Merchant Bank is a company that provides services like fundraising activities like IPOs, FPOs, loans, underwriting, financial advising or market making for big companies and individuals having huge net worth but these merchant banks do not provide for the basic banking services such as checking accounts, etc.
What is a Merchant bank?
Merchant banks provide financial services including underwriting, loan services, fundraising services, and financial advising to high net-worth individuals and small/mid-sized corporations.
It is not the bank for the general public. It’s similar to the investment bank, but a merchant bank and an investment bank are not the same. This bank provides services only to high net-worth individuals and multinational companies that have businesses all around the globe. On the other hand, an investment bank provides finance-related services to individuals, corporations, and government.
Services provided by a Merchant Bank
They provides an entire gamut of services.
Here are the top 5 services by a merchant bank to its clients –
- Project Counselling: A project counselling basically by following three steps – preparing the project reports, determining the right financing option, and assessing the merit of the project reports with the banks and financial institutions. Project counselling also involves filling up application forms and trying to fund the project via banks or financial institutions.
- Issue management: As the name suggests, this deals with issuing equity shares, preference shares, and debentures. acts as a partner to a high net-worth client by issuing shares & debentures to the general public.
- Underwriting services: One of the major services of a merchant bank is underwriting services. An underwriting is a guarantee given to the client stating that if the subscription is below a specified level, they would subscribe the said amount.
- Portfolio management: As mentioned earlier, this bank invests in different kinds of investments on behalf of clients; and then manages the whole investments as well.
- Loan Syndication: Syndication of Loan in simple terms means, bankers provide term loans to projects that need the money.
List of Top Merchant Banks
There are many banks in the world and some also provide investment banking services. The below list is taken from Leaderleague.com that ranked USA Merchant Banks in 2016 in TMT vertical.
- Bank of America Merrill Lynch
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
- Barclays Capital
- Credit Suisse
- Deutsche Bank AG
Highly Recommended Banks
- Jefferies International Ltd
- RBC Capital Markets
- SG CIB
- UBS Investment Bank
Merchant Bank vs Commercial Bank – Differences
The purpose of both the merchant and the commercial bank is to make money. But the scopes of both of these banks are quite different. Here are the differences between a commercial bank and a merchant bank –
- Customers: A commercial bank serves small business owners and the general public. On the other hand, a merchant bank only serves high net-worth individuals and multinational companies.
- Services: Under the scope of services also these two banks are quite different. A commercial bank provides a checking and savings bank account, accept fixed deposits, provide recurring deposits, etc. On the other hand, a merchant bank provides underwriting services, fundraising services, financial advising, etc.
- Investments: A commercial bank offers loans to small businesses, but it doesn’t directly invest in clients’ businesses. However, a merchant bank invests directly in the clients’ businesses.
- Transactions: The range of transactions in a commercial bank is quite broad. From a small savings account to offering loans to a business, a commercial bank offers a whole gamut of solutions. For a merchant bank, the range of transactions revolves around a niche area. A merchant bank won’t offer you services until you are a high net-worth individual.
- Making money: A commercial bank makes money by offering loans and earning interest. It also earns money by charging fees for checking accounts, ATM charges, charges on overdrafts, etc. On the other hand, a merchant bank makes money via fees they charge their big clients for providing financial services & consultation.
- Effect on the economy: The effect of a commercial bank on the economy is narrow. As a commercial bank serves the general public and deals with small to a large amount, it can only affect the economy of local/regional areas. It deals with big clients and has a reach in the national & international market. As a result, a merchant bank has a greater impact on the economy of a country.
For more details, please have a look at Commercial Banking vs Merchant Banking
Merchant Bank vs Investment Bank – Same or Different?
Often, a merchant bank is called an investment bank. But they’re not the same, especially the scope of work for both of these banks are quite different.
The main difference between a merchant and an investment bank is the clients they serve.
A merchant bank works with clients that are not big enough to go for initial public offering (IPO) but are privately held. That’s why to helps them in unique ways to raise capital. As for example, we can talk about private placements. Since private placements don’t require a privately held company to disclose as per the Security Exchange & Commission (SEC), it becomes easier for the privately held companies. On the other hand, an investment bank works with huge clients that have the funds large enough to go for IPO and they are large enough to provide time, effort, money to raise the capital through the traditional means. Plus, an investment bank also helps companies in mergers & acquisitions and also provides investment research to the clients.
It may often seem that an investment bank is the same because they both serve high net-worth individuals and they both are not open to the general public. But as their services are different, they don’t have the same name and same bandwidth. Since there’s a very slight difference in scope, merchant banks and investment banks are often synonymous.
This has been a guide to what is the meaning of Merchant Banks, services offered and list of top merchant banks. We also discuss how they are different from commercial banks and investment banks. You may also have a look at the following recommended articles on Investment Banking –
- Disadvantages of Redeemable Preference Shares
- Top 10 Banks in the United Kingdom
- Overview of Banks in Luxembourg
- Portfolio Manager Job Description
- Private Placement of Shares – Advantages and Disadvantages
- Proprietary Trading
- Investment Banking Resources
- How to Get Into Investment Banking
- Investment Banking Training