What is a Merchant Bank? | Definition, Working vs Types

Key Takeaways

  1. A merchant bank is a financial institution that provides advisory and investment services to businesses, governments, and wealthy individuals.
  2. It specializes in private equity, underwriting, mergers and acquisitions, and project financing.
  3. Unlike commercial banks, merchant banks do not take deposits or provide retail banking services.
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What is Merchant Bank

  1. Merchant banks are financial institutions and companies that deal with international finance for multinational corporations and high-net-worth individuals (HWNIs) by providing legal and financial advice, loan services, fundraising services, and investing equity capital.
  2. Generally, banks provide services like checking accounts, investments, bill payments, etc. These banks focus more on services for large corporations than the general public.
  3.  Merchant banks for small-scale institutions raise money by raising initial public offerings (IPO) through corporate credit products providing bridge, equity, and mezzanine financing. They consult on trading and trade technology. They also issue and sell securities on behalf of corporations to investors.
  4.  Large merchant banks, however, place equity by acquiring a considerable share of the company’s ownership. The ownership is acquired keeping in mind the company’s future growth rate. This seals the gap between venture capital and public stock. The regulatory disclosure by merchant banks isn’t required, while acquiring ownership is very less.

The traditional functions include:

  1. It provides financial and underwriting to real estate.
  2. Trade finance is also provided along with foreign investment.
  3. Issuance of letter of credit (LOCs)
  4. Transfer of funds
  5. They issue securities to sophisticated investors through private placements.
  6. Merchant banks provide financial advising, portfolio management, loan, and fundraising services for large corporations and high-net-worth individuals.
  7. Merchant banks do not provide services like checking accounts.
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 How does it work?

  1. They are mostly involved in the financial dealings of multinational companies (MNCs).
  2. A global corporation willing to purchase a smaller business in a foreign region approaches a merchant bank.
  3. The merchant bank gives guidance on how to handle the sourcing phase.
  4. The merchant bank may also facilitate funding and lending services.
  5. They also work to collect money for big corporations.
  6. They also work in cross-border transactions.
  7. Merchant Bank works to provide the right approach to customers and assesses all key parameters for building a financial plan considering the present economic conditions.
  8. Merchant banks are service providers to large-scale corporations and wealth management services to rich individuals.

Advantages and Disadvantages of Merchant Banks:

Merchant Banking customers get the most honest advice as they deal with experts and get counselling sessions fit for their respective businesses.Merchant banking services are very costly; this is one of the major disadvantages. The customer will be required to pay fees, including counsellors, not just normal bankers but experts in their fields.  
The customers get other services like information on the company’s status, portfolio management, and lease financing, which is beneficial for companies that need constant funding for their business.    Merchant banking involves undertaking lots of risks for the future. Many different kinds of risks are involved, even with banks offering underwritings. The customer is not guaranteed 100% returns if the business goes down.  

Examples of Merchant Banks:

Leading Banks

  1. Goldman Sachs
  2. Bank of America Merrill Lynch
  3. Morgan Stanley
  4. Citigroup
  5. J.P. Morgan
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Excellent Banks

  1. Barclays Capital
  2. Credit Suisse
  3. Deutsche Bank AG
  4. Evercore

Highly Recommended Banks

  1. Jefferies International Ltd
  2. Lazard
  3. SG CIB
  4. Stifel
  5. RBC Capital Markets
  6. UBS Investment Bank
  1. https://ideas.repec.org/b/oxp/obooks/9780198283065.html

Last Updated : 11 June, 2023

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17 thoughts on “What is a Merchant Bank? | Definition, Working vs Types”

  1. The role of merchant banks is fascinating, from providing financial advising on real estate to consulting on trading technology. It is helping corporations to reach new heights. Technology combined with financing creates a new wave of opportunities for businesses.

    • Absolutely, Jason73. The future of merchant banking looks bright. It’s exciting to see the innovative ways they are contributing to the growth of corporations.

    • I agree. Merchant banks are playing a pivotal role in shaping the global economy. The level of expertise they bring to the table is truly commendable.

  2. The role of merchant banks in providing financial advising and portfolio management is invaluable. However, caution must be exercised due to the potential risks involved in merchant banking activities.

  3. Merchant banking plays a pivotal role in driving strategic financial planning and investment management. Its significance in the financial sector cannot be overstated.

  4. The involvement of merchant banks in cross-border transactions is noteworthy. It demonstrates the global impact of their operations, and how they effectively facilitate international business activities.

    • Absolutely, Joanne Ward. The ability of merchant banks to navigate the complexities of cross-border transactions is impressive and plays a key role in supporting global business expansion.

    • The international scope of merchant banking enables companies to engage in global business transactions more efficiently, contributing to economic growth and stability.

  5. While merchant banking offers unparalleled financial services to large corporations, it comes with a downside – the high costs and inherent risks involved. The balance between risk management and financial growth is a critical aspect.

  6. Merchant banking is essential for facilitating international business transactions and providing custom financial strategies. It’s a part of the financial system that is overlooked, but it plays a crucial role.

    • Indeed, Vicky73. Merchant banks contribute significantly to global finance, which in turn impacts economic development and growth. Their services are essential for addressing the complex financial needs of large corporations and wealthy individuals.

  7. Merchant banks are synonymous with high-level financial expertise, yet the inherent risks and costs involved underscore the need for thorough evaluation and risk management strategies.

  8. Merchant banking offers crucial financial advising and fundraising services to large corporations, but it’s essential to recognize the associated costs and risks. Businesses must carefully weigh these considerations.

  9. Merchant banking’s focus on providing tailored financial solutions to large corporations and high-net-worth individuals is driven by expertise and in-depth analysis. It’s a sector that thrives on excellence.

    • The fusion of expertise and comprehensive financial services offered by merchant banks fosters a climate of innovation and strategic growth for businesses and individuals.

    • Absolutely, Jayden Jackson. The specialized financial services offered by merchant banks are indispensable for the successful implementation of intricate financial strategies across diverse sectors and regions.

  10. The involvement of merchant banks in the issuance of securities and provision of financial advising is commendable. However, it’s important to acknowledge the inherent risks associated with the services provided.


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