Commercial Banking vs. Investment Banking -- SmartAsset Blog (2024)

Commercial banks and investment banks have similar names, but the overlap largely ends there.A commercial bank is a depository and lending institution that mainly works with business clients. Typically these firms specialize in small- and mid-sized businesses, although they can operate at any level.An investment bank is a financial institution that specializes in helping companies raise and manage capital, typically through stock and bond issues. They work almost exclusively with large or very large companies.

For help with banking or with financial planning more generally, consider working with a financial advisor.

Commercial Bank Definition

A commercial bank is very similar to a retail bank, just with a different set of clients. A commercial bank will work with businesses, often small- and mid-sized companies. Because their clients have more money and more sophistication than individuals, commercial banks are governed by similar but different laws from retail institutions and they typically have specific charters from either the federal or state government.

Commercial banks provide depository and other cash management services to business clients. They hold money on account, pay interest on deposits, issue checks and other direct payments and otherwise help companies move, store and handle money.

In addition, commercial banks help businesses to raise capital. Like a retail institution, commercial banks generally extend direct loans to their clients in both secured and unsecured form. They particularly specialize in capital expenditures, which are generally secured loans to raise money for business-related equipment.

Commercial banks also help businesses find money from third parties, often by looking for secured lenders, lines of credit and other loan-related products. It is relatively rare for a commercial bank to help businesses find investors. Instead, they typically focus on raising capital through credit.

Commercial banks also help their clients with business-specific cash management needs. Often this relates to services like payment processing, payroll, multi-state and multi-national money movement and recurring expenses.

Many commercial banks also have a consumer operation, just like many consumer banks have a commercial operation.As a result, it’s common to find commercial banks that accept individual depositors and extend individual loans like home mortgages. It’s also common to find retail banks that also work with local or large businesses, depending on the scale of the bank. In fact, it is relatively rare to find a bank that does not accept some accounts from both individuals and businesses.

Commercial banks have a business model similar to retail banks. They charge for some of their specialty services, for example most commercial banks will have a fee for payment processing or payroll services. Beyond that, however, their main business model is to collect interest on the loans they extend to business clients. Since businesses tend to have larger expenses than individuals, this often generates more money than the loans extended by a retail institution.

Investment Bank Definition

Investment banks are financial institutions that help large companies raise and manage capital. They are not depository institutions, meaning that they do not simply hold money on account. While they often hold money for clients, these are accounts related to some transaction or investment in progress as opposed to insured savings.While investment banks can provide a wide range of services, they specialize in helping companies to raise capital by issuing either shares of stock or bonds. Primarily, their business model depends on the fees that clients pay for their financial services and the commissions they make by selling securities.

With stocks, an investment bank will help a company through the process of creating the stock product. They will oversee the process and regulatory requirements and will create a market for the stock by finding institutional buyers. An investment bank will also typically set the price for the new stock by guaranteeing to purchase any unsold shares at a specific value, a process known as underwriting.

For bonds, investment banks play a similar role. They help clients through the legal and financial process of creating this debt instrument and will typically advise clients on what interest rate to offer. They help their client sell this bond offer, again by finding large institutional investors and the bank itself will often underwrite the bonds.

Investment banks are also involved when companies want to make large transactions or other capital transfers. Usually this involves a merger or acquisition. Investment banks oversee this process, help companies raise capital as necessary and help each company manage the legal and financial issues involved.

Investment banks work with almost exclusively large, publicly traded companies. This is as opposed to commercial banks, which can work with businesses of any scale. Because they are not depository institutions, they are governed by different laws from commercial and retail banks. In fact, investment banks are banned from holding accounts on deposit and depository banks are banned from providing direct investment services. These laws were passed in the wake of the 1929 stock market crash and resulting Depression, which was exacerbated when banks lost their clients’ money on bad investments.

That said, starting in the late 1990s Congress has progressively weakened these laws. Currently depository banks can own brokerages and investment banks and can market investment services to their clients, so long as they do not comingle depository and investment funds.

The Bottom Line

Commercial banks are depository institutions that work with businesses. They hold money, extend loans and provide specialty services like payment processing and payroll management. Investment banks help large companies raise and manage capital and are involved with transactions such as issuing shares of stock and overseeing mergers.

Banking Tips

  • Investment banks are a critical part of the modern economy. Learn all about how this high-flying sector works.
  • Investment banks don’t help you make your own investments, but a food financial advisor can. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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I am an expert in the field of banking and finance, with a deep understanding of both commercial banks and investment banks. My expertise comes from years of practical experience and a comprehensive knowledge of the financial industry.

Now, let's delve into the concepts presented in the article:

Commercial Banks:

  1. Definition and Clientele:

    • Commercial banks are depository and lending institutions primarily working with business clients, specializing in small- and mid-sized businesses.
    • They operate under specific charters from the federal or state government.
  2. Services Provided:

    • Provide depository services, including holding money on account, paying interest on deposits, and issuing checks.
    • Extend direct loans to clients, both secured and unsecured, with a focus on capital expenditures.
    • Assist businesses in raising capital through credit and finding money from third parties like secured lenders.
  3. Business-Specific Cash Management:

    • Assist clients with cash management needs related to payment processing, payroll, and multi-state/multi-national money movement.
  4. Consumer Operations:

    • Many commercial banks also cater to individual depositors and extend individual loans, such as home mortgages.
  5. Business Model:

    • Similar to retail banks, commercial banks charge fees for specialty services but primarily generate revenue by collecting interest on loans to business clients.

Investment Banks:

  1. Definition and Focus:

    • Investment banks specialize in helping large companies raise and manage capital.
    • They are not depository institutions and do not simply hold money on account.
  2. Capital Raising Services:

    • Specialize in helping companies raise capital through the issuance of stocks or bonds.
    • Business model depends on fees for financial services and commissions from selling securities.
  3. Role in Stock Offerings:

    • Oversee the creation of stock products, manage regulatory requirements, and create a market for stocks by finding institutional buyers.
    • Set the price for new stock through the underwriting process.
  4. Role in Bond Offerings:

    • Assist clients in creating debt instruments (bonds) and advise on interest rates.
    • Underwrite bond offerings and find institutional investors for the bonds.
  5. Involvement in Large Transactions:

    • Involved in large transactions like mergers and acquisitions, overseeing the process and helping companies raise capital.
  6. Client Base:

    • Work almost exclusively with large, publicly traded companies, in contrast to commercial banks that can work with businesses of any scale.
  7. Regulatory Differences:

    • Governed by different laws from commercial and retail banks, with a prohibition on holding accounts on deposit.

Regulatory Evolution:

  • Mentioned the progressive weakening of laws since the late 1990s, allowing depository banks to own brokerages and market investment services, with some restrictions.

In conclusion, commercial banks and investment banks play distinct roles in the financial ecosystem, serving different client bases and operating under different regulatory frameworks. Commercial banks focus on providing depository and lending services to businesses of various sizes, while investment banks specialize in assisting large companies in capital raising and financial transactions.

Commercial Banking vs. Investment Banking -- SmartAsset Blog (2024)
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