A merchant bank is quite different from the type of bank that can be found on a high street. This is not somewhere to go when you want to withdraw money or deposit checks. Merchant banks are not aimed at satisfying the needs of the general public. Instead they focus on other functions such as big business loans, stock underwriting, and international finance. These institutions can be responsible for huge sums of money. Their typical customer will be other banks or financial institutions. They are sometimes referred to as wholesale banks because they work in a similar way to wholesalers for shops.
In many ways the merchant banks and normal banks are very different. In fact to some of us it may seem that these other entities have very little to do with banking as we understand it. On the other hand, there is no doubt that such institutions provide important services for their customers.
The Functions of Merchant Banking
Merchant banks provide a number of important functions including:
- One of the functions that are most in demand from this type of bank is underwriting. This is where they take responsibility for the stock of a company. They can decide how much stock needs to be created and the price of it when first introduced to the market. The merchant bank can also take over a lot of the responsibility for any documentation related to the stuck launch and for marketing of this stock.
- Portfolio management is also another important service that these banks will offer to their customers. They are in a good position to evaluate any potential investment and to advise their customers as to how best to proceeds.
- Issue management is where the merchant bank helps a business transfer into a public company. They will take charge of all the paperwork and even create a prospectus for the company.
The Benefits of Merchant Banking
The main benefit of merchant banking is that it is so highly specialized. This means that it can really focus on the particular needs of its customers. Not all merchant banks will offer every service associated with this type of enterprise; instead they will often focus on one specific thing. This increases their skill in this area even further and it is why customers will seek them out. Most of the most famous banks in the world will have retail banks and merchants banks because they each provide a vital function for customers and will be in demand.
Merchant bankers may not be as well known to the public as their retail counterpart, but this should not devalue the importance of their work. They provide a great service to businesses and those who have a lot of money to invest — it is hard to imagine how some enterprises would be able to function without such help. They can be in charge of sums of money that some of us will only be able to dream about.
