If you need to borrow money, exchange currency, or get help with your portfolio, you can go to your local retail bank or credit union. But what about large companies? Where do they go when they need these same financial services — but at a much larger scale?
Merchant banks offer financial solutions for large, private corporations. These banks aren’t depository institutions like your local bank; they don’t offer checking accounts, and they don’t cater to the public. But they’re not investment banks either. Instead, they cater to businesses in the middle — those that have complex financial needs but typically haven’t gone public.
Learn more about what merchant banks are and how they compare to other types of financial institutions.
Merchant banks are financial institutions that provide services to private companies and high-net-worth individuals (HNWIs), not the general public. They’re nondepository institutions, meaning they don’t offer checking, savings, and other deposit accounts. Instead, merchant banks help businesses grow and restructure by arranging financing, providing advisory services, and even investing their own capital in them.
Merchant banks serve the sweet spot between smaller businesses and public corporations. These companies are too big for retail or commercial banks but not big enough to be investment bank customers. Merchant banks cater to the particular needs of these businesses, which often include fundraising, financing, underwriting, consulting, portfolio management, and more.
Even though merchant banks don’t serve the general public, they may have retail and commercial arms that do.
Note: Merchant banks have a different meaning in the United Kingdom. There, they refer to investment banks. In the U.S., merchant banks and investment banks are two separate types of financial institutions.
Again, merchant banks don’t offer the same services as retail banks. That’s because they serve a different audience, which has different needs.
Here’s a snapshot of some common services provided by merchant banks:
Investing: Merchant banks might invest in private companies or purchase minority stakes. They may operate similarly to private equity, but on a smaller scale.
Advising: Merchant banks help their clients with complex financial decisions and transactions, and they may even arrange small-scale mergers and acquisitions.
Fundraising, financing, and underwriting: Merchant banks can help their customers get necessary funding by connecting them with interested investors or lenders. They often help their clients secure letters of credit, as well as mezzanine, bridge, or equity financing.
Loan syndication: Large businesses’ borrowing needs may surpass what a single bank can offer, in which case they need to secure financing from several institutions. Some merchant banks help businesses secure financing from several sources, a process known as loan syndication.
Currency exchange and trade finance: Merchant banks often work with large, multinational businesses and can help manage their international transactions.
Portfolio management: Merchant banks may offer portfolio management for institutional investor clients, helping them buy or sell securities with the goal of growing their wealth.
Merchant banks can be mistaken for other types of financial institutions, especially others that serve businesses. Here’s a closer look at how merchant banks compare to commercial banks and investment banks.
Both merchant banks and commercial banks cater to businesses, but the services they offer — and even the size of the businesses they serve — differ.
Commercial banks serve businesses of varying sizes with deposit accounts, business loans and lines of credit, payment processing, foreign transactions, and wealth management. Essentially, commercial banks help businesses with their day-to-day transactions and money management.
Merchant banks, on the other hand, don’t offer deposit accounts. Instead, merchant bank services focus on more complex business finance with the goal of helping larger businesses grow.
The difference between merchant banks and investment banks can be tough to nail down — likely due in part to the fact that investment banks are known as merchant banks in the U.K. However, these two types of banks have some key differences in the U.S.
First, investment banks often serve public companies, while merchant banks primarily serve private companies. This also means merchant bank customers tend to be smaller companies compared to investment bank customers.
Services also differ between investment and merchant banks. Investment banking often involves facilitating mergers and acquisitions and IPOs (initial public offerings). Merchant banks typically don’t offer these services, as they work with smaller companies.
Additionally, merchant banks may invest their own capital into companies, while investment banks act more like deal brokers without putting their own money on the line.
Read more: 9 common types of banks: Which one is right for you?
Merchant banks help private businesses and high-net-worth individuals make money by facilitating deals, arranging financing, and investing their own capital.
What is the difference between a merchant bank and a regular bank?
Merchant banks cater to complex business needs, while retail banks serve individuals by protecting their deposits and providing them with loans. While merchant banks serve large businesses, assisting them with deals and financing, retail banks cater to individuals’ everyday banking needs. Common retail bank offerings include checking accounts, savings accounts, loans, and mortgages.
Merchant banks make money by charging fees for their range of services, including advising, underwriting, and financing services. They can also make money through returns on their investments.
