Merchant banks and investment banks are financial entities that offer services to businesses and HNIs (High Net Worth Individuals). Unlike commercial or retail banks, these banks do not offer financial services to individual customers. Moreover, the Investment Bank's traditional role was to provide underwriting services and assist corporations with their IPO (Initial Public Offering) processes. Similarly, the Merchant Bank's historical role was to provide trade finance services to companies and high-net-worth individuals.
There is a fine line between Merchant Banking and Investment Banking in today's world. Merchant Banks and Investment Banks conduct a wide range of duties and activities in today's dynamic environment. Furthermore, both Merchant and Investment Banks demand fees and a portion of profits/ownership in exchange for their services.
Merchant Bank vs Investment Bank
Investment banks are specialized financial institutions or corporations that assist large corporations and the government with security underwriting and advising services. Underwriting financial securities such as bonds and shares from issuers and reselling them to a group of investors is the main activity of investment banking services. In truth, investment banks link issuers in need of capital and investors looking for new ways to put their money to work. Some of the world's largest investment banks are J.P. Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Goldman Sachs, Barclays, and Bank of America.
On the other hand, Merchant Banks are financial institutions specializing in international financing, trade finance mega corporations, high net worth individuals, and firms seeking to raise capital through an initial public offering. Merchant banks provide advice on fundraising and various important matters that arise throughout a trade between two companies. Bajaj Capital Ltd, Bank of Maharashtra, Barclay Bank PLC, Axis Bank LTD, and others are instances of merchant banks.
According to the previous description, merchant banks and investment banks can vary based on the clients they serve and the services they provide.
Difference Between Merchant Bank and Investment Bank in Tabular Form
|Basis||Investment Bank||Merchant Bank|
|Scope||It deals with larger companies.||
It deals with larger companies.
Deals with small and medium companies.
|Activity||Traditional investment banks were engaged in the underwriting of shares and issuance of shares||Merchant banks are well known in international financial activities.|
|Direct investment||Don’t make direct investments.||Raises funds through various financing.|
|Merger &Acquisition||Investment banks assist companies in the acquisition and mergers||Traditional Merchant banks not assist companies in the Merger and acquisitions|
|Ipo||Raises funds through ipo’s.||Raises funds through private placements.|
|Scale||Investment banks emphasis mainly on large-scale private and public companies||Merchant banks mainly provide services to small-scale companies.|
|Trade Financing||Investment Banks||Merchant banks offer trade financing to their clients|
|Connecting links||Between business to customer.||Between one business to another.|
What is Merchant Bank?
A Merchant Bank's primary and traditional purpose is to provide financial and advisory services in international trade and trade finance. Merchant Banking also offers underwriting, advising, finance, portfolio, and insurance services, among other things. And the majority of these services are provided on a small scale, with the majority of clients being small businesses or high-net-worth individuals.
Functions of Merchant Bank
- Merchant banking's primary and long-standing purpose is to facilitate international trade and finance. When a multinational corporation expresses interest in buying a small domestic enterprise, it helps to boost international trade. In addition, it offers cross-border transactional services.
- Clients of Merchant Bank benefit from portfolio management services provided by the bank (PMS). They also assist small businesses and high-net-worth individuals (HNIs) in making financial decisions and trading on their behalf.
- Merchant Banks can assist companies in raising financing for expansion and growth. And the money can be raised in various ways, including primary and secondary stock, debentures, and other instruments. Furthermore, Merchant Banks may become venture capitalists and invest directly in the company.
- Merchant Banking provides promotional services. When firms are new to the market, these banks may assist them in promoting their brand to establish a foothold in the market.
- The Merchant Bank's fourth duty is to provide project finance services. In this case, the Merchant Bank provides Loan Syndication services so that the client can obtain a loan from any other financial institution or commercial bank.
- Clients can use Merchant Banking to raise cash through a Private Placement or a Public Offering.
The services offered by a merchant bank are diverse.
Promotion of a project
Corporate/companies might use project promotion or project consulting services to assess a project's profitability. For each of its clients, a merchant bank develops a project report that includes capital structure, liquidity analysis, profitability analysis, and economic and technical factors.
Merchant Bankers organize term (short, medium, and long) loans for their customers. It primarily consists of calculating the capital requirements for a particular project. Merchant banks assess loan proposals and carry out step-by-step actions such as initial negotiations with financial institutions, loan application preparation, etc.
Merchant banks offer their services to clients to ensure that the issue is fully subscribed or at least partially subscribed.
Counseling for companies
Merchant bankers provide their clients with individualized financial solutions. They offer various types of consulting services.
Venture capital is one of the financing types that allow businesses.
Merchant banks provide venture capital services to their customers. It entails meetings with numerous venture capital firms and the preparation of the necessary paperwork, such as a project presentation, application preparation, negotiating terms and conditions, and finally receiving their approval letter.
Securities are placed.
A merchant banker assists in the placement and distribution of a wide range of securities. They help distribute stock, bonds, and insurance products, among other things.
What is Investment Bank?
An Investment Bank's primary and conventional duty is to provide underwriting and mergers and acquisitions (M&A) services. It is primarily concerned with generating money for corporations, states, the federal government, and other legal organizations. In addition, they serve as a link between the issuer of securities and the investors. The Investment Bank successfully plans and manages the financial side of a corporation, government, or financial organization. It identifies risks in projects and helps the client save time and money. They also provide financial services in addition to their intermediary position.
Functions of Investment Bank
- An Investment Bank's primary purpose is to underwrite the security used to raise financing. And it all starts with underwriting the security (equity or debt), valuation, prospectus creation, pricing, documentation, and ultimate security allocation, among other things.
- An Investment Bank's second primary job is to assist a company in the mergers and acquisitions process. The Investment Bank plays a critical role throughout the process, from assessing the target firm to finalizing the deal.
- Clients can also pay for advice and consultancy services provided by investment banking.
- These banks offer services such as proprietary trading and securities trading. With the help of an Investment Bank, institutional investors actively trade in hedge funds, stocks, options, and other financial instruments.
- Clients benefit from primary and secondary research services provided by investment banks.
- Investment banks also provide back-end services such as risk management, financial control, business strategy, etc.
- Investment banks help companies restructure their capital to make them more profitable.
What are the fundamentals of investment banking?
Services for Research
Clients of investment banks receive research services. It entails stock buy and sell advice, financial statement analysis, financial forecasting, and financial modelling, among other things. Investment banks also provide fixed income research, financial research, economic research, and analytical support across various asset classes, markets, and client segments, in addition to equities research.
Trading and Sales
An investment bank's sales and trading activities are very different from what you'll find in research.
As a financial middleman, an investment bank assists its customers in raising capital via IPOs, FPOs, and private placements. They generally assist their clients with debt and stock issues to raise funds. This includes obtaining funds on behalf of the customer through IPOs (Initial Public Offerings), private placements, and other means. Consulting fees are how investment banks make money. For capital raising, clients enlisted the services of investment banks.
When an investment bank underwrites equity or any other debt instrument, it assures its customers that investors will buy its new stock issuance. Investment banks serve as a go-between for their client and the investors.
Acquisitions and Mergers
This is one of the most important duties that an investment bank performs. Clients of investment banks receive assistance on mergers and acquisitions. Investment banks create different merger and acquisition models. To evaluate a company, investment bankers use accretion or dilution analysis. Banks also do a synergy analysis.
The role of the Investment Bank in capital restructuring and reorganization is crucial. Investment banking is reorganizing a corporation to make it more profitable.
Key Differences Between Merchant Bank and Investment Bank in Points
Today, the duties of Investment Banking and Merchant Banking are mostly intertwined. However, there are a few non-exhaustive distinctions between the two. The following are some of them:-
The primary activity
The most significant distinction between a Merchant Bank and an Investment Bank is their primary and traditional business operations. Investment banks are heavily involved in securities underwriting and issuance. On the other hand, Mercantile banks are heavily involved in international financial and trade activity. To put it another way, their working methods are distinct. In simple terms, a Merchant Bank's main job is to enable commerce, loan syndication, and other financial transactions. An Investment Bank's main job is to assist businesses in growing and expanding and underwrite public securities offerings.
Compared to a Merchant Bank, Investment Banks have a far broader reach. Large corporations and High Net Worth Individuals are the main clients of investment banks (HNIs). Merchant banks work with small businesses and high-net-worth individuals.
Merchant banks assist small businesses in raising cash through equity, bridge, and mezzanine finance. They may invest directly in the client's business alongside other investors. Clients of investment banks are typically giant corporations with solid financial backgrounds. To put it another way, Investment Banks seldom make direct investments.
Activities in International Financing
Both Investment Banks and Merchant Banks engage in trade finance, international investments, and foreign real estate investment, among other operations. However, a few key trade finance activities are only handled by Merchant Banks, such as international cash transfers and letters of credit (LOC).
Acquisitions and Mergers (M & A)
Previously, only Investment Banks provided Mergers and Acquisitions (M & M&A) services to clients, but now Merchant Banks do so. Although Merchant Banks only provide M&A services to small businesses, they do so on a smaller scale.
Based on a fee or a rental
Merchant banks charge fees for the services they give to their customers. On the other hand, investment banks provide services for a charge or on a rental basis. Investment banks occasionally provide lease rental, interest, or profit-sharing services.
A private placement or a public offering
Because their clientele is medium or small-scale businesses, merchant banks primarily raise funds through private placement. These little businesses aren't big enough, and their needs aren't enough to justify going public. On the other hand, investment banks raise money primarily through initial public offerings (IPOs) and occasionally through private placements. The size of fund mobilization is also still rather substantial.
Investment banks, in general, serve as a link between the entity and the investor (B2C). To facilitate trade, Merchant Banks usually operate as a connecting connection between one business entity and another, i.e. B2B.
Investment banking and merchant banking are sometimes confused. Even though both the Bank and the Bank provide a wide range of services in today's world, their primary functions are distinct. Investment banks underwrite loans and equity and assist mergers and acquisitions between businesses, whereas merchant banks facilitate international trade and transactions between businesses. Furthermore, we might say that investment banks have a broad notion, whereas commercial banks have a narrow one. A merchant bank supports corporations in issuing shares through private placement, whereas an investment bank underwrites and sells shares to the general public through an initial public offering.