Difference Between Commercial Banking and Merchant Banking

Commercial Banking refers to the banking service where commercial banks offer various types of monetary services to anyone who wants to avail of its services, including the general public and corporations. In contrast, Merchant Banking refers to the banking service where merchant banks offer financial services to a large company or wealthy individuals.

Both banking systems are two of the primary forms of banking services that offer some of the most lucrative careers in finance. However, a commercial bank deals with the general public and companies that accept deposits and withdrawals. A merchant bank does not provide general banking services. They only deal with investment avenues and commercial loans.

Commercial banks offer to check and savings accounts for individuals and businesses issue debit and credit cards along with a host of retail banking services. They also offer loans to individuals and small businesses and earn the interest levied on such credit. Commercial banks may also provide certificates of deposit and saving schemes aimed at retail customers.

Commercial banks perform their work by raising funds from the general public in the form of deposits, offering savings and checking accounts, disbursing funds in the form of loans, and charging interest on such loans. Apart from collecting the deposits and disbursing the loans, other functions performed by the commercial banks include an investment of the funds, discounting the bills of exchange, agency functions, etc.

Merchant banks provide financial services for corporate entities, including trade financing and a whole range of international financial activities. They usually cater to mid-sized corporations and can assist with the underwriting of securities, raising venture capital, and offer a host of trade advisory services depending on the specific needs of their clients. They primarily earn through the fee paid for their advisory services.

The main focus of the merchant banks is to invest the depositor's assets in a financial portfolio that suits best their various requirements like return, risk-taking capacity, etc., and then appropriately manage these investments. Other services offered by merchant banks include providing counseling and advisory services to wealthy individuals and large corporations. As these banks offer various investment functions, they are typically called investment banks.

For dynamic, outgoing, and ambitious individuals, merchant banking could be the right choice of career option, offering an intensely competitive work engagement with some of the best industry perks. On the other hand, individuals with excellent people skills and technical know-how may be better suited for commercial banking with a relatively less stressful work existence.

Growth opportunities abound in both of these fields. However, perks, working hours, and the nature of roles differ greatly, and these factors usually play a central role in choosing the right career. For example, merchant banking can be the preferred choice in terms of perks and bonuses, along with an exciting and challenging career path. On the other hand, commercial banking offers a relatively better work-life balance, and perks are not bad. However, commercial banking jobs are becoming increasingly competitive with longer working hours and focusing on technology-oriented roles.

For anyone planning a career in banking, these criteria could help make the right choice. But, more importantly, it is about going along with the popular choice, or simply better perks, but about identifying one's skill sets and aptitude, to be able to choose the right work profile.

Now that we understand the basic of both these forms of banking, lets delve deeper into these topics and understand their differences through the visual representation below. These infographics shall help us understand the differences in detail.

By now, we know that both these banks have different purposes to fill and thereby, have different functions and approaches to banking. Let us discuss their key differences through the points below.

1. A financial intermediary that is established in a place with the main aim of providing the basic different financial services to the general public that includes the acceptance of the deposits and disbursement of the loans is known as the Commercial bank, whereas the financial establishments that are established with the main aim of providing financial advisory services and consultancy to clients with high net worth and multinational corporations.
2. The main source by which the commercial banks generate the earnings includes the interest received by disbursing the various types of loans, including auto loans, issuing mortgages, house loans, small business finance loans, etc. Apart from these, other earnings that the commercial banks earn include fees received on various services like fees received for issuing the ATM card and allowing services related to that, fees against opening and maintaining the customer's checking account, rent on the safety deposit box, etc.
3. On the other side, a merchant bank generates its primary earnings through fees paid for the advisory services given to large customers. Merchant banks provide various financial services to their clients mainly related to the investments like investing depositor's assets in a finance portfolio as per their requirements and then appropriately managing these investments so that customers can get a good amount of money on those investments and in return, merchant banks charge fees from these clients. Apart from these fees, banks also make a large number of capital investments in private companies, which are in their growing phase, and when these investment stakes are sold at a later stage, the company earns a good amount of money.
4. The impact of both of the banks is on different economies where in the case of the commercial bank, the main impact is on the economy of the local area where it is providing its services as the amount of money given as a loan is spent by consumers on purchasing homes, new startups and other required areas which also leads to the creation of the jobs thereby impacting the economy of local areas.
5. By contrast, in the case of Merchant banks, the main impact is on large corporations to whom it is providing its services. These large corporations invest their money in the share market, thereby impacting prices in the stock market and the national economy.
6. As the main function of the commercial bank is to provide loans to its customers, its role resembles that of a financier. In contrast, the main function of merchant banks is to provide advice and consultancy to their customers, so its role resembles that of a financial advisor.
7. When it comes to the risk, the commercial banks are prone less to lose and other financial risks, whereas, on the other hand, merchant banks are prone more to a string of risks.

While careers in both these forms of banking are lucrative, the pre-requisites for both are different. Let us understand the required education and skills for them through the detailed explanation below.

#1 - Commercial Banking

Having a degree in finance, mathematics or accounting would help lay a solid foundation for someone looking to enter this field.

• However, pre-requisites for a career role in commercial banking could vary, depending on the nature of a specific role. Still, excellent people and communication skills are essential for almost any banking career.
• Good accounting knowledge can be a big plus, and those planning for an accounting-oriented role can consider earning a Chartered Public Accountant (CPA) designation, which could be a big advantage.
• Banking internships can be one of the best ways to acquire industry knowledge and experience for a banking career. Some of the roles in commercial banking include loan officer, credit analyst, mortgage banker, trust officer, and branch manager, among others. Each of them would require a different skill set to succeed in that role and different levels of responsibility for a professional. Hence, it would be best to prepare accordingly.

Key Skills

• Good technology skills
• Should have an eye for detail
• Excellent accounting skills
• Strong marketing and sales abilities

#2 - Merchant Banking

Top merchant banks regularly hire from the pool of graduates and undergraduates in finance, engineering, and even law.

• However, they prefer hiring from top MBA programs with an exceptional academic record.
• Merchant banking career roles can be exceptionally competitive, requiring excellent communication skills, a flair for finance, and the ability to be a great team player and fluency in a foreign language, which can be an added asset.
• Acquiring a relevant certification, including Chartered Financial Analyst (CFA) or Financial Risk Manager (FRM), can be of great advantage in acquiring the advanced skill sets required for higher merchant banking roles.

Key Skills

• Excellent analytical abilities
• Ability to perform under pressure
• Should be good at number-crunching
• Strong work ethics

Banking has indeed seen positive developments as an industry, but there are several reasons why banking jobs have been impacted in the last decade. As per the U.S. Bureau of Labor Statistics, banking jobs have gone down by 2% between 2004 and 2014. Some of the reasons for this state of affairs include industry consolidation and an increasing reliance on technology with a sudden spurt in online banking services.

This has affected the demand for bank tellers and similar job roles typically involving personal interaction with the customers. However, at the same time, there has been a rise in the demand for financial analysts, financial advisors, marketing professionals, and techies who understand an entire suite of financial products offered by commercial banks and can help sell them effectively.

With the repeal of the Glass-Steagall Act, a new era of industry consolidation began with M&A activity involving investment banks and commercial banks. Two prime examples of this trend include the acquisition of Wachovia by Wells Fargo and FleetBoston by Bank of America. Unfortunately, this has also contributed to a slowdown in demand for traditional banking jobs. As a result, the industry is undergoing a major transformation like banks' services and operations.

As far as merchant banking jobs are concerned, it would be relevant to add here that although theoretically defined as separate forms of banking, few merchant banks and investment banks function purely within their technically defined limits. Several merchant banks are also engaged in M&A activity and other investment banking roles. It follows logically that the factors affecting investment banking jobs have also contributed to a decline in jobs for merchant banks. Some of these factors include the industry consolidation we have already discussed above, along with the credit crunch of 2008.

To sum it up, those planning to build a career in commercial or merchant banking need to acquire the competencies for emerging job roles in the banking industry to make the most of it. In addition, it must be realized that as industry changes are forcing a fundamental shift like banking careers, they continue to become ever more challenging and competitive.

We have mentioned it a couple of times in this article that the jobs in either of these forms of banking are lucrative. Let us understand the average packages of different positions in both these forms of banking through the detailed discussion below.

Commercial Banking

Though hit hard by industry consolidation and the advent of online banking services, commercial banking continues to be a major attraction for those planning to enter the banking industry. The remuneration can vary depending on the job roles, and typically, roles requiring technical and people skills attract a better pay package.

• The loan officer is an entry-level professional role, attracting an annual salary ranging from anywhere between $30,000 to $120,000 depending on the level of work experience.
• Bank teller is more of a traditional banking role that is less in demand these days due to industry consolidation and a rise in banking automation. Usually, a bank teller might earn anywhere from $20,000 to $40,000 annually.
• As a Branch Manager, one can earn between $40,000 to $150,000 annually. Usually, an experienced professional occupies this position and can afford great opportunities to learn about M&A activity.
• A programmer is more of a technical job with comparatively better prospects and attracts a package of around $35,000 to $150,000.
• Trust Officer is more of a people-skills job, fit for those with expert knowledge of finance and interested in financial counseling for HNIs. He might earn anywhere from $45,000 to $80,000.

Sales are one of the few roles which continue to be of great relevance and can offer some of the best opportunities for building a career in banking and finance. One can earn anywhere from $30,000 to $150,000 annually. This excludes any commissions and bonuses earned.

Merchant Banking

Traditionally, merchant banking has been considered one of the most rewarding careers in finance. However, several factors discussed above have impacted job growth negatively to an extent.

• The average annual salary of a merchant banker stood at around $69,680 as of May 2008. This excludes a significant amount of bonuses earned by a merchant banking professional.
• Average salaries for a merchant banker could vary depending on the location. For instance, the figures stand at $157,640 for Connecticut, $129,620 for New York, and $111,750 for Washington D.C.

This is why several individuals might look for work opportunities in certain locations with relatively better prospects.

Average salaries for some of the popular job roles in merchant banking are included here.

• Merchant Sales Specialist $63,000
• Business Sales Consultant $71,000
• Experienced Sales Representative $61,000
• Independent Sales Agent $78,000
• Mergers & Acquisitions Analyst $41,000

All concepts and phenomenon have to sides of a coin; both these forms of banking are no different. Let us understand the pros and cons of having a career in either commercial or merchant banking through the comprehensive discussion below.

Commercial Banking

Pros:

• Commercial banks offer some of the most popular career options in banking. Job roles in this field accommodate people with widely differing skill sets, and compensation is also adequate.
• Advanced educational qualifications or practical experience is not a must for some entry-level positions in commercial banking, which makes it more of an accessible career option for an average individual.

Cons:

• The demand for traditional job roles involving personal interaction with customers is declining due to industry consolidation and banking automation. Individuals with a combination of people and technical skills are preferred these days as more challenging roles emerge.
• Perks are not among the best, not as competitive as in merchant banking roles. Additionally, working hours are also not what they used to be. Still, it is relatively better than the hours in a merchant banking role.

Merchant Banking

Pros:

• One of the best banking career options in terms of package and bonuses, along with exciting and challenging work roles. Merchant banking is more of a high-profile career where professionals help secure major deals and facilitate raising funds for corporations.
• Remuneration is quite competitive right from entry-level positions. Growth prospects are excellent, making it possible for a dedicated professional to rise through the ranks to become a vice president or managing director in a firm.

Cons:

• Despite being classified as a high-profile career, the prospects of pay packages and growth opportunities depend largely on the work location. It may not be possible for everyone to relocate to a hub of activity in merchant banking.
• Very few individuals may rise to higher management positions due to cut-throat competition in the field and fewer opportunities at the top. In fact, due to the slowdown brought about by industry consolidation, job growth has been impacted in the last few years.
• Working hours are longer than commercial banking, and the amount of work stress is on the higher side, which everyone may not be able to cope with.

• Commercial banking offers a clear advantage over merchant banking roles as far as work hours are concerned. Given the competitive nature of the job and the intense involvement needed, merchant bankers usually have much longer work hours and high levels of work stress than commercial bankers.
• Most merchant bankers work for six or seven days a week, spending nearly 65 to 75 hours at work. This affects the work-life balance adversely, and merchant bankers lead a comparatively stressful life, spending little time with family and friends.
• In the long term, this unhealthy trend can impact the health and well-being of an individual and create stress-related problems.
• In commercial banking, work hours are usually confined to 50-55 hours, even for higher-level positions, as the focus continues to be on standard banking hours.
• However, due to industry changes, job roles are also increasingly redefined in commercial banks, and workers must spend a good amount of time after banking hours at work.
• This is why current-age commercial bankers may not have the ideal work-life balance. Still, they are in a much better position than merchant bankers.
• Commercial bankers tend to face lower stress-related issues than merchant bankers and lead more of a balanced life.

Now that we have a detailed understanding of both commercial and merchant banking, let us pin the differences in a comparative table to reiterate the differences and help enhance our understanding of these concepts individually and their differences with each other.

This has been a guide to Commercial vs Merchant Banking. Here we explain the prospects, salary, and work-life balance through tables and infographics. You can learn more from the following articles –

• Investment Banking vs Commercial Banking
• Commercial Loans Definition
• What is Universal Banking?
• What is Transaction Banking?
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