Banking plays a crucial role in facilitating trade and investments in the modern economy. These institutions come in various kinds. The differences are mainly brought about by the unique roles they play in facilitating the economy. Of the many kinds that are available, the investments and the merchant banks stand out.
We shall examine merchant and investment banks in detail and then go ahead to compare and contrast them. We believe by digging deeper, it is possible for you to gain the insight you need to do a better job at making good use of them.
Merchant Bank vs Investment Bank
The main difference between Merchant Bank and Investment Bank is that a merchant bank provides services like brokerage, fundraising and also acts as a financial advisory to its clients. An Investment bank is a bank that helps a company in raising funds by acting as an intermediary between the client and the investing public.
Comparison Table Between Merchant Bank and Investment Bank
| Parameter of Comparison | Merchant Bank | Investment Bank |
|---|---|---|
| Purpose | Merchant banks exist primarily to provide business loans, facilitate international finance, and serve the various trading companies with underwriting roles. | Investment banking exists to create capital for commercial and government entities. |
| Funding | The services of merchant banks are availed for commissions and interests. As such, they tend to be more expensive to come by comparatively. | Those of the investment banking is however accessible via fees and funding on a case by case basis. They hence tend to be comparatively cheaper to come by. |
| Clientele | Merchant banks mainly deal with high net worth individuals and medium-sized corporate entities. | Investment banks, however, deal with huge corporations as they have higher financial muscle power than the merchant banks. |
| Services Provided | A merchant bank facilitates the exchange of goods and services mainly by offering advisory services to the companies that deal with those trade. It also underwrites debts, processes payments and facilitates access to credit. | Investment banks however aid companies in expanding their services mainly by scaling new heights. They arrange for extra capital and help companies in widening their scope of operations. |
| Sheer Size | As we have already hinted, the merchant banks are smaller in size and financial muscle power. These two are mainly due to the fact that they handle fewer clients. | Conversely, investment banks are larger in scope and financial muscle power due to their handling of many clients and the use of huge amounts of money. |
What is Merchant Bank?
A merchant bank is a financial institution that exists primarily to facilitate trade. In this role, it handles all the services that pertain to commerce like loan services, underwriting, financial advisory, and fundraising. Unlike typical commercial banks, its services are limited to corporate entities alone.
On the whole, these banks target their services to the small and medium-sized enterprises that are incapable of leveraging the Initial Public Offering to grow their businesses. These banks are the ones you would want to look up to if your business is barely starting out.
What is the Investment Bank?
An investment bank is a financial institution that mainly facilitates the growth of businesses and investments.
It seeks to offer advice to firms on the best ways forward with regards to expansion, trying out newer markets, the launch of new products, the creation of capital, mergers, and acquisitions. Like the merchant bank, this one also targets the corporate entities alone. As such, it does not accept deposits from the general public as other banks do.
Also, its services tend to target only those ambitious businesses that want to extend their reach and sphere of influence.
Main Differences Between Merchant Bank and Investment Bank
Character
A merchant bank exists primarily to facilitate trade. It is an institution that advises and guides mainly international merchants to settle their dues. An investment bank, on the other hand, exists to aid businesses in expanding and furthering their reach and possibly raking in new clients. It is hence a good one to look up to for business expansion.
Scope
The merchant bank only engages in those activities that center around trade and the exchange of goods and services. Its investment bank counterpart, however, revolves around those activities that aim at expanding businesses and establishing their presence in a target market.
Target Market
A merchant bank targets much of its services to the high net worth individuals and the small and medium-sized enterprises. Its investment bank counterparts on the other hand mainly target corporations, parastatals, investment groups, and large-scale commercial entities.
Services Provided
The services of the merchant banks are mainly business loans, underwriting or advisory in nature. These stand in sharp contrast with the financing and capital creation that the investments banks ordinarily provide.
Applicability
Generally speaking, the services of a merchant come in handy when engaging in international trade more so, importation and exportation of merchandise. Those of the investment banks, on the other hand, are mainly applicable when attempting to expand a business within the borders of a sovereign state.
Operational Capital
To secure the services of a merchant bank, you will generally have to pay some commission for each service provided. Simply put: you get to pay for the service you secure from the bank.
Those of the investment banks are however provided for at a fee that is predetermined way before the service is provided.
Specialty
A merchant bank may be described as a business-to-business company in that it mainly transacts business with other commercial enterprises. The investment bank, however, is a business-to-consumer as it mainly deals with the consumers directly.
Regulatory Regime
Given that many of the services of the merchant banks transpire within the borders of two or more national entities, it is subject to international regulatory authorities and regimes. A typical investment bank is subject to local regulatory authorities though as it mainly operates within a national boundary.
Capital Base
Owing to their smaller scope and limited reach, the merchant banks have limited capital base. The opposite, however, applies to the investment banks.
Their capital bases are wider as they have to handle huge transactions and facilitate equally larger companies.
Potential of Diversification
By their limited and narrower scope of operations, it is unlikely that the merchant banks may diversify their services. They thus maintain only a narrower scope of operations.
The investment banks nonetheless are capable of venturing into added services that relate to buying and selling. These could include speculation and other pertinent investment-related services.
Frequently Asked Questions (FAQ) About Merchant Bank and Investment Bank
How do Merchant Banks make money?
Merchant banks are organizations that offer an assortment of financial support and advisory services to merchants, international traders, and business enterprises. These banks earn substantial revenue in the form of fees for offering various types of advisory and fundraising services to their clients.
They also charge interest in offering equity-related loans to business owners and companies.
What are the types of Merchant Banking?
The 3 types of merchant banking are:
- Full Service – A full-service merchant banking caters to small businesses or retail customers as well as large corporations and multinational business organizations.
- Regional – Regional merchant banking deals with small and medium business originations and helps in managing business ventures within a particular region or state.
- Boutique – Boutique merchant banking specializes in either corporate financing or retail banking services that cater to the needs of small businesses.
What services are provided by Merchant Bankers?
The major services provided by merchant bankers are:
- Corporate Counseling – Assisting business owners in choosing profitable product lines based on market analysis. It also involves project counseling.
- Fundraising – Merchant bankers help business organizations and companies in raising capital by public issues and underwriting of shares and debentures.
- Portfolio Management – Investment and capital portfolio management is a major service provided by merchant bankers. This includes a variety of consultation services.
- Loan Services – Merchant bankers engage in the funding of business projects owned by their clients.
What are the functions of Merchant Banker?
The main function of a merchant banker is to help companies and business owners in running their organizations profitably.
They offer consultation services to entrepreneurs for assisting them in expanding and reviving their business activities through fundraising and launching of new projects.
What is the structure of the Commercial Bank?
Commercial banks are mainly classified into 2 categories namely, scheduled commercial banks and non-scheduled commercial banks.
Under scheduled banks, there are 3 types that are:
- Private Sector Banks – The majority of shareholders are private parties and the government has a fairly smaller stake.
- Public Sector Banks – More than 50% of shares are owned by the government. Under this category you have:
- SBI and Associate banks.
- Nationalized banks.
- Regional Rural banks.
- Urban Cooperative banks.
- Foreign Banks – Banks that are controlled by a head office located in a foreign country are foreign banks.
Conclusion
Our long and elaborate study of the differences between the merchant and the investment banks come to an end there. We are now confident that you have what it takes to distinguish between these two concepts and apply them appropriately.
What are you now waiting for? Go for the one that is suited for your preference!
References
- https://ideas.repec.org/b/oxp/obooks/9780198283065.html
- https://www.tandfonline.com/doi/abs/10.1080/00076799300000085