Question

Financial intermediaries are often given credit for reduction in transaction costs and information asymmetry.
How they manage to do it?
Do the customers benefit from reduced transaction costs?
In what way?

Answer 1

How they manage to do it?

• Financial Intermediaries have exhaustive knowledge of the financial products selling in the market.
• They are the one interacting with buyers and sellers, both, all the time.
• They have a better understanding of the nerves of the markets.
• They have a better understanding of the drivers of the business.
• They are in possession of all the relevant information about the products

Because of these reasons, they are able to ensure flow of information and prevent information asymmetry. They prevent abuse of customers by educating them. They make customers aware. They communicate the pain points of customers to the service providers. They thus help achieve efficiency and bring in transparency. Customers are better informed and hence they can negotiate downward on the transaction costs.

Do the customers benefit from reduced transaction costs? In what way?

Yes, customers do benefit from reduced transaction cost. Buyers and sellers have full knowledge. There is reduced information asymmetry. Buyer is well aware of other suppliers and hence is under no pressure to buy the product from one particular service provider. The customer therefore enjoys a good bargaining power. The customers therefore insist on reduced transaction cost. The transaction cost is an add on cost on the cost of the product or service the customer is buying. The reduced transaction costs thus benefits the customer:

• By keeping their total cost of acquisition lower
• By reducing the immediate burden on their cash outflows at the time of purchase