Difference Between Merchant Bank and Investment Bank

Banking plays a crucial role in facilitating trade and investments in the modern economy. These institutions come in various kinds.

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The differences are mainly brought about by the unique roles they play in facilitating the economy. Of the many kinds that are available, the investments and the merchant banks stand out.

We shall examine merchant and investment banks in detail and then go ahead to compare and contrast them. We believe by digging deeper, it is possible for you to gain the insight you need to do a better job at making good use of them.

Key Takeaways

  1. Merchant banks primarily offer financial advisory services, trade financing, and capital raising for small- to medium-sized businesses.
  2. Investment banks specialize in underwriting securities, mergers and acquisitions, and financial advisory services to large corporations and governments.
  3. Although both types of banks assist in raising capital, merchant banks cater to smaller businesses, while investment banks focus on large-scale financial transactions and services.

Merchant Bank vs Investment Bank

Merchant banks provide a range of financial services, including corporate finance, mergers and acquisitions, and underwriting of securities. They work with large corporations and governments. Investment banks primarily focus on raising capital for companies and governments. They do this by underwriting and issuing securities such as stocks and bonds.

Merchant Bank vs Investment Bank

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Comparison Table

Parameter of ComparisonMerchant BankInvestment Bank
PurposeMerchant banks exist primarily to provide business loans, facilitate international finance, and serve the various trading companies with underwriting roles.Investment banking exists to create capital for commercial and government entities.
FundingThe services of merchant banks are availed for commissions and interests. As such, they tend to be more expensive to come by comparatively.Those of the investment banking is however accessible via fees and funding on a case by case basis. They hence tend to be comparatively cheaper to come by.
ClienteleMerchant banks mainly deal with high net worth individuals and medium-sized corporate entities.Investment banks, however, deal with huge corporations as they have higher financial muscle power than the merchant banks.
Services ProvidedA merchant bank facilitates the exchange of goods and services mainly by offering advisory services to the companies that deal with those trade. It also underwrites debts, processes payments and facilitates access to credit.Investment banks however aid companies in expanding their services mainly by scaling new heights. They arrange for extra capital and help companies in widening their scope of operations.
Sheer SizeAs we have already hinted, the merchant banks are smaller in size and financial muscle power. These two are mainly due to the fact that they handle fewer clients.Conversely, investment banks are larger in scope and financial muscle power due to their handling of many clients and the use of huge amounts of money.

What is Merchant Bank?

A merchant bank is a financial institution that exists primarily to facilitate trade. In this role, it handles all the services that pertain to commerce like loan services, underwriting, financial advisory, and fundraising.

Unlike typical commercial banks, its services are limited to corporate entities alone.

On the whole, these banks target their services to the small and medium-sized enterprises that are incapable of leveraging the Initial Public Offering to grow their businesses. These banks are the ones you would want to look up to if your business is barely starting out.

What is the Investment Bank?

An investment bank is a financial institution that mainly facilitates the growth of businesses and investments.

It seeks to offer advice to firms on the best ways forward with regards to expansion, trying out newer markets, the launch of new products, the creation of capital, mergers, and acquisitions. Like the merchant bank, this one also targets the corporate entities alone.

As such, it does not accept deposits from the general public as other banks do.

Also, its services tend to target only those ambitious businesses that want to extend their reach and sphere of influence.

Main Differences Between Merchant Bank and Investment Bank

Character

A merchant bank exists primarily to facilitate trade. It is an institution that advises and guides mainly international merchants to settle their dues.

An investment bank, on the other hand, exists to aid businesses in expanding and furthering their reach and possibly raking in new clients. It is hence a good one to look up to for business expansion.

Scope

The merchant bank only engages in those activities that center around trade and the exchange of goods and services. Its investment bank counterpart, however, revolves around those activities that aim at expanding businesses and establishing their presence in a target market.

Target Market

A merchant bank targets much of its services to the high net worth individuals and the small and medium-sized enterprises. Its investment bank counterparts on the other hand mainly target corporations, parastatals, investment groups, and large-scale commercial entities.

Services Provided

The services of the merchant banks are mainly business loans, underwriting or advisory in nature. These stand in sharp contrast with the financing and capital creation that the investments banks ordinarily provide.

Applicability

Generally speaking, the services of a merchant come in handy when engaging in international trade more so, importation and exportation of merchandise. Those of the investment banks, on the other hand, are mainly applicable when attempting to expand a business within the borders of a sovereign state.

Operational Capital

To secure the services of a merchant bank, you will generally have to pay some commission for each service provided. Simply put: you get to pay for the service you secure from the bank.

Those of the investment banks are however provided for at a fee that is predetermined way before the service is provided.

Specialty

A merchant bank may be described as a business-to-business company in that it mainly transacts business with other commercial enterprises. The investment bank, however, is a business-to-consumer as it mainly deals with the consumers directly.

Regulatory Regime

Given that many of the services of the merchant banks transpire within the borders of two or more national entities, it is subject to international regulatory authorities and regimes. A typical investment bank is subject to local regulatory authorities though as it mainly operates within a national boundary.

Capital Base

Owing to their smaller scope and limited reach, the merchant banks have limited capital base. The opposite, however, applies to the investment banks.

Their capital bases are wider as they have to handle huge transactions and facilitate equally larger companies.

Potential of Diversification

By their limited and narrower scope of operations, it is unlikely that the merchant banks may diversify their services. They thus maintain only a narrower scope of operations.

The investment banks nonetheless are capable of venturing into added services that relate to buying and selling. These could include speculation and other pertinent investment-related services.

Difference Between Merchant Bank and Investment Bank
References
  1. https://ideas.repec.org/b/oxp/obooks/9780198283065.html
  2. https://www.tandfonline.com/doi/abs/10.1080/00076799300000085
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