Intermediation

Intermediation is the process by which a third party facilitates a transaction or agreement between two or more other parties. This party, the 'intermediary,' acts as a bridge, connecting those who need or want something (e.g., goods, services, capital) with those who can provide it. This crucial function often involves expertise, risk mitigation, and reduced transaction costs. intermediation can take various forms, from financial institutions (banks) to online platforms (marketplaces), and is driven by the need to overcome information asymmetry and match supply with demand. Effective intermediation fosters efficiency and facilitates economic growth.

Intermediation meaning with examples

• In the financial sector, banks are classic examples of intermediation. They take deposits from savers and lend those funds to borrowers, generating profit through the interest rate spread. This process, intermediation, allows for efficient capital allocation and fuels economic activity by connecting those with capital to those who need it for investments or consumption.
• Online marketplaces, like Amazon and Etsy, exemplify modern intermediation. They connect buyers and sellers, providing a platform for transactions, handling payments, and often offering customer service. This form of intermediation significantly reduces transaction costs and expands market reach for both businesses and consumers by providing services.
• A real estate agent provides intermediation services by connecting buyers and sellers of property. They assist with property searches, negotiations, and legal paperwork, reducing the complexities involved in the transaction. Effective intermediation in real estate streamlines the process for both parties and can contribute to favorable outcomes.
• Insurance companies are another form of intermediation. They pool the risks of many individuals or businesses, paying out claims in exchange for premiums. This system of intermediation allows for risk sharing and protection against potential financial losses, ensuring a smooth transfer of funds from users.