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

Key Takeaways

What is Merchant Bank

1. Merchant banks are financial institutions and companies that deal with international finance for multinational corporations, high-net-worth individuals (HWNIs) by providing legal financial advice, loan services, fundraising services, and investing equity capital.
2. Generally, banks provide services like checking accounts, investments, bill payments, etc. These banks are more focused on services for large corporations instead of the general public.
3.  Merchant banks for small scale institutions raise money by raising initial public offering (IPO) by corporate credit products providing, bridge financing, equity financing, 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 acquiring 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 ownerships 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 carry out financial advising, portfolio management, loan services, and fundraising services for large corporations and high net worth individuals.
7. Services like checking accounts are not provided by the merchant banks.

 How does it work?

1. They are mostly involved in the financial dealings of multi-national 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:

Advantages	Disadvantages
Merchant Banking customers get the most honest advice as they deal with experts, they also get counseling sessions fit for their respective business.	The services of merchant banking are very costly; this is one of the major disadvantages. The customer will be required to pay fees including counselors, which aren’t just normal bankers but experts in their fields.
The customers get other services like information on the status of the company, portfolio management, lease financing which 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, in case 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

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

References

1. https://ideas.repec.org/b/oxp/obooks/9780198283065.html