Differences Between Commercial Banks and

Merchant Banks (Investment Banks)

Braden Galea
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While commercial banks deal more with individuals as customers, investment banks cater more for
the needs of firms. There are various differences in the conducting of business by both types of
banks. Commercial banks take deposits and issue loans, while investment banks help their clients get
the required funds through the issue of securities.
Commercial banks take deposits from customers, which may be individuals or corporate, and provide
a payment transmission service, savings and loan facilities. They are allowed to accept deposits and
create money through the credit multiplier. Investment banks are more in the business of helping
corporations to get the required funds. It offers a range of services from corporate financing to loan
arranging.
It can be said that the main difference between commercial banks and investment banking is that
the former refers to deposit and lending activities while the latter relates to securities
underwriting and other security-related activities.
Banks such as HSBC or Deutsche Bank are referred to as commercial banks because their main
business is deposit- and lending-related, although they both have substantial investment banking
operations. Goldman Sachs and Morgan Stanley are known as investment banks because securities-
related activity constitutes the bulk of their banking operations even though they also take wholesale
deposits and lend.
In terms of services offered to large companies, commercial banks typically provide cash
management, payments and credit facilities whereas investment banks arrange other types of
financing through the issue of equity and debt to finance company expansion. They also offer
an extensive array of other securities-related services including risk management products (such as
interest rate and foreign exchange derivatives) and also advice on company merger and acquisitions
activity as well as other company restructuring.
Further more, commercial banks are considered to be more risk-averse for the reason that they
make money in a much diverse way than investment banks. Commercial banks generate profits from
the spread between what they pay their customers for deposits and what interest rate they get from
loaning out depositors money. Such banks are vested in the success of their customers given that
if a loan is not paid back, the bank loses money. Moreover, commercial banks are under the close
supervision of the Federal Deposit Insurance Corp., the Federal Reserve and the State Department
of Financial Institutions, among other regulators. Such oversight results in far less risk for
Commercial Banks.
On the other hand, investment banks do not take federally backed consumer deposits which
enable them to be less regulated than Commercial Banks. They are not under the scrutiny of many
regulators. In fact Investment firms are overseen by just the Securities and Exchange Commission,
which has also been criticized for its lack of careful oversight of the Investment banks. For this reason
also, such banks offer products that have potentially high returns and high risk. Moreover, the future
success or failure of clients is of lesser concern for investment banks because in providing their
services, they receive upfront fees before actually doing the work.


Although commercial banking and merchant banking come under the banking sector, the purpose and
the services provided by both are entirely different. Commercial banks serve the requirements of the
general public, like individuals, small-scale entrepreneurs and so on. However, merchant banks,
generally called investment banks tend to serve mostly the needs of large corporations or very rich
people.
Commercial banking courses and career opportunities
Various Universities offer a wide range of commercial banking courses. Aspirants can pursue the
graduate and postgraduate courses in the relevant fields with specializations of their choice. Since it is a
developing industry, so many opportunities are also prevailing in the commercial banking sector. All the
postings in commercial banks are made through competitive tests. Those who complete the PhD or
M.Phil programs in commercial banking can seek out for career in the sector as research analysts. A
pass in the intermediate exam is a prerequisite for the entry-level jobs in commercial banks.
Professionals can get placements in the higher posts of banks through promotions and according to their
seniority. Those who have completed the course can search out for employments in banks from entry-
level leasing agents to international finance officers and much more.
Merchant banking courses and career opportunities
As there are so many courses in merchant banking, aspirants can choose their interesting topics in
merchant banking for study. There are Bachelors and Masters programs in concerned areas. Aspirants
can pursue the program in an acknowledged University. Those who are interested in doing MBA, can
pursue the same with specialization in merchant banking. Various institutes also provide short-term
Certificate programs in merchant banking for working professionals. On completion of the programs,
they can seek out for occupations in public or private undertakings. Most of these merchant bankers find
jobs in investment banking sector, Corporate Finance, Capital Markets, Equity and Fixed Income
Research and so on.
Key differentiators between Commercial Banking and Merchant Banking
Commercial banks verify and uphold savings accounts of individuals; provides loans and mortgages to
individuals or small-scale businesses. But, merchant banks operate as fiscal consultants to large-scale
companies. Commercial banking is usually reachable to everyone for elementary banking requirements,
whereas merchant banking is concerned to hand out primarily large corporations and very wealthy
persons.



What is the difference between investment banks and merchant banks?

Merchant banks and investment banks, in their purest forms, are different
kinds of financial institutions that perform different services. In practice, the
fine lines that separate the functions of merchant banks and investment
banks tend to blur. Traditional merchant banks often expand into the field of
securities underwriting, while many investment banks participate in trade
financing activities. In theory, investment banks and merchant banks
perform different functions.

Pure investment banks raise funds for businesses and some governments by
registering and issuing debt or equity and selling it on a market.
Traditionally, investment banks only participated in underwriting and selling
securities in large blocks. Investment banks facilitate mergers and
acquisitions through share sales and provide research and financial
consulting to companies. Traditionally, investment banks did not deal with
the general public.

Traditional merchant banks primarily perform international financing
activities such as foreign corporate investing, foreign real estate investment,
trade finance and international transaction facilitation. Some of the activities
that a pure merchant bank is involved in may include issuing letters of credit,
transferring funds internationally, trade consulting and co-investment in
projects involving trade of one form or another.

The current offerings of investment banks and merchant banks varies by the
institution offering the services, but there are a few characteristics that most
companies that offer both investment and merchant banking share.

As a general rule, investment banks focus on initial public offerings (IPOs)
and large public and private share offerings. Merchant banks tend to operate
on small-scale companies and offer creative equity financing, bridge
financing,mezzanine financing and a number of corporate credit products.
While investment banks tend to focus on larger companies, merchant banks
offer their services to companies that are too big for venture capital firms to
serve properly, but are still too small to make a compelling public share
offering on a large exchange. In order to bridge the gap between venture
capital and a public offering, larger merchant banks tend to privately place
equity with other financial institutions, often taking on large portions of
ownership in companies that are believed to have strong growth potential.

Merchant banks still offer trade financing products to their clients.
Investment banks rarely offer trade financing because most investment
banking clients have already outgrown the need for trade financing and the
various credit products linked to it.

1. Function
o When one thinks of a commercial bank, one thinks of such services as checking and
savings accounts, loans, credit cards, and lines of credit to businesses and individuals.
Commercial banks sell investments, such as certificates of deposit, and provide
brokerage services to individuals for buying and selling stocks. Retirement plans, college
savings programs and financial planning services are also offered by commercial banks.
Merchant banks act as financial consultants to large companies. These banks offer advice
to companies seeking to become larger by means of mergers or acquisitions. Rather than
making loans, merchant banks often invest their own money into their customers'
businesses, back stock transactions and manage large amounts of money for their
customers.
2. How They Make Money
o Commercial banks earn revenue by making auto loans, issuing mortgages, and by
providing small business and home improvement loans. When you take out a loan, the
interest you pay on the money is income for the bank. In addition, fees on your checking
account, ATM charges and safety deposit box rental all contribute to a commercial banks'
bottom line.
By contrast, a merchant bank makes much of its profit from fees it charges its large
customers for the services it provides. Often, these banks invest large amounts of capital
into growing private companies, then benefit by selling their stake once the company's
value has been maximized.
o
Effect on the Economy
o A commercial bank has an impact on the economy of the local area it serves. Money that
is loaned by the bank is spent by consumers for cars, homes and other items that
increase business in the community. Commercial banks provide loans to individuals, as
well as nearby small- and medium-sized businesses that use the money for expansion
and job creation.
Merchant banks have an impact on the value of the large corporations they provide
services to, which affects the national economy and stock prices.
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