The intermediation approach assumes financial institutions play the role of intermediators
in financial markets, accepting funds from depositors and converting them into loans and other assets.
The buyers and sellers benefit because they can use the price quotations offered by different intermediators to guide their substitutions between different goods.
The purest form of market-making intermediator simply buys and resells the same product.
An economist might ask at this point why the intermediator needs to collect information for himself.
If the buyers understate their valuations and the sellers overstate theirs then it may appear that no margin can be earned, whereas if the intermediator checked out the situation for himself it would become apparent that it could.
Intermediators who have a comparative advantage in screening such assets will normally prefer to purchase them outright, whilst those who have a comparative disadvantage in screening may prefer to purchase the specific services of these assets instead.
Fee-charging intermediators, such as employment agencies, cannot be trusted to the same extent as normal intermediators because they do not directly bear the risks of their mistaken decisions.
The intermediator exploits his own knowledge in the same way that the buyer and seller do - through negotiations.
For example, in pre-Nasser rural Egypt, with cotton as the main cash crop, tenants squeezed the landless workers (taraheel) below subsistence wages; landlords, in their turn, squeezed as much surplus as they could from tenants; landlords, seeking cash, made future cotton sales through financial intermediators
(mostly foreign), far below international market prices, and, finally, at the core centre, the latter group was squeezed by industrialists and traders in England.