intermediation adds huge value but it's got a new cousin
In the first of our series of three articles, we look at how intermediation in SME finance is changing in the digital era.
The services economy in the UK powers some 80% of the British GDP and around 10% is from financial services alone. Of the services exports, 29% are from financial services. These are multibillion pound markets and employ a huge number of 'knowledge workers' who can work with these abstract financial concepts.
Yet, the SME financial services market is not particularly efficient; for customers it is still fairly opaque, demand isn't matched to supply so working with an impartial third party to find the most suitable and best value provider often pays dividends.
In 1971, Peter Diamond, an American economist, showed that even small 'search costs,' such as the time it takes to walk down the street to see what is on offer at a rival shop, can seriously undermine competition on price. Hence, intermediation has served a long purpose of getting the best price for the customer.
So, what does this look like in the digital era?
Intermediation in it's simplest (non-consultative) form is really aggregation of supply. This is nothing new since, according to Mintel, 60% of Brits are 'most likely' to use a price comparison site when researching or buying a financial product.
In the digital era both comparison websites and platforms are ubiquitous. In fact many of the largest service companies in the world, such as Uber, Airbnb and - arguably - Netflix and Spotify are just thin layers of supply aggregation. The bulk of the value the customer is paying for is not something they control and they leave the cost of production (the expensive bit) to the individuals within the network.