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Merchant Banking vs Investment Banking – A Comparative Analysis

Have you recently graduated? Did previously study finance as one of your subjects? If you said yes, then I have some very good news for you. You are eligible for jobs in the field of Merchant Banking as well as investment Banking. These are considered to be highly rewarding career prospects to consider. These career fields offer big compensation in exchange for providing an optimal degree of service. Moreover, these career fields also allow further growth opportunities in your career. This article aims to list down the fundamental distinctions between Merchant Banking vs. Investment Banking, how Merchant Banking functions differ vs. Investment Banking functions, Eligibility criteria for Merchant Banking vs. Investment Banking roles, Skills essential for Merchant Banking vs. Investment Banking positions, Merchant Banking vs. Investment Banking job perspective, and, Merchant Banking vs. Investment Banking Salary.

Merchant Banking vs Investment Banking

Merchant Banking vs. Investment Banking Definition

Definition of Merchant Banking

When a banking organization deals with global financing and offers a plethora of services to clients like new issue underwriting, securities administration, finance advisory services, corporate investing, loan syndication, project promotion, corporate investing, investment banking, corporate counseling, etc.

These banks have profound knowledge of and proficiency in global trade, because of which they strategically deal with large multinational corporations. A merchant bank must be registered with SEBI, according to the SEBI (Merchant Bank) Act.

A merchant banker is a person that performs the business of issue handling, by facilitating the subscription, sales, and, purchase of securities as a giving advisory services, consultant, or manager.Here are some famous merchant banks – BOM (Bank of Maharashtra, Barclays Bank, Axis Bank Limited, Bajaj Capital Limited, Goldman Sachs, etc.

Definition of Investment Banking

The purpose of investment banks is to help their clients High Net-Worth Persons, governments, and, organizations in raising capital. By acting as a financial intermediary between investors and corporations demanding capital, the savings get converted into investments. Additionally, they help to generate revenues from treasury management, financial engineering, brokerage operations and dealers, corporate restructuring, corporate finance, and, arbitrage and speculation.

Investment banks provide crucial services to their clients by performing tasks like asset and IPO handling, buying and selling securities, underwriting of shares along with bonds and, consulting services for the purpose of M&As (Merger & Acquisition). Some of the well-known investment banks are Bank of America, Deutsche Bank, Credit Suisse, Morgan Stanley, Goldman Sachs, etc.

Merchant Banking vs. Investment Banking Theoretical Distinctions

Conceptual Distinctions between Merchant Banking vs. Investment Banking

Merchant Bank Functions

Merchant Banks carry out several functions that include:-

1. Equity Underwriting

In order to generate or raise capital using the stock market, large corporations often seek the professional services of merchant bankers. Through assessment of the volume of stocks that are to be issued, the worth of the business organization, the application of sale proceeds, and, the timing of the issuance of new stocks, merchant bankers underwrite equities. These bankers are in charge of managing all the required documentation and liaison with the correct market team concerned for advertising the stock.

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2. Credit Syndication –

Merchant bankers help in analyzing loan applications for long as well as short-term credit from financial organizations. Through the computation of overall costs required, the development of financial plans for the whole project, and, also the adoption of loan applications for commercial banks, merchant bankers offer these services. Furthermore, they also aid in selecting the perfect financial organizations to respond to the scenario of the loan application with the person or company that will be controlling a large amount of money and credit facilities. They also ascertain that the lender is ready to act, deal with legal formalities about the investment that are pending for approval, arrange bridge finance, and, inspect the working capital necessities.

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3. Portfolio Governance 

Institutional and other investors can get portfolio management services from merchant banks. To increase the worth of the principal investment, they aid in the administration of securities. To aid in the achievement of their investment goals, merchant banks may offer their clients assistance in the sale and purchase of securities.

Investment Banking

Investment banks’ core duties are underwriting as well as sales of securities using share offerings and initial public offerings (IPO). An investment bank’s clientele consists of major corporations with sufficient resources to fund the selling securities publicly, as opposed to merchant banks, which concentrate on small firms with growth potential. Furthermore, clients also receive help from investment banks as they are engaged in performing essential tasks like making buy-selling agreements, remodeling of capital, and, finally, Mergers and Acquisitions.

Investment banks concentrate on raising capital for organizations and governments through the issuance of debt or equity on the market. This is a shift from their prior responsibilities of underwriting and selling securities.

Eligibility criteria for Merchant Banking vs. Investment Banking roles

Merchant Banking

The group of undergraduates and recent graduates in law, finance, and, engineering, is one from which top merchant banks frequently hire. However, they favour recruiting graduates from prestigious MBA programs and who have excelled in the classroom. Careers in merchant banking can be very competitive to succeed, and, one must have outstanding communication skills, become a great team player, be fluent in another language, and, as a bonus, have a penchant for finance. Obtaining the advanced skill sets necessary for senior merchant banking roles can be greatly aided by earning a relevant certification, such as Financial Risk Manager (FRM) or Chartered Financial Analyst (CFA).

Additional Skills essential for Merchant Banking vs. Investment Banking positions:-

  • Outstanding analytical mindset
  • Thrives under high-pressure work environments
  • Exceptional calculation skills
  • Best work ethics

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Investment Banking

An investment banker needs to have relevant skills and must possess an undergraduate degree credential in finance or investment or related fields. Usually, recruiting organizations hire those people who possess a bachelor’s degree certification in a field like finance or similar areas. They also hire a candidate holding a graduate degree certification or a master’s degree certification (MBA) holders graduating from leading institutions. Some training programs like an MBA in the area of finance offer a world of networking opportunities that can be beneficial for persons interested in making a career in finance. If compared to other beginner-stage positions in other arenas of finance, internship programs in banking can turn out to be highly competitive. Majority of the investment bankers start out as analysts or associates. They can initiate a tough climb upward in investment banking after acquiring some years of experience to become a VP (Vice President) or an MD (Managing Director) or SVP (Senior Vice President/Director).

Skills essential for Merchant Banking vs. Investment Banking positions:-

  • The greatest degree of knowledge of financial basics
  • Profound analytical skills
  • Unmatched networking skills
  • Great client negotiation skills
  • Thrives under high pressure
  • Critical hard technical skills such as Microsoft PowerPoint, Excel, and, also Financial Valuation & Modelling

Merchant Banking vs. Investment Banking job perspective

When it comes to merchant banking jobs, it would be pertinent to remark that while theoretically considered to be distinct types of banking, some investment banks as well as merchant banks perform their operations specially within their officially set limitations. Therefore, it is logical to assume that factors impacting investment banking positions would likewise have an impact on merchant banking jobs. The above-mentioned industry consolidation and the 2008 credit crunch are just a few of these issues.

A decade back, investment banking was people’s first choice career option in finance. However, in the last few years, the competition scenario in this field has got even stronger, as the field endured huge losses, especially in the years succeeding the credit crunch.

As the economy begins to get back up, the financial industry is still witnessing a big restructuring. Nevertheless, investment banking is still considered a top career option, although getting into the field has got even more difficult. As a whole, as per a forecast performed by the US Bureau of Labour Statistics, the financial industry is likely to see an increase in jobs by approximately 11% starting from 2012 till 2022. This is a strong number that is optimistic for anyone thinking about a financial career, particularly when it pertains to the long-term average ratings.

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Merchant Banking vs. Investment Banking Salary

Merchant Banking

Conventionally, merchant banking is ranked as one of the top paying careers in finance. Nonetheless, various factors impact job growth opportunities in a negative way to some degree. As per the estimates of May 2008, the average salary of a merchant banker is 69680 USD per annum. This is exclusive of a large amount of bonuses received by merchant bankers. The average salary varies as per the job location, company size and scale, qualifications, skill sets, and, work experience, forcing several people to search for job opportunities in particular locations where job prospects are better along with compensation that will be provided.

Here are the usual salary packages offered:-

  • 63000 USD per annum on average for Merchant Sales Specialist
  • 71000 USD per annum on average for Business Sales Consultant
  • 61000 USD per annum on average for Experienced Sales Representative
  • 78000 USD per annum on average for Independent Sales
  • 41000 USD per annum on average for Mergers & Acquisitions Analyst

Investment Banking

Despite a small decline, the investment banking field still pays a considerable amount in comparison to other finance career options. Investment bankers in India get Rs. 400000 per annum on average, with the salary starting from Rs. 200000 at the beginner stage and going up toRs. 2875000 yearly on average for senior positions. Like most companies, here also, your salary is impacted by the skill set, qualifications, organization size and scale, and, work location. For example, large corporations pay a significant amount to a candidate holding an MBA degree certification. Moreover, investment banking associates also receive equity-oriented incentives. With time and after acquiring more than three years of work experience, associates get paid more.

In both Merchant Banking and investment banking, compensation packages and incentives may be significantly influenced by the size of the organization recruiting a person. Investment Banking would be the preferred choice because salaries for comparable positions may vary greatly among companies as a result. However, it would appear that working in merchant banking for a large organization would allow one to earn significantly more money.

Career Advantages of Merchant Banking vs. Investment Banking

Merchant Banking Career Advantages

Merchant Banking is one of the top banking career opportunities in terms of perks and compensation packages, as well as interesting and difficult job responsibilities. With the more high-profile profession of merchant banking, experts aid in the funding of organizations and the closing of significant deals. Starting in entry-level positions, the salary is reasonably decent. A committed employee could advance through the levels in order to become an MD or a VP in a company thanks to the great growth prospects.

Investment Banking Career Advantages

It is sort of the best pick from the perspective of a finance career. Some of the reasons are that it is regarded to be among the high paying positions, which draw a lot of sector notoriety. Unquestionably, entry-level compensation is among the best in the financial industry, and also a rookie investment banker working for a multinational company can make significantly higher than greatly experienced employees in other areas of finance.

The training is rigorous for novice analysts who interact with a number of the best brains in the field and work in a challenging setting. They have put in a lot of effort over the course of a few years and are qualified to bear the titles of VP/SVP, Director, and MD. Only after an early working stage of between two and three years, they can create a solid foundation in Investment Banking, they might be committed to it for the long haul. For someone with the ability to operate under incredibly demanding timelines, in-depth financial knowledge, strong negotiating abilities, and a competitive edge, this position is suitable.

Merchant Banking vs. Investment Banking Work-Life Balance

Both investment banking and merchant banking demand long work hours and are meant for people who love to deeply indulge themselves in their work, i.e. call themselves “workaholics”.

Merchant bankers typically work substantially longer hours and experience a greater amount of stress because of the deep participation required and the level of competitiveness of the position. Most merchant bankers put in between 65 to 75 hours per week, working six to seven days a week. Due to the negative effects on the work-life balance, merchant bankers mostly have stressful lives and spend little time with their loved ones. Long-term effects of this unhealthy behavior could harm a person’s health and well-being and lead to issues with stress.

Operating in investment banking has a horrible reputation for requiring long hours because there isn’t any time left for socializing with friends and family or indulging in recreational activities. Given that financial jobs are ranked among the most attractive, it would seem that senior-positioned individuals would be rewarded with a healthy work-life balance. However, that could not always be the scenario.

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Frequently Asked Questions

  1. What are the primary differences between Investment Banking and Merchant Banking?

The difference between the merchant bank and investment bank are explained clearly in the points given below:

A merchant bank is a type of banking institution that focuses primarily on international finance and performs real estate investment, corporate investment, as well as trade finance-related tasks. Corporate counselling, issue management, portfolio controlling, etc. are among merchant banks’ primary responsibilities. An investment bank, on the other hand, is a type of banking organization working with big corporations to help them meet their long-term capital needs by serving as a middleman between the investors and the companies.

Investment banks are focused on the issuing and underwriting of securities, while merchant banks handle international finance operations. An investment bank is fee-focused since it offers clients a variety of services, including banking and advisory services, and it is also fund-oriented because it receives income from lease rentals as well as interest. A merchant bank, on the contrary side, is the sole fee-oriented entity because it offers its clients custodial, advisory, and banking services.

Clients of merchant banks have access to trade financing facilities. On the other hand, there aren’t many investment banks that offer their clients trade financing services. A merchant bank typically works with firms that aren’t big enough to raise capital through an IPO, thus these banks turn to more innovative methods like securities’ private placement. An investment bank, on the other hand, works with global corporations that are eager to offer their securities for public sale.

  1. Describe the skills that are necessary for me in order to become an investment banker or a merchant banker.

Here are the skills and qualifications required for merchant banking and investment banking roles.

Merchant Banking

  • Outstanding analytical mindset
  • Thrives under high-pressure work environments
  • Exceptional calculation skills
  • Best work ethics
  • Outstanding communication skills
  • Great team player
  • Fluent in another language
  • Penchant for finance

Investment banking

  • The greatest degree of knowledge of financial basics
  • Profound analytical skills
  • Unmatched networking skills
  • Great client negotiation skills
  • Thrives under high pressure
  • Critical hard technical skills such as Microsoft PowerPoint, Excel, and, also Financial Valuation & Modelling
  1. Why must I pursue Merchant Banking as a career option?

For college students with a flair for management and finance, merchant banking offers a very profitable career path. It opens up a wide range of career options, including becoming a corporation’s chief financial officer (CFO), financial analyst, financial head, investment banker, or risk analyst. The desire for merchant bankers has been steady and continuous, and it appears that this trend will last for a while. Professionals in merchant banking now have a powerful ally in technology. Professionals with knowledge and expertise in merchant banking will be valuable to companies that handle financial data. Corporates will find success by combining technology, finance, and management, and employees having these skill sets are going to be in great demand.

  1. I am confused about choosing the appropriate career path – investment banker or merchant banker, can you please help me?

Here are some factors to take into account when choosing between the two career prospects:

  • Consider your likings – Despite performing similar tasks as financial consultants as well as researchers, investment and merchant bankers may offer distinct work and services to various kinds of clients. To decide between these two possibilities, start by thinking about your preferences. A job in merchant banking might be more appealing if you’re interested in advising multinational clients about global financial opportunities. However, you might personally work as that of an investment banker unless you want to interact with significant firms or governments.
  • Consider your educational priorities –Both merchant and investment bankers may need a bachelor’s degree certificate to begin their careers, but master’s degrees or higher are frequently required for jobs in the field of investment banking. Bachelor’s degrees in accounting, administration, economics, statistics or other relevant subjects are typical for merchant bankers. Any of these fields can lead to a bachelor’s degree in investment banking, but to achieve further certifications, an investment banker may also want to explore getting a master’s degree in business administration or perhaps another advanced degree. When deciding between these two professions, you can find it useful to take your educational preferences into account. Those who don’t want to seek additional education could find that working as a merchant banker is a preferable option.
  • Consider potential internships – Should you be a student pursuing finance internship opportunities, an investment bank may offer additional opportunities. There can be fewer internship chances with merchant banks because they are less prevalent than investment banks. However, any opportunity for a finance internship can be a terrific method to gain knowledge and network with finance experts. You could take into account how it will become crucial for you to undertake an internship program within the selected division while opting for any of these careers. There may be more options in investment banking if you want an internship that is directly related to your area of interest.

Conclusion

In essence, merchant banks and investment banks are different in that the latter allows companies to issue shares through private placements while the former sells as well as underwrites shares with the help of an initial public offering (IPO) to the general public. To make the most of their careers in merchant banking, individuals should develop the skills necessary for newly emerging employment roles within the banking sector.

Arka Roy Chowdhury has done his post-graduate diploma course from Asian College of Journalism. Previously, he has worked at a few publications. Currently, he is an intern at IIM skills. Arka is an avid reader of sports and entertainment news.

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