Investment Banks vs. Merchant Banks: An Overview
Financial institutions can be classified as either investment banks or merchant banks. These banks do not provide services to individuals, small and medium-sized businesses, or consumers. They both offer similar services, including as underwriting and investing services. However, because the activities frequently cross over into one another’s purviews, the thin line that supposedly divides the tasks of these two institutions tends to blur. While merchant banks engage in international financing and underwriting activities, investment banks engage in trade finance activities.
- Merchant banks provide underwriting, business loans to corporations, and international finance services.
- Investment banking offers a larger range of services to its clients and is typically fee- or fund-based.
- Merchant banks support businesses and wealthy people.
- Corporations, governments, and institutional investors are some of the investment banking clientele.
Investment Banks
Investment banks are organizations that act as middlemen for a range of reasons. Between institutions, they typically engage in different activities. The majority of the services they provide involve significant and complicated financial transactions. Governments and other financial institutions, major corporations, hedge funds, pension funds, and other institutional clients are typical examples of investment banking clients.
By registering and issuing debt or stock, pure investment banks are primarily in charge of raising money for corporations, governments, and municipalities. These investments are then sold on an open market through initial public offerings (IPOs). These securities are typically underwritten and sold in bulk by investment banks. Small, specialized investment banking organizations could concentrate on a single, specialized field. Additionally, they help corporations merge and acquire one another by selling shares, and they offer research and financial advising to businesses.
Due to their ability to offer banking and consulting services, investment banks may be fee-based. Because they can profit from interest and other leases from their clients, they might also be fund-based.
The biggest and most well-known investment banks in the world are Barclays (BCS), UBS (UBS), and Credit Suisse (CS). Numerous of these banks also run more modest retail and business locations for the general public.
Merchant banks provide their services to businesses that are too large for venture capital firms but not small enough to make a convincing initial public offering on a major exchange. Investment banks concentrate on larger businesses.
Merchant Banks
The actual list of services offered varies based on the merchant bank, much like with investment banks. It’s interesting to note that the British term for investment banks is merchant bank.
Merchant banks don’t accept deposits or withdrawals because they don’t deal with the general public. Instead, they work for international organizations and high-net-worth individuals (HNWIs). Their main responsibilities include underwriting and foreign funding. These could involve foreign corporate investment, foreign real estate investment, trade finance, among other things, and the facilitation of global trade.
Letters of credit may be issued by merchant banks, as well as money transfers abroad and trade and trading technology consulting. Because they offer their clients advising services and other associated services, these banks make money via fees.
Today’s top merchant banks are J.P. Morgan (JPM), Citigroup, and Goldman Sachs (GS) (C). Many of these banks, like investment banks, also operate commercial and retail operations that cater to small- and medium-sized businesses as well as individual consumers.
Key Differences
Between merchant banks and investment banks, there is a thin line. Even though they both work in the financial sector, there are some significant overall differences. Investment banks typically concentrate on IPOs and significant public and private share offerings. By providing inventive equity financing, bridge financing, mezzanine financing, and a number of highly specialized corporate credit products, merchant banks frequently concentrate on small-scale businesses.
Larger merchant banks frequently privately place equity with other financial institutions in order to bridge the gap between venture capital and an IPO. In the process, they frequently acquire significant ownership stakes in businesses they believe have strong balance sheets, sound fundamentals, and strong growth potential.
While merchants provide trade financing products to their customers, investment banks rarely do because the majority of their customers no longer require trade financing or the many credit products that go along with it.
Special Considerations
Investment banks can offer advisory services to private investors through their private wealth management and private client services divisions, even if their primary clients are large corporations like significant mutual fund houses. On various stock investments, the analysis normally includes buy, sell, and hold ratings. Businesses and high-net-worth individuals who often operate globally offer services to merchant banks.
Learn more: The Difference Between Hard Money vs. Soft Money