Table of Contents
What Is a Merchant Bank?
Let me explain what a merchant bank really is. It's a financial institution that handles underwriting, loan services, financial advising, and fundraising for large corporations and high-net-worth individuals (HNWI).
These banks focus on privately-owned corporations. Unlike retail or commercial banks, they don't typically serve the general public. And unlike investment banks, they target private companies, not public ones. Think of big names like JPMorgan Chase, Goldman Sachs, and Citigroup as examples.
Key Takeaways
Merchant banks are non-depository institutions specializing in financial services for private corporations or specialty clients. They provide loans, advising, private equity, and fundraising for large corporations and HNWI. They don't generally serve the public, though some have retail arms. Again, examples include JPMorgan Chase, Goldman Sachs, and Citigroup.
How Merchant Banks Work
Merchant banks operate as non-depository institutions dealing with international finance for multinational corporations. They offer services like private equity, fundraising, and business loans to private companies.
Their services aren't aimed at the general public. They might handle some banking for wealthy individuals, but they're geared toward corporate clients. They could have a retail arm, but they don't offer things like checking accounts.
In the UK, 'merchant bank' means investment bank, but in the US, it's narrower. Here, they focus on services for multinational corporations and HNWI doing business across countries. Remember, unlike investment banks, US merchant banks don't target publicly held companies.
Functions of a Merchant Bank
Merchant banks deliver financial and advisory services to help corporate clients run their businesses. They often assist companies too small for public fundraising via an IPO.
On financing and loans, they handle international financing and underwriting, including real estate, trade finance, and foreign investment. They issue letters of credit too. They can provide creative financing, like helping issue securities through private placement, which involves less regulation and targets sophisticated investors.
For international transactions, if a multinational operates in various countries, a merchant bank finances operations everywhere and manages currency exchanges. When making a major purchase abroad, you'd use a merchant bank to transfer funds via a letter of credit.
Example of Merchant Banking
Suppose Company ABC in the US wants to buy Company XYZ in Germany. They'd hire a merchant bank to facilitate it. The bank advises on structuring the deal and helps with financing and underwriting.
The German sellers get a letter of credit from the bank as payment. The bank also guides Company ABC through legal and regulatory issues for doing business in Germany.
Merchant Banks vs. Investment Banks
Merchant and investment banks are similar, but let's break it down. Investment banks underwrite and sell securities to the public via IPOs. Their clients are large corporations ready to register securities publicly. They advise on M&A and provide investment research.
Merchant banks are fee-based, while investment banks have fees plus income from interest and leases. Both require disclosures for securities sales, like audits by CPAs for investor decisions.
Key Differences
- Merchant Banks: Underwrite and sell securities for private placements; Fee-based income; Clients are private, pre-IPO companies.
- Investment Banks: Underwrite and sell securities to the public; Income from fees and advisory services; Clients are large public companies.
What Is a Merchant Bank Account?
A merchant bank account is set up for business clients to receive debit, credit cards, or electronic payments.
What Does Merchant Services Mean on a Bank Statement?
Merchant services are intermediaries between a bank and its business clients, handling payment processing, cash advances, online transactions, check services, or other cash flow needs.
Can I Open an Account at a Merchant Bank?
Merchant banks don't offer consumer services like retail banks. They might serve wealthy individuals, but focus on financing and investment for commercial enterprises.
The Bottom Line
Merchant banks provide loans and capital for businesses, plus consulting or structuring international deals. They differ from retail and investment banks, and while they might have retail divisions, they don't serve the general public.
Other articles for you
The Situational Leadership Model advocates adapting leadership styles based on employees' maturity levels to achieve better outcomes.
A kangaroo bond is a foreign bond issued by non-Australian entities in the Australian market, denominated in Australian dollars.
The Guinea Franc (GNF) is the national currency of Guinea, with a history linked to its independence and economic challenges.
A non-accredited investor is someone who doesn't meet SEC's financial criteria and faces restrictions on certain high-risk investments to protect them from potential losses.
A store of value is an asset that maintains its worth over time without depreciating.
An economy is a system involving production, consumption, and distribution of goods and services within a region or entity.
Brokerage fees are charges by brokers for executing transactions or providing services in various industries, with ways to minimize or eliminate them in stock trading.
A negotiable certificate of deposit is a high-value CD guaranteed by banks, tradable in liquid markets, and designed for large investors seeking low-risk returns.
Inside sales is the process of selling products or services remotely through phone, email, or online methods, contrasting with in-person outside sales.
Withholding tax is the income tax deducted by employers from employees' paychecks and paid directly to the government as a credit toward annual taxes.