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Investment Banking vs. Commercial Banking: An Overview
Commercial and investment banks are both critical financial institutions in a modern economy, but they perform very different functions. Commercial banks are what most people think of when they hear the term “bank.” Commercial banks accept deposits, make loans, safeguard assets, and work with many different types of clients, including the general public and businesses.
On the other hand, investment banks provide services to large corporations and institutional investors. For example, an investment bank may help in merger and acquisition (M&A) transactions, issue securities, or provide financing for large-scale business projects.
Key Takeaways
- The critical difference between the two types of banks is who they provide services to.
- Commercial banks accept deposits, make loans, safeguard assets, and work with many small and medium-sized businesses and consumers.
- Investment banks provide services to large corporations and institutional investors.
Investopedia / Sabrina Jiang
Commercial Banks
Commercial banks usually have tellers, sales associates, trust officers, loan officers, branch managers, and technical programmers. You find many commercial banks in your town operating as local businesses.
Commercial banks give loans, take deposits, and provide other account and banking services for their customers. These banks also offer services to small and medium-sized businesses, such as business loans and lines of credit.
Investment Banks
Investment banks include consultants, banking analysts, capital market analysts, research associates, trading specialists, and many others. There are several types of investment banks, each directing their services toward different audiences.
Types of Investment Banks
There are generally four types of investment banks—bulge bracket, regional boutique, middle market, and elite boutique.
A bulge bracket bank is the largest of the investment banks. Examples you might be familiar with are Goldman Sachs, Morgan Stanley, Credit Suisse, and Deutsche Bank. These banks are referred to as full-service investment banks and operate across the entire financial spectrum, generally globally. Bulge bracket banks handle clients with more than $500 million in assets but also offer services for some smaller clientele.
Middle-market investment banks are a step below the bulge bracket banks. They tend to offer the same products and services, albeit at a smaller scale than the bulge bracket banks. Middle-market investment banks serve clients with assets between $5 million and $500 million.
A regional boutique investment bank is the smallest of the investment banks. Regional boutiques specialize in specific actions such as mergers and acquisitions, personal investment management, or other niche investment services.
Elite boutique banks generally offer a much smaller spectrum of services, such as asset management, restructuring, and M&A-related banking. They are smaller but handle larger financial transactions, similar to the bulge bracket banks.
Key Differences
| Investment Banks | Commercial Banks | |
|---|---|---|
| Clientele | Investors, corporations, government | Small and medium sized business |
| Primary Services | Assisting institutional investors and corporations with financial needs | Loans, mortgage loans, deposit accounts for small and medium businesses |
| Other Services | Wealth and asset management, broker services, financial advisory services | Mobile banking, credit cards, M&A services |
| Profits | From fees on services | From fees for services provided and interest |
Clientele and Services
A key difference between commercial and investment banks is their clients. Commercial banks serve consumers and small and medium-sized businesses, providing loans, bank accounts, and credit cards. They can also offer online banking, real estate loans, and limited investment opportunities.
Investment banks cater to investors, governments, and corporations. They provide services for corporations and wealthier individuals, such as wealth and asset management, merger and acquisition services, security underwriting, and financial advisory and auditing services.
Financial Differences
Commercial banks provide services to small and medium-sized businesses and consumers and earn money through interest and fees. For example, a commercial bank might issue a loan to a small business and charge it interest, which represents revenues for the bank.
Investment banks make money on the investment services they provide. For instance, an investment bank might help a company issue stocks in an initial public offering (IPO) and assist it during the IPO process. The bank would charge the company for its services.
Can You Go From Commercial Banking to Investment Banking?
If you work at a commercial bank, you’ll need additional skillsets to move to investment banking, such as financial modeling.
How Is an Investment Different From a Commercial Bank?
Investment banks differ in that they cater to different clientele. For example, commercial banks serve consumers and some small businesses, while investment banks serve institutional investors and larger businesses.
What Are Four Major Differences Between Commercial and Investment Banks?
Four significant differences are clientele served, products and services offered, the amount of money in transactions, and the regulations that must be followed.
What Is an Example of Commercial Banking?
Commercial banks are used to make deposits or finance an auto loan. An example might be a Home Trust Bank in North Carolina or a Deerwood Bank in Minnesota. Commercial banks can also operate on a larger scale, such as Citibank and Bank of America.
The Bottom Line
Commercial and investment banks are important in modern society because they have different purposes. Commercial banks provide services for small businesses and consumers and offer services for everyday banking needs; investment banks provide financial services for institutional investors and larger enterprises.
