Difference between Investment Banking and Merchant Banking

Difference between Investment Banking and Merchant Banking

In this lesson, we will discuss some key difference between investment banking and merchant banking services. Although, unlike commercial banks, both investment banks and merchant banks are engaged in specialized financial services to business corporations, yet there are some critical differences lies in their offered services, however, there is one similarity between both that is none of the banks provide their services to the general public.

Hence, let us discuss the key differences between investment banking and merchant banking.

Investment Banking vs Merchant Banking:

Investment banks are specialised kinds of financial institutions or corporates that provide mainly security underwriting and advisory services to large corporations and Government. The main activity of investment banking services is underwriting the financial securities such as bonds and stock from the issuer and resell them to the group of investors. In fact, investment banks establish the bridge between the issuer who require finance and investors who have funds and seeking opportunities to invest their funds. Some largest investment banks in the world are J.P. Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Goldman Sachs, Barclays, Bank of America etc.

On the other hand, Merchant Banks are those financial companies which deal mainly in international finance, trade finance for multinational companies, high net worth individuals or the companies struggling in raising funds through an initial public offering (IPO). Merchant banks also provide advisory services regarding fundraising and other significant affairs during trade between two companies. Some examples of merchant banks are Bajaj Capital Ltd, Bank of Maharashtra, Barclay Bank PLC, Axis Bank LTD etc.

Read Also, Difference Between Commercial Banks and Merchant Banks

As per the above explanation, we can easily understand that merchant banks and investment banks can be distinguished based on their clients and services which they offer. Therefore, let us discuss the functions of investment banks and merchant banks.

The main functions of investment banks are:

  1. Underwriting of financial securities for Government and large private and public corporations.
  2. Equity Research and Advisory Services
  3. Assists Mergers and Acquisitions 
  4. Facilitates Initial Public Offering (IPO)
  5. Trading and Asset Management

Main functions of merchant banks are:

  1. Facilitates international trade finance for multinational companies.
  2. Loan syndication service
  3. Arrange finance through private placement 
  4. Advisory services

Difference between Investment Banking and Merchant Banking:

  • Investment banks typically provide their services to the Government, corporations and institutional investors, on the other hand, merchant banks generally provide their services to small and medium-scale companies and individuals having high net worth.
  • Investment banks mainly deal with financial security underwriting, underwriting of equity share, merger and acquisition advisory services for both the companies whether purchaser or seller whereas merchant banks majorly facilitates cross border trade finance, loan syndication and advisory services.
  • Investment banks facilitate the Government in issuing debt securities like government bonds, T-Bills or debentures by purchasing and reselling them to the group of investors, on the other hand, merchant banks arrange finance for mediocre companies which are unable to raise funds through IPO by private placement or arranging business loans.
  • Investment banks don’t facilitate international trade finance, however, merchant banks facilitate international trade finance through the letter of credit
  • Investment banks offer research, audit and advisory services during merger and acquisition to their clients whereas merchant banks don’t provide merger and acquisition services.
  • Investment banks act as a bridge between corporations and investors, on the other hand, merchant banks act as a middleman between one party to another party (B2B) during sale and purchase of goods and services. In fact, merchant banks provide advisory services on settling the dues or acquiring loans for the companies.

Investment Banking and Merchant Banking (Comparison Table):

BASIS OF COMPARISONINVESTMENT BANKINGMERCHANT BANKING
MeaningInvestment banks are specialised kinds of financial institutions or corporates that provide mainly security underwriting and advisory services to large corporations and Government.Merchant Banks are those financial companies which deal mainly in international finance, trade finance for multinational companies, high net worth individuals.
Deals WithGovernment, Large Public or Private corporationsSmall and Medium industries, high net worth individuals
Types of ServiceDebt and Equity underwriting, Auditing, research, advisory services, merger and acquisitionInternational trade finance, loan syndication services, advisory services
ScopeBroadNarrow
Name of BanksJ.P. Morgan, Credit Suisse, Morgan Stanely, Merrill LynchBajaj Capital Ltd, Bank of Maharashtra, Barclay Bank PLC,Bajaj Capital Ltd, Bank of Maharashtra, Barclay Bank PLC
Facilitate IPOYESNO
Merger & Acquisition ServiceYESNO

Conclusion:

Hope you have understood the difference between investment banking vs merchant banking. In a nutshell, investment banks engage in underwriting of debt and equity and facilitate merger and acquisition between two organisation, on the other hand, merchant banks serve international trade and transactions between two business entity. In addition, we can say investment banks are broad concept whereas merchant banks are limited to a narrow concept.

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Reference: CFI

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