Intermediation refers to the process or activity of acting as an intermediary or middleman between two or more parties involved in a transaction or relationship. It involves facilitating or mediating the interaction or exchange of goods, services, information, or funds between these parties.
In financial terms, intermediation refers to the role played by financial institutions such as banks, credit unions, or investment firms, in directing funds from savers or investors to borrowers or businesses. These intermediaries serve as a bridge between the surplus units (people who have excess funds to invest) and the deficit units (people who require funds).
Intermediation involves various functions such as assessing the creditworthiness of borrowers, conducting due diligence, matching the needs of savers and borrowers, providing liquidity, managing risks, and providing other value-added services. Financial intermediaries earn a profit by charging fees, interest, or commissions on the services they provide.
In a broader sense, intermediation can also be seen in other contexts such as in the field of communication, where intermediaries such as translators or interpreters facilitate communication between parties speaking different languages. Similarly, in the field of commerce, intermediaries like wholesalers or distributors help bridge the gap between producers and end consumers.
Overall, intermediation plays a vital role in facilitating transactions, reducing transaction costs, managing risks, and enabling a smooth flow of goods, services, funds, and information between parties involved in various economic and social activities.
