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. Night Depository

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

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

    A purchase amount over which further authorization is needed ...
  5. Batch Credit Card Processing

    The process of a merchant processing all of its authorized credit ...
  6. Settlement Bank

    The entity that facilitates the exchange of money between the ...
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. 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.
  3. 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.
  4. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  5. Insights

    How Investment Banks Make Money

    Take a look at methods through which investment banks make money, such as investment research, asset management, and brokerage and underwriting services.
  6. Investing

    Amazon Tests Delivery Service—Targets FedEx, UPS

    Amazon aims at reducing its reliance on UPS and FedEx and overcrowding in its warehouses.
  7. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  8. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against those of their brick-and-mortar peers.
  9. Personal Finance

    How Will Bank Regulation Affect British Banks?

    We look at the proposed changes to Britain's banking system, and see whether it will be able to stay competitive.
RELATED FAQS
  1. 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 >>
  2. What are some roles of an investment bank?

    Explore the world of investment banking and discover the various functions investment bankers serve, such as handling IPOs ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
Trading Center