Banks act as intermediaries between borrowers and depositors. They’re the financial institutions involved with the task of accepting deposits, lending, and offering a broad range of investment products.
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It’s to be however noted that not all banks are the same. There are different types of banks, each tasked with performing different functions.
Among them are the two primary forms of banking services, commercial and merchant banking.
The functions of these two banking services are defined based on the nature of the financial services they’re involved with.
Commercial Bank vs Merchant Bank
The difference between Commercial Bank and Merchant Bank is that a commercial bank is a bank that is established to provide general banking facilities like opening a bank account and lending money to people, a merchant bank is a bank that provides its services mostly to businesses and it is specialized in international trade.
|Parameters of Comparison||Commercial Banks||Merchant Banks|
|Meaning||A banking establishment involved with basic banking functions such as lending money and accepting deposits from the general public||A financial institution specializing in international trade and offering a wide spectrum of financial services to multinational corporations and high net worth clients|
|Governing Body||Conducted in accordance with banking regulation Act of 1949||Conducted as per the rules and regulations laid down by SEBI|
|Services Offered||General banking services||Banking consultancy services|
|Risk Exposure||Less||More compared to commercial banks|
What are Commercial Banks?
Commercial banks offer financial services to the general public and businesses as well. They offer savings and checking accounts for both individuals and businesses.
They also offer credit and debit cards, alongside a string of other retail banking services.
Commercial banks also offer loans to individuals and businesses and make a profit through the interest levied on those loans. At times, they do provide certificates of saving and deposit schemes targeted at retail customers.
The primary function of commercial banks is to take deposits and grant loans. Other than that, they’re also involved in services.
In addition to all that, commercial banks also offer a wide selection of products to their customers, including savings account, fixed deposits, current account, and certificate of deposit, to name a few.
They also provide interest to the amount their customers deposit with them.
In the same vein, they charge interest on their loans, and that’s their primary source of earning.
In this case, the rate of interest in both loans and deposits varies depending on the product a customer opts for.
What are Merchant Banks?
Merchant banks share a whole lot with investment banks. They don’t provide regular banking services. Instead, they’re involved with investment avenues and commercial loans.
They offer financial services to corporate entities.
They’re also involved with trade financing in addition to providing a broad range of international financial services.
Merchant banks cater to mid-size corporate entities.
They also happen to offer trade advisory services, in addition to raising venture capital and underwriting securities.
They primarily make money from the service fee they charge on their advisory services.
In brief, a merchant bank is a type of bank that offers both consultancy and financial services to its clients.
Its expertise lies in underwriting, international finance, and business loans.
Other than that it’s also involved in a series of activities associated with both the development and promotion of industrial projects.
3) Their Clientele
Merchant banks strive to fulfill the advisory requirements of high net worth individuals and big businesses.
It also offers financial services to international corporations and manages currency exchange whenever funds are transferred.
Merchant banks also assist big companies in issuing securities through private placement, especially those that don’t necessarily adhere to any form of legal formalities as with the case of IPO.
Main Differences Between Commercial Banks and Merchant Banks
Here are the main points summing up the differences between commercial banks and merchant banks:
1) From Definition
A commercial bank is a financial intermediary or establishment that’s been installed in place by a group of investors with the sole aim of offering basic financial services to the general public.
It’s simply involved with accepting cash deposits and advancing credits.
Merchant banks, on the other hand, are the large financial establishments that offer financial advisory services to multinational corporations, in addition to a wide spectrum of products and services to high net worth individuals.
2) Governing Body
Commercial banks are both governed and regulated the Banking Regulation Act of 1949. On the contrary, merchant banks are governed and regulated by the rule and regulations crafted by SEBI.
3) Services Offered
A commercial bank is involved with regular banking services such as cash deposits and credit advances. A merchant bank, on the other hand, offers consultancy and advisory to its clientele, most of which happen to be high net worth individuals and multinational corporations.
The loans that commercial banks extend are more debt-related. Merchant banks, on the other end, offer equity-related loans.
5) Risk Exposure
Commercial banks are less exposed to risks. That’s to say; they are less prone to losses and a series of other financial risks.
Merchant banks, on one end, are more exposed to a string of risks that makes them more vulnerable.
A commercial bank operates like a financer. Their services spin around cash deposits, withdrawal, and loan advances.
On the contrary, a merchant bank acts as a financial advisor.
7) Customer Base
A commercial bank serves the general public. That’s to say they offer a host of financial services to local citizens.
Merchant banks, however, are big houses operating in more than one nation.
They’re multinational financial institutions serving big corporations and high profile individuals operating on a war chest of cash.
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