Commercial banks serve individuals and small businesses with basic banking needs, while investment banks provide services to large corporations and wealthy individuals. Merchant banking focuses on investing and managing assets, and investment banks offer advice and consultancy to large companies. The use of commercial banks by the average citizen is a relatively new phenomenon.
There are many different types of financial institutions, including commercial banks and investment banks. The difference between these two types of banks lies mainly in the services they provide and to which they are provided. Commercial banks are generally accessible to anyone for basic banking needs, while commercial banks mostly serve large corporations and very wealthy individuals.
Commercial banks are what is generally referred to when talking about banks in general. They typically offer checking and savings accounts and may offer loans to individuals and small businesses. This type of bank raises funds by taking deposits from these same groups of people, as well as from the interest charged on loans. It also buys bonds from governments and corporate entities.
This form of banking is sometimes defined as the provision of banking services such as bank checks and loans to large businesses, as distinct from individual citizens. In this case, banking activities provided to individuals are referred to as retail banking activities to differentiate them from the second definition of commercial banking.
Merchant banking often focuses on investing a depositor’s assets in a financial portfolio and managing those investments. In the United States, banks that offer these services are typically called investment banks. In addition to investing and managing the businesses of wealthy clients, they also offer advice and consultancy to large companies. This advice is especially helpful when a company is considering a merger or acquisition of another business.
Both commercial and merchant banking have roots that go back hundreds of years, if not more. Merchant banks were actually the original banks and were invented in the Middle Ages by Italian grain merchants. These merchants, as well as Jewish traders fleeing persecution in Spain, used merchant banks to finance long trade voyages and grain production.
The use of commercial banks by the average citizen is a relatively new phenomenon, historically speaking, but money lenders have engaged in basic banking practices since the days of the ancient Roman Empire. Early banking, however, was mostly about exchanging foreign currency, rather than investing, as people see it today. Commercial banks are so common today that more people work in the commercial banking industry than anywhere else in the financial services industry.
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