There are many different types of financial institutions, including commercial banking and merchant banking. The difference between these two types of banks lies mainly in the services they provide and to whom they are provided. Commercial banking is generally accessible to anyone for basic banking needs, whereas merchant banks serve mainly large companies and very wealthy individuals.
Commercial banks are what people typically refer to when talking about banks in general. They typically offer checking and savings accounts and can provide loans to individuals and small businesses. This type of bank raises funds by collecting deposits from these same groups of people, as well as from interest charged on loans. It also purchases bonds from governments and corporate entities.
This form of banking is also sometimes defined as the provision of banking services such as checking and loans to large businesses, as distinguished from individual citizens. In this case, banking provided to individuals is referred to as retail banking to differentiate it from the second definition of commercial banking.
Merchant banking often focuses on investing a depositor’s assets in a finance portfolio and managing these investments. In the US, banks that offer these services are typically called investment banks. Apart from investing and managing the assets of wealthy clients, they also offer counsel and advice to large corporations. This advice is particularly useful when a company is considering merging with or acquiring another business.
Both commercial banking and merchant banking have roots that go back hundreds of years, if not more. Merchant banks were actually the original banks, and they were invented in the Middle Ages by Italian grain merchants. These merchants, as well as Jewish traders fleeing persecution in Spain, used merchant banking to finance long trading journeys as well as the production of grain.
The use of commercial banks by the average citizen is a relatively new phenomenon, historically speaking, but moneylenders have engaged in basic banking practices since the time of ancient Roman Empire. Primitive banking, though, mainly consisted of changing foreign currency, rather than investment as people see today. Today's commercial banks are so common that more people work in the commercial banking sector than in any other part of the financial services industry.
