Types of Financial Intermediaries

Starting From Zero

How to Start an Ecommerce Business

Get Instant Access

Chapter 4 introduced in detail the role of the intermediary in the context of quality uncertainty and market efficiency. Financial intermediaries are just one example of intermediaries for digital products, in this case for digital financial and payment services. In many ways, their function is similar to that of other intermediaries outside electronic commerce.

Cable News Network (http://www.cnn.com), for example, serves as an information intermediary, collecting, combining, and selling information products—leveraging the needs of information producers and consumers. More importantly, CNN also acts as a quality guarantor, whereby information buyers are assured by CNN's reputation for the quality of their news. Likewise, firms trading on the NYSE are credible as an investment opportunity, as a news report broadcast on CNN is credible as a source of information. NYSE's member firms are also subject to the exchange's rules and regulations, which engenders confidence among investors in the trading environment and the firms.

Despite the significant role the financial sector plays in our economy (see sidebar, "The Financial Sector"), there is a dire lack of studies dealing with banks, insurance companies, or brokers at the institutional level. To understand how electronic commerce will affect the future of these institutions, you must first investigate their functions and, second, analyze how these functions will change given new technologies and market conditions.

An intermediary is a middleman who facilitates transactions between potential traders. Intermediaries conduct the following activities:

• Match buyers with sellers (broker, see section 9.2, "Transactional Efficiencies")

• Buy goods from sellers and then sell the goods to buyers (retailer, see section 9.2)

Page 376

• Buy goods and sell them after modifications (transformation, see section 9.3, "Transformation Functions")

• Sell only transaction-related information (information brokerage, see section 9.4, "Information Brokerage")

The first case describes a simple brokerage connecting a buyer with a seller. The more buyers and sellers the more marketable a commodity becomes because the probability of finding a match increases. A corollary to this, however, is the increased difficulty in matching bid and ask prices to complete the trade. For example, it may take longer to contact, inquire and negotiate a deal due to the sheer size of the market. The need for better communication between sellers and buyers prompted the organization of exchange markets at a central location, such as commodity trading markets or stock exchanges. In this brokerage function, the commission paid to a broker reflects the cost of the intermediary's search.

Commercial banks and a large group of financial institutions handling payment clearing services are the primary players in capital markets, although we usually distinguish them from securities exchange market players. Payment service intermediaries go between a payer and a payee and act as account settlers, which can be characterized as the first type of intermediaries. In this sense, deposit-taking banks, payment clearing houses, and credit card services are broker-type intermediaries.

In the second case, the intermediary becomes an owner-seller instead of a simple matchmaker. Although a consignment store is a broker of the first type, most retail stores fall under this second category. Take the historical example of a Venetian trader, whose ship load of Eastern goods would be a loss to him, not to Asian sellers, if his ship were to sink. Compared to a brokerage situation in which sellers need to interact with buyers to negotiate a sale or contract (albeit via an intermediary), in the retail scenario, the intermediary needs to be most concerned with the ultimate buyers of the goods because the intermediary's profits originate from the spread between the bid (of the buyers) and ask (of the sellers) prices in the market. This spread is often made possible

Previous | Table of Contents | Next

Products | Contact Us | About Us | Privacy | Ad Info | Home

Use of this site is subject to certain Terms & Conditions, Copyright © 1996-2000 EarthWeb Inc.

All rights reserved. Reproduction whole or in part in any form or medium without express written permission of EarthWeb is prohibited. Read EarthWeb's privacy statement.

Was this article helpful?

0 0

Post a comment