Difference Between Investment Banking and Merchant Banking (With Table)

Management is a critical component of the banking industry. The finance sector’s strongholds are Investment banking and Merchant banking. Investment banking, as well as Merchant banking, play a vital role in today’s economic environment to favor the best interests of investors. Both aim to serve as financial instruments in the business sector, providing the organization with adequate resources and benefits.

Investment Banking vs Merchant Banking

The difference between Investment banking and Merchant banking is that investment banking helps the business by providing services likes advisory, merging, and acquisition while merchant banking deals with national and international finance.

Investment banking is a branch of a bank that provides advisory services to government and corporate clients such as capital raising, mergers, and acquisitions. In a nutshell, these banks act as a bridge between a company and a potential investor. Investors invest in corporations, while corporations need investment to expand in the market. Investment banking serves as a source of funding for a variety of businesses, government agencies, and other organizations.

Merchant banking is services provided by the financial institutions called Merchant Banks that specialize in international finance, high-net-worth individuals, trade finance for multinational corporations, and companies seeking to raise capital through an IPO (IPO). Merchant banks also provide advice on fundraising and other significant matters that arise during a transaction between two firms.

Comparison Table Between Investment Banking and Merchant Banking

Parameters of ComparisonInvestment BankingMerchant Banking
MeaningThese are specialized banks handling the financial services (advisory services, merger & acquisition, etc.) of a government organization or large public or private sector business.These are specialized banking services offering financial services to a multinational company and people having high net worth.
ServicesMerger and Acquisition, Advisory assistance, Private Equity, Venture capital, and Underwriting, Sales and trading, Research servicesPromotion of projects, Syndication services for loans, Corporate counseling, Underwriting and placement of securities, Venture capital, Portfolio management
Deals withLarge private or public corporations, Government organizationsSmall scale industries,  medium scale industries, high net worth individuals
Banks example J.P. Morgan, Morgan Stanley, Credit Suisse, Merrill Lynch, Bank of America, Goldman Sachs, Barclays, etc.Bank of Maharashtra, Barclay Bank PLC, Bajaj Capital Ltd,  Axis Bank LTD, etc.
Facilitates IPO and Merger & Acquisition servicesYesNo

What is Investment Banking?

The financial assistance that offers advisory services to a government, company, or any entity is provided by investment banking methods. Financial capital is used in investment banking transactions. Commercial and retail banking is not the same as investment banking. Unlike other banks, investment banks do not accept taking deposits from their customers.

Investment banking is divided into three parts: front office, middle office, and back office. In both investment banking and the business, the front office produces income. When it comes to the middle office, it is responsible for risk management, treasury oversight, and corporate strategy growth. The back office monitors the trades that have been completed and makes any necessary adjustments for the transaction.

Investment banking firms that are highly skilled normally assist with one of two main activities: purchasing or selling a business. It aims to raise an investor’s capital by offering its financial services to the investor. They assist in the promotion of new mergers and acquisitions, verification of new debts, selling of shares, parity securities for all forms of firms, and trades for both reputable corporations and private investors.

What is Merchant Banking?

Merchant banking specializes in international financial transactions including foreign real estate investment, foreign corporate investment, and trade finance. Merchant banks offer services such as LC (letters of credit) issuance, trade advice, cross-border fund transfers, and so on. Merchant bank customers are usually small to medium-sized businesses. They do not provide depositary services to the general public as commercial banks do.

They also sell shares on behalf of companies through private placements to sophisticated investors who don’t need as much regulatory disclosure. To bridge the gap between venture capital and public stock, large merchant banks acquire a significant share of ownership from companies with a significant potential for high growth rates and position equity privately with other financial institutions.

Traditional merchant banks specialize in international financings, such as global corporate investment, trade finance, and international real estate investment. Although some of these roles can be shared with investment banks, others, such as issuing letters of credit and international funds transfers, are mostly handled by merchant banks.

Main Differences Between Investment Banking and Merchant Banking

  1. Investment banks typically serve the government, corporations, and institutional investors while Merchant banks serve small and medium-sized businesses as well as high-net-worth individuals.
  2. Investment banks specialize in equity share underwriting, financial security underwriting, merger, and acquisition advisory services for both buyers and sellers while merchant banks specialize in loan syndication, cross-border trade financing, and advisory services.
  3. Investment banks do not help with international trade finance while merchant banks help with international trade finance via letters of credit.
  4. During mergers and acquisitions, investment banks provide analysis, audit, and advisory services to their clients, while merchant banks do not.
  5. Merchant banking provides advice on paying off debts and obtaining loans for businesses while Investment banking does not.

Conclusion

Although Investment Banking and Merchant Banking are both subsets of the same industry, they offer different financial services. Investment banking is a branch of a bank that provides advisory services such as capital raising, mergers, and acquisitions to their clients. Merchant banking offers services such as loan syndication, portfolio management, and venture capital to their clients. Investment banking is beneficial to businesses to accelerate their capital or cost of production.

In a nutshell, investment banks underwrite debt and equity and promote mergers and acquisitions between companies, while merchant banks facilitate foreign exchange and transactions between companies. Furthermore, it can be said that investment banks have a broad concept, while merchant banks have a narrow concept.  

References

  1. https://heinonline.org/HOL/LandingPage?handle=hein.journals/fdicbnkrv14&div=6&id=&page=
  2. https://link.springer.com/content/pdf/10.1057/9780230001114.pdf
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