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What is a Merchant Bank?
A merchant bank is a financial institution that offers banking services and consultancy for corporations and high-value clients. Merchant banks offer loan services, financial advice, underwriting, and fundraising for their clients.
Unlike commercial or retail banks, merchant banks do not offer their services to the general public. The main target clients of merchant banks are multinational corporations.
There are quite a number of merchant banks globally, but some of the most well-known are Goldman Sachs, J.P. Morgan, and Citigroup.
Historically, merchant banks were the first modern banks. They originated in the middle ages in Italy and were quickly adopted by the greater England.
Initially, merchant banks provided their services to grain and cloth merchants. They offered loans to grain farmers at the start of a growing season. They would then offer underwriting (insurance) services to the farmer. This included guaranteeing the buyer of product delivery.
Over the years, merchant banking has evolved and is now mostly concerned with multinational corporations. The evolution of merchant banking has seen the expansion of multiple corporations. International trade has now become easier due to the availability of financing and consultancy from merchant banks.
What is an Investment Bank?
Investment banks are institutions that work as intermediaries between a business or an institution and investors. The activities that are handled by investment banks are more large-scale and complex.
The majority of clients handled by an investment bank are high-value clients, government institutions, and large corporations among other financial entities.
Some roles that investment banks play are similar to those of a merchant bank such as underwriting services, fundraising, and consultancy.
Investment banks also offer assistance with IPOs (Initial Public Offerings), that is, they help a business to go public for the first time. Some of the other roles that investment banks play are buy-hold-sell decisions, bonds and shares brokerage, and assistance with mergers and acquisitions.
Investment banks can be classified as either “buy side” or “sell side”. The “sell side” is involved with the trading of securities such as bonds and shares. The “buy side” on the other hand, is mostly involved with offering advice to purchasers of investment services. Examples of the entities on the “buy side” are mutual funds, hedge funds, private equity funds, and many more.
Investment banks can also be divided into either public or private functions. A screen separates the two functions to make sure that sensitive information is not leaked out.
Difference Between Merchant Banks and Investment Banks
- Merchant banks offer their services to medium to large clients while investment banks offer their services to large corporations and government institutions.
- Merchant banks offer loans but investment banks do not.
- While merchant banks play an advisory role, investment banks will go a step further in helping with mergers and acquisitions.
- Merchant banks do not help a new business go public. Investment banks on the other hand assist with IPOs (Initial Public Offerings).
- Merchant banks help businesses connect to consumers whereas investment banks help businesses connect to other businesses.
Comparison Between Merchant and Investment Bank
|Parameters of comparison
|Medium to Large corporations
|Government institutions and large corporations
|Do not offer loans
|Mergers and Acquisitions
|Offer advisory role but not assistance with mergers
|Offer assistance with mergers and acquisitions
|Do not help with IPOs
|Help a business go public by offering IPOs
|Offer B2C (Business to Consumer) links.
|Offer B2B (Business to Business) links