Commercial vs Merchant Bank: Difference and Comparison

Banks act as intermediaries between borrowers and depositors. They’re the financial institutions 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.

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Key Takeaways

  1. 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.
  2. 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.
  3. 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 customers’ accounts. Merchant banks provide large businesses and corporations corporate finance, underwriting, and investment advisory services.

Commercial Bank vs Merchant Bank

Comparison Table

Parameters of ComparisonCommercial BanksMerchant Banks
MeaningA banking establishment involved with essential banking functions such as lending money and accepting deposits from the general publicA financial institution specializing in international trade and offering a broad spectrum of financial services to multinational corporations and high-net-worth clients
Governing BodyConducted by the banking regulation Act of 1949Conducted as per the rules and regulations laid down by SEBI
Services OfferedGeneral banking servicesBanking consultancy services
Risk ExposureLessMore compared to commercial banks
RoleFinancerFinancial 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, 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 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.

commercial banks

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 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, it’s 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 don’t necessarily adhere to legal formalities, as in the case of IPO.

merchant bank

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.

It’s 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 SEBI’s 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. 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.

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. That’s to say; they offer various 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.

Difference Between Commercial Bank and Merchant Bank
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