Merchant bank

A merchant bank is a financial institution primarily focused on international trade transactions. Its main clients are international corporations and large investors from different countries. In addition, merchant banks provide services such as underwriting, financial advising, loans, and fundraising to large entities and HNWI (high-net-worth individuals).

It’s hard to imagine any modern business performance without a bank. These financial institutions are vital for sellers and purchasers, for they allow them to pay and accept payments and also issue loans to help customers save their funds. The modern banking structure includes many types of institutions, and merchant bank is one of the most important.

What is the difference between a commercial bank and a merchant bank?

An ordinary commercial and a merchant bank have several significant differences between them.

Commercial banks

Commercial banks provide basic personal services to individuals and businesses, such as loans and deposits. The banking regulation legislation determines their activity.

Merchant banks

Merchant banks focus on international transactions. In addition to basic banking products and services, merchant banks offer businesses expert financial advisory services.

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What are the functions of a merchant bank?

The range of services of a merchant bank is very diverse. It includes the following:

• underwriting – taking the risk in the event of unfavourable conditions during certain payments (they do it for a fee);
• financial advising;
• special services for exporters and importers of goods;
• issuing letters of credit;
• investing in securities portfolios;
• operating in international money markets and precious metals markets;
• services for clients carrying out a transaction in terms of deferred payments;
• leasing operations to clients for the purchase of various funds by taking a long-term lease with subsequent redemption;
• venture funding;
• operations with documentary bills and certificates of deposit.

A merchant bank's sphere of interests usually includes real estate transactions, support for foreign investments, management and custody of securities, and control over the work of pension and private funds. Some merchant banks operate in many areas simultaneously, but some specialise in one.

What is a merchant bank account?

It’s a special account for business clients in a merchant bank that is set up to accept different electronic payments, including debit and credit cards.

Who do merchant banks serve?

Merchant banks cooperate with companies of different sizes. Usually, these are small firms and individual entrepreneurs who address banks for advice on trading technologies. Large corporations have their own in-house experts and rarely use the consulting services of commercial banks.

Merchant banks regularly help various firms to issue their own securities.

How does a merchant bank work?

Merchant banks are constantly interested in international financial transactions. Imagine a company from one country (for example, the USA) wants to buy a company in another country (for example, Germany). The company contacts a merchant bank, which helps to complete the transaction, resolve legal issues, exchange currency, and transfer funds.

Also, merchant banks often act as investment banks, serving wealthy individuals and large corporations operating in several countries at once. The results of the activities of large merchant banks affect the state of the financial markets in all leading countries.