Investment banking and commercial banking are two major types of banking services that differ in their clients, services, functions, and purpose. While investment banks focus on large corporations and institutional clients, providing services like underwriting IPOs, M&A advisory, etc., commercial banks cater to individual and SME customers with services like savings accounts, loans, credit cards etc. Though the terms sound similar, they serve very different banking needs.
In this article, we will dive deeper into understanding what exactly investment banks and commercial banks are, their key differences, as well as the typical roles and services they provide. With a better grasp of banking, you can make informed decisions on career options or banking needs.
Investment banks help large companies access capital markets and provide advice
Investment banks are primarily focused on large corporate clients and institutional investors. Their main service offerings include:
– Raising capital through IPOs or other securities issuance
– Mergers & acquisitions – providing valuation advice and deal execution
– Trading of securities and derivatives
– Investment research and analytics
Essentially, investment banks act as intermediaries between companies and capital markets. They help corporations raise money for expansion by issuing and selling securities.
Investment bankers may work on IPOs, bond issuances, mergers, or pitching business ideas to potential investors. They use financial modeling and valuation methodologies to structure optimal deals. Top investment banks include Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America Merrill Lynch among others.
Commercial banks focus on savings, loans and retail banking services
Commercial banks, also known as retail banks or business banks, primarily serve individual customers, small businesses and entrepreneurs. Their key functions and product offerings are:
– Savings accounts, checking accounts, CDs
– Mortgages and personal loans
– Credit cards and debit cards
– Wealth management and investments
– Insurance products
Essentially they handle basic banking requirements of common individuals like savings, loans, payments etc. Leading commercial bank examples include Wells Fargo, Citibank, HSBC, ICICI Bank etc.
Within commercial banking, there are also further segments like corporate banking, private banking and investment banking arms. While corporate banking caters to mid-market and SME companies, private banking serves high networth individuals.
Key differences between investment and commercial banks
While investment banks and commercial banks sound similar, they serve very different client types and purposes. Below are some of the key differences:
– Clients:
– Investment banks serve large corporations, institutional investors
– Commercial banks serve individuals, entrepreneurs and SMEs
– Services:
– Investment banks focus on capital raising, M&A deals, trading
– Commercial banks focus on savings, loans, payments
– Purpose:
– Investment banks help companies access capital markets
– Commercial banks handle basic retail banking requirements
– Regulation:
– Investment banks are relatively lightly regulated
– Commercial banks are tightly regulated to protect consumers
– Business models:
– Investment banks earn via deal fees and trading spreads
– Commercial banks earn via net interest margins on loans
Typical careers and jobs in investment banking vs commercial banking
Within both investment banks and commercial banks, there are front office, middle office and back office roles.
Investment banking front office roles directly generate revenues and involve high stress. These include:
– Investment banking analysts/associates – conduct analysis and pitch deals
– Sales and trading professionals – trade securities and derivatives
– Research analysts – publish research reports on companies
Commercial banking front office roles interact with and source customers:
– Branch managers – manage retail bank branches
– Relationship managers – manage corporate or HNI customers
– Product managers – design financial products
There are also shared support functions like risk management, HR, IT, operations etc. Though support roles entail better work life balance, compensation is lower than front office.
When choosing a career, you must assess your interests, working style and compensation expectations.
Conclusion
Though investment banking and commercial banking sound similar as banking services, they serve very different purposes. Investment banks help large corporations access capital markets, facilitate M&A deals and trade securities. Commercial banks handle basic savings and banking needs of retail individuals and SMEs. Careers within the two also vary greatly in nature of work, stress levels and earning potential. By understanding the key differences in depth, you can make better career and financial decisions.
Investment banks advise corporations on capital raising and M&A deals while commercial banks handle savings accounts, loans and payments for individuals and SMEs. Though named similarly, they serve very different client types and purposes.