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.
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.
Comparison Table Between Commercial Banks and Merchant Banks
|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.
Frequently Asked Questions (FAQ) About Commercial Bank and Merchant Bank
What are the types of merchant banking?
Merchant banking is the practice of providing different banking and consultation services.
A merchant bank is basically a company that provides consulting services and other services like providing fund loans to large companies or any individual who has a high net worth.
The general public cannot receive the services of a merchant bank.
SEBI has declared 4 types of merchant bankers for registration:
Type I – Type I merchant bankers can provide services like underwriting, consulting, portfolio management, advising and issue managing.
Type II – They have the authority to do underwriting, consulting, advising and portfolio management but they are not supposed to do issue managing. They can do co-managing instead.
Type III – They cannot do issue managing, co-managing or even portfolio management. They only hold the right to do underwriting, consulting and advising.
Type IV – They can only do consulting and advising in case of any issue with capital.
How do Merchant Banks make money?
Merchant banks make money by charging fees for the services they provide like consulting, financial advising, portfolio management, etc.
Their money also comes with the interest on the loan they provide to big companies and individuals with high net worth.
What is a Merchant Bank Account?
A merchant bank account is just a type of account that allows businesses to receive payments in an electronic manner such as debit cards or credit cards.
Who can be a Merchant Banker?
Any brokerage firm or a commercial bank can be a merchant banker. But they cannot do it right away. They are required to create an FHC first. FHC means a financial holding company. FHC must be created to perform merchant banking activities separately as an entity.
How do I create a Merchant Account?
Here are the steps to create a merchant bank account.
1) Firstly you have to select the credit card brand with which you want to work.
2) Decide whether the payment is recurring billing or a one-time payment.
3) Provide all the necessary documents of your annual turnover to the financial institution.
4) Search for a local bank.
5) Create your company’s or your own website.
6) Collect every document as instructed and required by the bank and submit them.
7) You are also required to fill an application form to create your merchant account.
8) Once the bank will set up your account, you can start making transactions.
Both commercial banks and merchant banks operate as financial intermediaries catering to the varied needs of the customers they serve. They’re however not the same. Neither are they involved in the same line of services.
A merchant bank charges a service fee on the advisory and consultancy services they offer. Commercial banks, however, earn through the service fees imposed on the facilities they provide, including mobile banking, ATM, and net banking.
Also, while commercial banks offer repository services for saving, merchant banks don’t.
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