Loading the player...

What is a 'Merchant Bank'

A merchant bank is a company that deals mostly in international finance, business loans for companies and underwriting. These banks are experts in international trade, which makes them specialists in dealing with multinational corporations. A merchant bank may perform some of the same services as an investment bank, but it does not provide regular banking services to the general public.

BREAKING DOWN 'Merchant Bank'

One role of a merchant bank is to provide financing to large corporations that do business overseas. Assume, for example, that XYZ Company is based in the United States and decides to purchase a supplier that is based in Germany.

How Merchant Banks Facilitate Trade

A merchant bank can provide the funds to make the purchase using a letter of credit (LOC). The sellers in Germany receive an LOC issued by the merchant bank as payment for the purchase. Merchant banks can also help the purchaser work through the legal and regulatory issues required to do business in Germany.

If a multinational corporation operates in many different countries, a merchant bank can finance business operations in all of those countries and manage the currency exchanges as funds are transferred.

The Differences Between Investment Banks and Merchant Banks

A merchant bank typically works with companies that may not be large enough to raise funds from the public through an initial public offering (IPO), and these banks use more creative forms of financing. Merchant banks help corporations issue securities through private placements, which require less regulatory disclosure and are sold to sophisticated investors.

Investment banks, on the other hand, underwrite and sell securities to the general public through IPOs. The bank’s clients are large corporations that are willing to invest the time and expense necessary to register securities for sale to the public. Investment banks also provide advice to companies regarding potential mergers and acquisitions, and provide investment research to clients. Both investment banks and merchant banks strive to build relationships with corporations so that the institution can provide a variety of services.

Regardless of how a company sells securities, there are some minimum disclosure requirements to inform investors. Both IPOs and private placements require a company audit by an outside CPA firm, which provides an opinion on the financial statements. The audited financial statements must include several years of historic financial data, along with footnote disclosures. All of this information is provided to inform the potential investor about the risks and potential rewards of buying the securities.

RELATED TERMS
  1. Merchant Agreement

    A contract between a business and a credit card service provider.
  2. Merchant Account

    A type of business bank account that allows a business to accept ...
  3. Merchant Discount Rate

    The rate chanrged to a merchant by a bank for providing debit ...
  4. Night Depository

    A bank drop box where merchants can deposit their daily cash, ...
  5. Processing Date

    The month, day and year when a merchant’s bank processes a credit ...
  6. Floor Limit

    A purchase amount over which further authorization is needed ...
Related Articles
  1. Personal Finance

    What Does a Merchant Bank Do?

    A merchant bank is a financial institution that performs underwriting, loan services, financial advising and fund raising services to large corporations.
  2. Insurance

    The Rise Of The Modern Investment Bank

    Get to know a little bit about the institutions whose actions help to guide free markets.
  3. Personal Finance

    The Evolution Of Banking

    Banks are a part of ancient history. Find out how this system of money management developed into what we know today.
  4. Personal Finance

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  5. Personal Finance

    Understanding Wholesale Banking

    Wholesale banking refers to banking services for merchant banks and other financial institutions.
  6. Personal Finance

    WePay vs. PayPal Fees

    WePay and Paypal facilitate payments between businesses and people. Which one should you go with?
  7. Insights

    The Role of Commercial Banks in the Economy

    We interact with commercial banks daily to carry out simple financial tasks. That said, the function and creation of a commercial bank is anything but simple.
  8. Investing

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  9. Small Business

    Spring: How it Works and Makes Money

    Read about Spring, a customer loyalty program and digital advertising company, and learn more about how it connects retailers and consumers.
  10. Investing

    What's the Role of an Investment Bank?

    Investment banks provide financial advice to businesses and governments and help them raise capital through the sale of stocks, bonds and other products.
RELATED FAQS
  1. What is the difference between investment banks and merchant banks?

    Merchant banks and investment banks, in their purest forms, are different kinds of financial institutions that perform different ... Read Answer >>
  2. What are some roles of an investment bank?

    Explore the world of investment banking and discover the various functions that investment bankers serve, such as handling ... Read Answer >>
  3. Why do long-term care insurers require the loss of two Activities of Daily Living ...

    Find out why an importing or exporting merchant might turn to a banker's acceptance to help facilitate an international trade ... Read Answer >>
  4. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  5. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
  6. What are the main reasons an investor should consider an allocation to the banking ...

    Learn about investment opportunities in the commercial and investment banking industry. Find out why many investors choose ... Read Answer >>
Trading Center