Merchant Bank - Explained
What is a Merchant Bank?
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Table of ContentsWhat is a Merchant Bank?How Does a Merchant Bank Work?How Merchant Banks Facilitate TradeMerchant Banks vs. Investment Banks
What is a Merchant Bank?
A merchant bank is a bank that offers commercial services in the banking and investment industry. Services offered by a merchant bank include underwriting services, loan services, fundraising, and other financial services. The services offered by merchant banks restricted to particular customers and are not for the general public. These services are designed for individuals who have high net-worth and large corporations. A merchant bank provides specialized advisory services for high net-worth individuals, this bank is similar to an investment bank. Merchant banks are different from contemporary banks, they offer specialized services and deal with international trade.
How Does a Merchant Bank Work?
In the United States, merchant banks are financial institutions that execute large transactions and international deals. The popular examples of world merchant banks are Citigroup, J.P. Morgan, and Goldman Sachs. Merchant banks are called investment banks in the UK, they offer services to business owners who have businesses in different locations and owners of large corporations. Merchant banks have expertise in international financing and foreign investment. They offer underwriting services and execute other transactions for their clients. For instance, if a company in the United Kingdom wants to acquire or purchase another company located in Japan, a merchant bank will be hired to facilitate the transaction.
How Merchant Banks Facilitate Trade
Merchant banks facilitate international trades and manage corporate accounts for businesses with multiple business outlets in different locations. Due to the ability of merchant banks to facilitate and finance transactions between companies, they have become significant to large corporations. Through a letter of credit (LOC), a merchant bank transfers funds to businesses for the purpose of financing a transaction such as the purchase of a business outlet. With the LOC, location does not pose a barrier for recipients receiving payment for a purchase. For instance, a seller in Japan can receive payment for a purchase made by a company located in the United Kingdom.
Merchant Banks vs. Investment Banks
Despite that there are certain similarities that exist between a merchant bank and an investment bank, there are also factors that distinguish them. Typically, both banks do not accept deposits of providing checking accounts to individuals. An investment bank as a financial institution buys newly issued shares of companies and resell the shares to the general public through an initial public offering (IPO). A merchant bank facilitates fundraising for companies that cannot raise funds in an IPO. There are varieties of services that investment banks and merchant banks offer. For instance, investment banks execute mergers and acquisitions for companies and offer advisory services for financial transactions. Merchant banks also provide underwriting services, loan services, advisory services, and others. Both merchant banks and investment banks offer their services in exchange for a fee. Here are some important points to know about a merchant bank;
- A merchant bank is a financial bank that conducts fundraising services, loan services, and underwriting services for large corporations and individuals with high net-worth.
- The most popular world merchant banks include J.P. Morgan, Citigroup, Goldman Sachs, and others.
- Merchant banks are different from commercial banks that offer checking accounts and accept deposits from customers.
- Merchant banks perform intermediary roles and also facilitate interaction transactions.
- All services offered by a merchant bank is in exchange for a fee.