Commercial banking and investment banking both have similar names. A bank is generally divided into two categories: Commercial banking and investment banking, depending on the type of work performed by a bank. Commercial banking and investment banking come under one area, “ bank” lots of people get confused between them. If you want to know the difference between Commercial banking vs investment banking, then please read our blog. But first, we discuss what commercial banking and investment banking are.
Precap: Commercial Banking vs Investment Banking
What is commercial banking?
What is investment banking?
Difference between Commercial banking vs investment banking
Similarities between Commercial banking vs investment banking
What is commercial banking?
Commercial banking is a financial institution that accepts deposits, provides checking account services, provides different types of loans, and offers primary financial products like C.D.s (certificate deposits) and savings accounts to individuals and small businesses.
Commercial banks play an essential role in the economy because they create capital, credit, and liquidity in the market. There are three types of commercial banking,
- Private bank:
- Public bank:
- Foreign bank:
Functions of commercial banking
- Accepts deposit
- Provides loan and advances
- Credit cash
- Discounting bills of exchange
- Overdraft facility
- Purchasing and selling of the securities
- Locker facilities
- Paying and gathering the credit
What is investment banking?
It is a type of banking that organizes large, complex financial transactions like mergers or IPO (initial public offer) underwriting. These banks may raise money for companies in different ways, including underwriting the issuance of new securities for a corporation, municipality, and other institution.
Investment banks were legally separated from other types of commercial banks in the U.S. from 1933 to 1999. The investment banking industry is commonly divided into three categories,
- Bulge bracket banks
- Middle-market banks
- Boutique banks.
The function of investment banking
- Merger and Acquisitions
- Risk Management
- Structuring of Derivatives
- Merchant Banking
- Investment management
also read: Private Banking vs Investment Banking
Difference between commercial banking vs investment banking
|particulate||Commercial banking||Investment banking|
|Service provided to||Normal public||Investors, corporations, and the government|
|Primary service||Deposit, mortgage loan, and lending loans||Buying and selling stock, bonds|
|Secondary service||Overdraft, promissory note, locker facility, internet banking, mobile banking, credit card, etc.||Assets management, raising money, brokerage service, underwriting of security, advisory service, etc.|
|Earn profit||Difference between lending and deposit rates||Fees charged on different service|
|Low risk||High risk|
|Customer base||Very high||low|
|Connected with||Credit demand||Performance of financial market|
|example||CitigroupWells FargoU.S. BancorpPNC Financial ServicesTruist FinancialGoldman Sachs.||JPMorgan ChaseGoldman SachsBofA SecuritiesMorgan StanleyCitigroupUBSCredit SuisseDeutsche Bank.|
Below are some key differences between commercial banking vs investment banking
- Investment banks serve large, publicly traded corporations, while commercial banks provide services to smaller, middle-market clients.
- Commercial banks are set to be a bridge(intermediator) between people who want to invest and people who want to lend. Investment banks are actually a direct relationship between lenders and investors. The person wants to raise money by bonds/ stock, and others want to invest in bonds hence creating a direct connection.
- Investment banks and their performance are tied to the stock market’s performance, and commercial banks are affected by economic growth and credit demand
- The primary service of a commercial bank is to lend and deposit money to the customers( account holders) and corporations legally. The services provided by a commercial bank are prevalent and not specific. The benefit of an investment bank is mainly based on the customers’ requirements. They act as a mediator between buying and selling bonds/stocks.
- Other services that banks provide and charge fees for are: Commercial banks can benefit from this by offering services related to credit and debit cards, as well as the creation and collection of checks, interest warrants, overdrafts, foreign exchange transactions, merchant facilities, and locker facilities. Investment banks may be compensated through commissions, trade profits, or fees for particular services. Brokerage, IPOs, Advisory, Mergers and Acquisitions, Asset Management, Restructuring, Leveraged Finance, research, proprietary trading, risk management, etc., are some of the ancillary services offered by investment banks.
- Commercial banks earn profit from the difference in the interest rates. They give a loan at a high-interest rate to the common public or corporations, or small businesses. When public corporations deposit money in commercial banks, the interest rate is lower. Investment banks earn profit from the different services they provide to customers.
- The risk in Investment banks is very high because they deal with investors and corporations. The danger in commercial banks is shallow because they will always be in demand as the money needed for the public for different purposes
- The customer base is higher in commercial banks as compared to investment banking.
- The primary purpose of commercial banks is to lend money and deposit and conduct all commercial transactions to all individuals and corporations. As the credit demand in the market is fulfilled by providing loans to the customers
Similarities between commercial banking vs investment banking
Financial and Investment Advisory:
Both give financial, management, and technical advice to their customers in matters relating to the investment. Commercial banking and investment banking advise their customers on how best they can carry out their business operations. They advise investors on the different ways of raising money for investment purposes.
Provision of Credit Facilities:
Commercial banking and investment banking both provide credit facilities to their customers. Commercial banks may provide loans to their customers, and investment banks provide finance and credit facilities to their customers.
Foreign Exchange Services:
Both banks deal with foreign exchange and provide foreign exchange services to their customers.
Commercial bank and investment bank, providing treasury management services, including fixed income, money market, and foreign exchange investment on behalf of clients.
Both banks undertake risk management of their customer’s investments. Risk management is a continuous process that includes the analysis of market risk and credit risk taken by both banks.
Example: Top three largest commercial banks in the U.S.
JPMorgan Chase & Co is the largest commercial bank in the U.S.
JPMorgan possessed consolidated assets worth $3,290,398 million on September 30, 2021.
It is followed by Bank of Amer Corp and Wells Fargo & Co, with consolidated assets worth $2,400,819 million and $1,786,611 million, respectively.
Q1. Current account deposits are
b) Non-repayable on demand
c) Repayable on demand
d) None of these
Q2. Which was the first commercial bank incorporated by the Indians in 1881?
a) Imperial Bank Of India
b) Awadh Commercial Bank
c) Reserve Bank Of India
d) State Bank Of India
Q3.By performing open market operation transactions, RBI regulates which of these factors
a) Borrowing power of the commercial banks
c) Money supply in the economy
d) Both B & C
Q4. The banking sector falls under which of the following sectors?
a) Industrial sector
b) Service sector
c) Manufacturing sector
d) None of these
Q5. Which is the primary activity of a commercial bank?
a) Maintaining deposit accounts, including current accounts
b) Issue and pay cheques
c) Collect cheques for the bank’s customers
d) All of these
The main difference between commercial banking vs investment banking is the function and the target audience. Commercial banks deal with deposits and lending money for business whereas investment banks deal with trading securities, stocks and bonds. I hope now you understand what is a commercial bank and investment bank, the difference between a commercial bank and an investment bank, and similarities between both.
FAQs: Commercial Banking vs Investment Banking
Que1.- Is commercial banking a good career?
Ans- If you want high-paying jobs, then you should consider a career in commercial banking. The pay is attractive even at the entry level and increases as you go high.
Que2.- Is being a commercial banker stressful?
Ans- Two out of five of every 5 banking executives describe their job as “extremely stressful.”
Que3- How do commercial banks make money?
Ans- They make money from what they call the spread, and the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They also earn interest on the securities they hold.