What is a Merchant Bank?
A merchant bank is a financial institution that engages in underwriting and business loans, catering primarily to the needs of large enterprises and high net worth individuals. In the British market, the term merchant bank refers to an investment bank.
How Does a Merchant Bank Work?
Like investment banks, merchant banks are not depository/retail lender institutions. Rather, merchant banks are intermediaries that provide brokerage, fund-raising, and financial advisory services on a large scale to businesses and a smaller scale to wealthy individuals. For this reason, they often assist in international transactions involving entities such as multinational corporations.
To illustrate the role of a merchant bank, suppose a multinational corporation XYZ is considering the purchase of a smaller company in another country. Company XYZ will likely solicit the services of a merchant bank for advice on how to best approach the acquisition process. In addition, the merchant bank may also assist in the financing of the acquisition, providing underwriting or loan services.
Why Does a Merchant Bank Matter?
Merchant banks play a similar role to that of investment banks, but perform on the international level. Consequently, while they assist in raising funds for large companies, they also assist in transactions across national borders.