Difference Between Investment Banking and Commercial Banking
Learn about concepts of investment banking and commercial banking, and explore difference between investment banking and commercial banking.
Investment banking and commercial banking are two divisions of the banking industry that provide substantially different services. Investment banks speed up the buying and selling bonds, stocks, and other investments and help companies conduct initial public offerings (IPOs). Commercial banks act as deposit account managers for businesses and individuals, although they mainly focus on business accounts and provide public loans through the deposited money they hold. Let us understand the concepts and differences between investment banking and commercial banking.
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What is Investment Banking?
Investment banking is made from a combination of two concepts; banking (a group of institutions dedicated to offering financial services) and investment (a term in economics that refers to allocating capital to obtain a return in the future).
Therefore, investment banking can be defined as entities that identify financial opportunities operating (purchase-sale).
Must Read – Types of Services Offered by Investment Banks
Investment banks offer services to corporations, pension funds, financial institutions, governments, and hedge funds. Many investment banks have retail operations for small individual clients.
Examples of investment banks in India –
- ICICI Securities Ltd.
- Axis Bank
- HDFC Bank
- The Reserve Bank of India
- Credit Suisse Securities (India) Private Ltd.
- Edelweiss Financial Services Ltd.
- HSBC Securities & Capital Markets (India) Private Ltd.
- JPMorgan Chase
- Goldman Sachs
- Morgan Stanley
- Citigroup
- Deutsche Equities India Private Ltd.
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What is Commercial Banking?
Commercial banking focuses on offering services to small savers and clients with less capital and smaller size. Its main function is to raise funds to lend them in exchange for interest. However, commercial banks also offer other services, such as services for the daily operations of an SME, offering collection tools for our clients, and lines of credit to finance us with suppliers.
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In other words, commercial banking offers a banking service to the general public, regardless of the company’s capital and size or the person’s wealth. The service is provided mainly through financing and other products linked to small savers and small businesses.
Examples of commercial banks in India –
- State Bank of India (SBI)
- HDFC Bank
- Punjab National Bank
- Kotak Mahindra Bank
- ICICI Bank
- Dena Bank
- IndusInd Bank
- Bank of India
- Corporation Bank
- Bank of Baroda
- Axis Bank
Investment Banking vs. Commercial Banking
| Investment Banking | Commercial Banking | |
| Service type | Investment and advisory services to companies | Banking services to the general public |
| Tasks | Stock market investments, mergers, share sales, bond issues, financial market trading operations, capital increases, and takeover bids. | Obtaining economic resources through loans and interests, bank card operations, savings plans, investment funds, and pension plans. |
| Customer base | Lower | Higher |
| Driving Factors | Stock market performance. | Economic growth and credit demands affect interest rates. |
| Type of banking | HNWI individuals, the government, corporations, etc. | A country’s citizens. |
| Source of income | Fees and commissions. | Interests. |
Commercial banking is the most common type of banking that we observe in our day-to-day lives. This type of banking accepts deposits from individuals and businesses and provides them with financial services. Commercial banking assists clients with daily banking needs, such as checking accounts, savings accounts, credit cards, and personal loans. Commercial banks also offer mortgages, car loans, and small business loans.
Investment banking assists businesses and governments in raising capital by underwriting and selling securities, such as stocks and bonds. The main job of investment banks is advising their clients on mergers and acquisitions, corporate restructuring, and other complex financial transactions.
Key Takeaways
- Investment and commercial banks provide various services and specialize in various financial activities.
- Investment banks underwrite new debt and equity securities, help sell securities, and drive mergers, acquisitions, reorganizations, and brokerage operations.
- Commercial banks give loans to individuals and small businesses and offer checking and savings accounts and certificates of deposit.
- Most financial services companies operate as commercial or investment banks, although some combine functions.
Conclusion
The main difference between investment banking and commercial banking is that the former allows access to a custody account to invest through stock market instruments, while the latter offers basic banking products such as managing savings accounts, deposits, and loans for individuals and small businesses.
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