Topic 7: Digital disintermediation

Question 1

What is a ‘financial intermediary’?

Answer 1

One of the most basic financial services is that of intermediation. A financial intermediary is an institution that borrows money from the surplus sector of the economy and lends it to the deficit sector, charging one interest rate to the person with a deficit and paying a lower rate to the person with the surplus; the intermediary’s profit margin is the difference between the two interest rates.

Question 2

What is ‘disintermediation’?

Answer 2

The process by which lenders and borrowers, or investors and organisations, interact directly rather than through an intermediary.

A good example is peer-to-peer lending by organisations like Funding Circle, where individual lenders are matched with individual borrowers in return for a ‘cut’.

Question 3

What has driven digital disintermediation?

Answer 3

It has been spurred on by the financial crisis in 2008 and later by Open Banking in 2018.