# Merchant Banks: Functions, Key Services, and Examples Explained

> **Definition**
>
> A merchant bank is a financial institution that provides services primarily to privately-owned corporations and high-net-worth individuals.

## What Is a Merchant Bank?

A merchant bank is a financial institution that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and [high-net-worth individuals (HNWI)](https://www.investopedia.com/terms/h/hnwi.asp). They are non-depository and play a significant role in international finance and transactions.

Merchant banks serve private corporations, not the general public. Unlike retail or [commercial banks](https://www.investopedia.com/terms/c/commercialbank.asp), they don’t offer services to everyone. Unlike investment banks, they focus on private, not public, companies. Examples of large merchant banks include JPMorgan Chase, Goldman Sachs, and Citigroup.

### Key Takeaways

*   Merchant banks specialize in providing financial services such as underwriting, loans, and advisory services, focusing exclusively on large corporations and high-net-worth individuals rather than the general public.
*   While merchant banks operate similarly to investment banks, they differ by concentrating on private companies and international finance, often facilitating cross-border transactions and currency exchanges.
*   Unlike retail or commercial banks, merchant banks do not offer deposit accounts or services like checking accounts to the public; however, they may have retail and commercial divisions within their structure.
*   A key function of merchant banks includes the arrangement of private placements, which allows companies to raise capital from sophisticated investors without the extensive regulatory requirements tied to public offerings.
*   The unique fee-based income model of merchant banks sets them apart as they earn revenue through the specialized financial services they provide to their corporate clients.  
    

![Merchant Bank: A financial institution that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals.](https://www.investopedia.com/thmb/bCuuLtgWkvYQVQOyzBSv7B-ZDVE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Merchantbank_final-a789dfb90e504c5b8bf3e237c05a53eb.png)

*— Investopedia / Michela Buttignol*

## Understanding the Operations of Merchant Banks

Merchant banks are non-depository financial institutions and companies that deal with international finance for [multinational corporations](https://www.investopedia.com/terms/m/multinationalcorporation.asp). These banks differ from other types of financial institutions in that they offer financial services such as private equity, fundraising, and business loans to private companies.

Most of their services aren’t for the general public. They may offer some banking to wealthy individuals, but focus more on corporate clients. They may have a retail banking arm, but they do not provide, for example, [checking accounts](https://www.investopedia.com/best-high-yield-checking-accounts-5070332).

In the UK, "merchant bank" refers to [investment banks](https://www.investopedia.com/terms/i/investmentbank.asp). In the U.S., however, it means banks focusing on services for multinational corporations and high-net-worth individuals doing business internationally.

> **Fast Fact**
>
> Unlike investment banks, merchant banks in the U.S. do not focus on publicly held companies.

## Key Functions and Services of Merchant Banks

Merchant banks offer financial and advisory services to help corporate clients. They often work with companies too small to raise funds via an [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp).

### Merchant Bank Financing and Loan Options

Merchant banks handle international financing and underwriting for [real estate](https://www.investopedia.com/terms/r/realestate.asp), trade finance, and foreign investment. They also issue [letters of credit (LOCs)](https://www.investopedia.com/terms/l/letterofcredit.asp).  

Merchant banks can also provide more creative forms of financing. They can help corporations issue securities through [private placement](https://www.investopedia.com/terms/p/privateplacement.asp), which requires less regulatory disclosure and is sold to sophisticated investors.

### Facilitating International Business Transactions

 For multinational corporations, merchant banks finance operations in various countries and manage [currency exchanges](https://www.investopedia.com/terms/c/currency-exchange.asp). When a company seeks to make a major purchase in another country, it will seek a merchant bank that can transfer the funds to make the purchase using a letter of credit.

## Practical Example of Merchant Banking in Action

Company ABC–based in the U.S., wants to buy Company XYZ in Germany. ABC would hire a merchant bank to facilitate the process. That bank would advise Company ABC on how to structure the [transaction](https://www.investopedia.com/terms/t/transaction.asp). It may also help ABC in the [financing](https://www.investopedia.com/terms/f/financing.asp) and underwriting process.

Using the example above, the sellers in Germany would receive a letter of credit issued by the merchant bank hired by Company ABC as payment for the purchase. The merchant can also help Company ABC work through the legal and regulatory issues required to do business in Germany.  

> **Important**
>
> Although merchant banks generally don't deal with the general public, some of the biggest merchant banks also have retail and commercial banking operations.

## Comparing Merchant Banks and Investment Banks

Investment banks underwrite and sell securities to the public via IPOs. Their clients are large corporations ready to invest time and money to register securities for public sale. They also advise companies on [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) and offer investment research.

While merchant banks are fee-based, investment banks have a two-fold income structure. They may collect fees based on the advisory services they provide to their clients, but may also be fund-based, meaning they can earn [income](https://www.investopedia.com/terms/i/income.asp) from [interest](https://www.investopedia.com/terms/i/interest.asp) and other leases.

When selling securities, companies have minimum [disclosure](https://www.investopedia.com/terms/d/disclosure.asp) requirements to inform investors. Both IPOs and private placements can require a company audit by an external [certified public accountant](https://www.investopedia.com/terms/c/cpa.asp) (CPA) firm, which provides an opinion on the [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp). Potential investors can use this information about the risks and potential rewards to make decisions about buying or selling the securities.

Merchant Banks

*   Underwrite and sell securities for private placements.
    
*   Fee-based income structures.
    
*   Clients tend to be private, pre-IPO companies.
    

Investment Banks

*   Underwrite and sell securities to the public.
    
*   Income based on fees and advisory services.
    
*   Most clients are large public companies.
    

## What Is a Merchant Bank Account?

A merchant bank account is a bank account for business clients. These accounts are set up to receive debit and credit cards or other forms of electronic payment.

## What Does Merchant Services Mean on a Bank Statement?

Merchant services providers are financial intermediaries between a bank and its business clients. They may help businesses handle payment processing, cash advances, online transactions, check writing and cashing, or other necessary services to maintain cash flow.

## Can I Open an Account at a Merchant Bank?

Merchant banks are non-depository institutions that do not provide the same types of consumer services that are offered by a retail bank. Although merchant banks may also serve wealthy individuals, their services are more focused on providing financing and investment to commercial enterprises.

## The Bottom Line

Merchant banks specialize in underwriting and financial services primarily for private corporations and high-net-worth individuals. Unlike commercial and investment banks, merchant banks do not typically serve the general public.

Merchant banks assist clients with international financing, advisory, and transaction structuring services, especially for multinational corporations. They might be involved in private equity, fundraising, and offering creative forms of financing such as private placements. Merchant banks differ from investment banks in that they are fee-based, while investment banks charge fees and earn income from interest and leases. Well-known merchant banks also manage retail and commercial banking operations, even if their services primarily target corporate clients.

> **Article Sources**
>
> 1.  Robinhood. "[What Is a Merchant Bank?](https://learn.robinhood.com/articles/6TZGwZ5jVA9JqRNoMhn7mc/what-is-a-merchant-bank/)"
>     
> 2.  International Trade Administration. "[Letter of Credit](https://www.trade.gov/letter-credit)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Private Placements Under Regulation D](https://www.sec.gov/oiea/investor-alerts-and-bulletins/private-placements-under-regulation-d-investor-bulletin)."
>     
> 4.  TKO Miller. "[How Do Investment Banks Get Paid?](https://www.tkomiller.com/blog/how-do-investment-banks-get-paid)"