Banks act as intermediaries between borrowers and depositors. Theyโre the financial institutions accepting deposits, lending, and offering a broad range of investment products.
Itโs 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 theyโre involved with.
Key Takeaways
- Commercial banks provide banking services to individuals and businesses, including deposits, loans, and essential financial products, while merchant banks specialize in financing, advisory, and investment services for corporate clients.
- Merchant banks focus on services like mergers and acquisitions, underwriting, and private equity placements, whereas commercial banks offer a more comprehensive range of consumer-oriented financial products.
- Commercial banks accept deposits and use them to fund loans, while merchant banks do not take deposits and raise capital through other means, such as issuing securities.
Commercial Bank vs Merchant Bank
Commercial banks are focused on providing essential banking services to individuals and businesses, including accepting deposits, making loans, and managing customersโ accounts. Merchant banks provide large businesses and corporations corporate finance, underwriting, and investment advisory services.
Comparison Table
| Parameters of Comparison | Commercial Banks | Merchant Banks |
|---|---|---|
| Meaning | A banking establishment involved with essential banking functions such as lending money and accepting deposits from the general public | A financial institution specializing in international trade and offering a broad spectrum of financial services to multinational corporations and high-net-worth clients |
| Governing Body | Conducted by the 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 |
| Role | Financer | Financial Advisor |
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 other retail banking services.
1) Earning
Commercial banks also offer loans to individuals and businesses and profit through the interest levied. Sometimes, they provide certificates of saving and deposit schemes targeted at retail customers.
2) Services
The primary function of commercial banks is to take deposits and grant loans. Other than that, theyโre also involved in services.
In addition to all that, commercial banks also offer a wide selection of products to their customers, including savings accounts, fixed deposits, current accounts, and certificates of deposit, to name a few.
3) Interests
They also provide interest on the amount their customers deposit with them.
In the same vein, they charge interest on their loans, which is their primary earning source.
In this case, the interest rate in 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 donโt provide regular banking services. Instead, theyโre involved with investment avenues and commercial loans.
They offer financial services to corporate entities.
Theyโre also involved with trade financing and providing a broad range of international financial services.
1) Earning
Merchant banks cater to mid-size corporate entities.
They also offer trade advisory services in addition to raising venture capital and underwriting securities.
They primarily make money from the service fee they charge for their advisory services.
2) 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, itโs also involved in a series of activities associated with developing and promoting industrial projects.
3) Their Clientele
Merchant banks strive to fulfil 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.
4) Other
Merchant banks also assist big companies in issuing securities through private placement, especially those that donโt necessarily adhere to legal formalities, as in 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 installed in place by a group of investors to offer essential financial services to the general public.
Itโs involved with accepting cash deposits and advancing credits.
On the other hand, merchant banks are large financial establishments that offer financial advisory services to multinational corporations and a broad spectrum of products and services to high-net-worth individuals.
2) Governing Body
Commercial banks are governed by and regulated by the Banking Regulation Act of 1949. On the contrary, merchant banks are governed and regulated by SEBIโs rules and regulations.
3) Services Offered
A commercial bank is involved with regular banking services such as cash deposits and credit advances. On the other hand, a merchant bank offers consultancy and advisory to its clientele, most of which are high-net-worth individuals and multinational corporations.
4) Loans
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. Thatโs 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.
6) Role
A commercial bank operates like a financer. Their services spin around cash deposits, withdrawals, and loan advances.
On the contrary, a merchant bank acts as a financial advisor.
7) Customer Base
A commercial bank serves the general public. Thatโs to say; they offer various financial services to local citizens.
Merchant banks, however, are big houses operating in more than one nation.
Theyโre multinational financial institutions serving big corporations and high-profile individuals operating on a war chest of cash.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
