, maintaining product information, and marketing expenses all add up. Finally, limiting a product's availability to Internet channels forces the producer to compete with the rest of the Internet for customers' attention, a space that is becoming increasingly crowded.


Examples

Notable examples of disintermediation include
Dell Dell is an American company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objecti ...
and Apple, which sell many of their systems
direct-to-consumer Direct-to-consumer (DTC) refers to selling products directly to customers, bypassing any third-party retail Retail is the process of selling consumer goods or Service (economics), services to customers through multiple distribution channel ...
—thus bypassing traditional retail chains, having succeeded in creating brands well recognized by customers, profitable and with continuous growth.


In the automotive industry

Tesla avoids using dealers as middlemen by offering their own outlets, which have only a few vehicles for display and test driving; customers complete their full purchase online. This approach allowed Tesla to raise auto gross profit by about 34%. This strategy also allows Tesla to control more of its customers' experience and build online community. Following Tesla's success, two other automotive brands,
Audi Audi AG () is a Germany, German automobile manufacturer that designs, engineers, produces, markets and distributes luxury vehicles. Audi is a wholly owned subsidiary of the Volkswagen Group and has its roots at Ingolstadt, Bavaria, Germany. Aud ...

Audi
and
General Motors General Motors Company (GM) is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinat ...

General Motors
, decided to start trials of direct sales in 2012 and 2013 respectively.


See also

*
Flat fee MLS Flat-fee MLS refers to the practice in the real estate industry of a seller entering into an "à la carte service agreement" with a real estate broker who accepts a flat fee rather than a percentage of the sale price for the listing side of the t ...
— An example of disintermediation in the Real Estate industry. * Laiki agora - an example of disintermediation of agricultural foodstuffs in Greece *
Outlet store An outlet store, factory outlet or factory shop is a brick and mortar or online shopping, online store in which manufacturers sell their stock directly to the public. Traditionally, a factory outlet was a store attached to a factory or warehouse, ...
*
Social peer-to-peer processes Social peer-to-peer processes are interactions with a peer-to-peer dynamic. These peers can be humans or computers. Peer-to-peer (P2P) is a term that originated from the popular concept of the P2P distributed computer application architecture which ...
*
Direct-to-consumer Direct-to-consumer (DTC) refers to selling products directly to customers, bypassing any third-party retail Retail is the process of selling consumer goods or Service (economics), services to customers through multiple distribution channel ...


References

Notes'' Bibliography *Graham, Mark.
Warped Geographies of Development: The Internet and Theories of Economic Development
" ''Geography Compass'', (2) 2008. *Hawken, Paul. "Disintermediation: an economics buzzword that neatly explains a lot of the good that is going on." ''CoEvolution Quarterly'', Spring 1981, pp. 6–14. {{Uberisation Business models E-commerce Distribution (marketing) Supply chain management