Tuesday, 20 January 2015

What is the Difference between Commercial Banks and Investment Banks?

When you go to an investment bank, their loan structuring team can give you advice on how your company can construct its loan. They follow different parameters and conduct a thorough analysis as to what elements can be incorporated. However, if they happen to have a commercial banking division, it does not necessarily mean that they will also approve your loan, just because you have consulted them on the same. Financial institutions usually operate two separate divisions for commercial and investment banking.

Relationship between the Two

So, irrespective of whether the structuring bank provides the loan or another bank sanctions it, two separate fees are charged. While one is for the advice provided, and other is for loan processing. Nonetheless, an investment bank with a lending division might give you the best terms. This means that if a bank offers multiple products, such as in the above explained illustration, it can afford to charge less for its products.
From this we understand that the primary function of a commercial banking entity is loans and advances, while an investment bank provides strategic advice to companies in the areas of acquisitions, divestments, capital market products and loan structures.

Commercial Banks

A commercial bank caters to millions of customers. They charge interest on loans, which is their primary source of revenue. They also provide standardized services, such as:
1.      Accounts management – Savings, Current and Overdraft accounts
2.      Credit and debit card facilities, both international and domestic
3.      Insurance and related services – Home, vehicle, travel, life, accident cover, etc
4.      Mortgage and personal loans – Home, student, car, etc
Owing to the fact that commercial banking services are their forte, these institutions do not specialize in providing strategic advice to businesses. However, they do provide a detailed presentation of their various products to the consulting company. These options are made available to the company, without the remittance of expert advice.   

Investment Banks

Unlike commercial banking, investment banks are a niche establishment, catering to just a few hundred core customers. They offer bespoke advisory services. So, a layman cannot go in to deposit money or ask for a personal loan. They assist companies with mergers and acquisitions, and provide advice on corporate related financing. Their main source of revenue is their charging fee and said commissions for their business. They usually have different teams of experts on board, in order to provide specialized subject-related aid and services.