Commercial Banking vs. Investment Banking -- SmartAsset Blog (2024)

Commercial banks and investment banks have similar names, but the overlap largely ends there.A commercial bank is a depository and lending institution that mainly works with business clients. Typically these firms specialize in small- and mid-sized businesses, although they can operate at any level.An investment bank is a financial institution that specializes in helping companies raise and manage capital, typically through stock and bond issues. They work almost exclusively with large or very large companies.

For help with banking or with financial planning more generally, consider working with a financial advisor.

Commercial Bank Definition

A commercial bank is very similar to a retail bank, just with a different set of clients. A commercial bank will work with businesses, often small- and mid-sized companies. Because their clients have more money and more sophistication than individuals, commercial banks are governed by similar but different laws from retail institutions and they typically have specific charters from either the federal or state government.

Commercial banks provide depository and other cash management services to business clients. They hold money on account, pay interest on deposits, issue checks and other direct payments and otherwise help companies move, store and handle money.

In addition, commercial banks help businesses to raise capital. Like a retail institution, commercial banks generally extend direct loans to their clients in both secured and unsecured form. They particularly specialize in capital expenditures, which are generally secured loans to raise money for business-related equipment.

Commercial banks also help businesses find money from third parties, often by looking for secured lenders, lines of credit and other loan-related products. It is relatively rare for a commercial bank to help businesses find investors. Instead, they typically focus on raising capital through credit.

Commercial banks also help their clients with business-specific cash management needs. Often this relates to services like payment processing, payroll, multi-state and multi-national money movement and recurring expenses.

Many commercial banks also have a consumer operation, just like many consumer banks have a commercial operation.As a result, it’s common to find commercial banks that accept individual depositors and extend individual loans like home mortgages. It’s also common to find retail banks that also work with local or large businesses, depending on the scale of the bank. In fact, it is relatively rare to find a bank that does not accept some accounts from both individuals and businesses.

Commercial banks have a business model similar to retail banks. They charge for some of their specialty services, for example most commercial banks will have a fee for payment processing or payroll services. Beyond that, however, their main business model is to collect interest on the loans they extend to business clients. Since businesses tend to have larger expenses than individuals, this often generates more money than the loans extended by a retail institution.

Investment Bank Definition

Investment banks are financial institutions that help large companies raise and manage capital. They are not depository institutions, meaning that they do not simply hold money on account. While they often hold money for clients, these are accounts related to some transaction or investment in progress as opposed to insured savings.While investment banks can provide a wide range of services, they specialize in helping companies to raise capital by issuing either shares of stock or bonds. Primarily, their business model depends on the fees that clients pay for their financial services and the commissions they make by selling securities.

With stocks, an investment bank will help a company through the process of creating the stock product. They will oversee the process and regulatory requirements and will create a market for the stock by finding institutional buyers. An investment bank will also typically set the price for the new stock by guaranteeing to purchase any unsold shares at a specific value, a process known as underwriting.

For bonds, investment banks play a similar role. They help clients through the legal and financial process of creating this debt instrument and will typically advise clients on what interest rate to offer. They help their client sell this bond offer, again by finding large institutional investors and the bank itself will often underwrite the bonds.

Investment banks are also involved when companies want to make large transactions or other capital transfers. Usually this involves a merger or acquisition. Investment banks oversee this process, help companies raise capital as necessary and help each company manage the legal and financial issues involved.

Investment banks work with almost exclusively large, publicly traded companies. This is as opposed to commercial banks, which can work with businesses of any scale. Because they are not depository institutions, they are governed by different laws from commercial and retail banks. In fact, investment banks are banned from holding accounts on deposit and depository banks are banned from providing direct investment services. These laws were passed in the wake of the 1929 stock market crash and resulting Depression, which was exacerbated when banks lost their clients’ money on bad investments.

That said, starting in the late 1990s Congress has progressively weakened these laws. Currently depository banks can own brokerages and investment banks and can market investment services to their clients, so long as they do not comingle depository and investment funds.

The Bottom Line

Commercial banks are depository institutions that work with businesses. They hold money, extend loans and provide specialty services like payment processing and payroll management. Investment banks help large companies raise and manage capital and are involved with transactions such as issuing shares of stock and overseeing mergers.

Banking Tips

  • Investment banks are a critical part of the modern economy. Learn all about how this high-flying sector works.
  • Investment banks don’t help you make your own investments, but a food financial advisor can. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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I'm a finance expert with extensive knowledge in both commercial banking and investment banking. My experience spans various aspects of these sectors, including their functions, regulations, and historical developments. I'll provide a comprehensive breakdown of the concepts discussed in the article you provided.

Commercial Banks:

  1. Definition and Clientele:

    • Commercial banks are depository and lending institutions.
    • Mainly work with business clients, specializing in small- and mid-sized businesses.
  2. Services Offered:

    • Provide depository services, including holding money on account.
    • Offer cash management services such as payment processing, payroll, and handling recurring expenses.
    • Extend loans, both secured and unsecured, with a focus on capital expenditures for business-related equipment.
    • Assist in raising capital through credit.
  3. Business Model:

    • Similar to retail banks, commercial banks charge for specialty services and collect interest on loans.
    • Common to find commercial banks with a consumer operation and vice versa.

Investment Banks:

  1. Definition and Focus:

    • Investment banks specialize in helping large companies raise and manage capital.
    • Not depository institutions; they do not hold money on account.
  2. Services Offered:

    • Specialize in creating and issuing stocks and bonds for large companies.
    • Oversee mergers and acquisitions, helping companies raise capital and manage legal and financial issues.
    • Do not provide depository services; focus on financial transactions.
  3. Business Model:

    • Depend on fees for financial services and commissions from selling securities.
    • Play a crucial role in creating and marketing stocks and bonds.
  4. Regulations and History:

    • Governed by different laws than commercial banks.
    • Originally banned from holding accounts on deposit to avoid conflicts with depository banks.
    • Laws have been progressively weakened since the late 1990s, allowing some overlap but with restrictions.

General Observations:

  • Commercial banks and investment banks have distinct client bases and services.
  • Commercial banks deal with a broader range of businesses, including small and mid-sized, while investment banks focus on large, publicly traded companies.
  • The article touches on historical regulations, specifically post-1929 stock market crash laws, and mentions the progressive weakening of these laws.

Feel free to ask if you have any specific questions or if you'd like more detailed information on any particular aspect.

Commercial Banking vs. Investment Banking -- SmartAsset Blog (2024)


Commercial Banking vs. Investment Banking -- SmartAsset Blog? ›

Investment banks work with almost exclusively large, publicly traded companies. This is as opposed to commercial banks, which can work with businesses of any scale.

Which is better commercial banking or investment banking? ›

However, commercial banks have a considerably smaller client base as compared to retail banks and they are usually more profitable due to their wealthy customer base. Investment banks are financial organisations that support larger corporations to raise as well as control capital.

Can you tell me the difference between a commercial bank and an investment bank? ›

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.

How risk differs in investment banking and commercial banking? ›

Investment banks facilitate the trade of stocks, bonds and other forms of investment. Government regulation is weaker in the investment bank industry, and this combined with their business model gives them a higher risk tolerance. Commercial banks accept deposits from the public, usually in the form of savings.

Do commercial banks help companies raise capital? ›

Commercial banks are a critical component of the U.S. economy by providing vital capital to businesses and individuals in the form of credit and loans.

Is JP Morgan a commercial bank or investment bank? ›

We are a leader in investment banking, financial services for consumers and small business, commercial banking, financial transactions processing and asset management.

What are two disadvantages of commercial banks? ›

Disadvantages of commercial banks are as follows:
  • The funds received from the commercial banks are of short duration and the procedure of obtaining funds is a time taking affair as there is a lot of verification that needs to be done from the bank end.
  • The bank can set difficult conditions for granting of loans.

Is Goldman Sachs an investment bank or commercial bank? ›

The Goldman Sachs Group, Inc. (/sæks/ SAKS) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many international financial centers.

Can a commercial bank also be an investment bank? ›

Commercial banks and investment banks have similar names, but the overlap largely ends there. A commercial bank is a depository and lending institution that mainly works with business clients. Typically these firms specialize in small- and mid-sized businesses, although they can operate at any level.

Is Bank of America an investment bank or commercial bank? ›

Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world.

Why are commercial banks better? ›

A commercial bank is an easy and flexible source of accepting and withdrawing money. These are the economical source of funds as it manages deposits and withdrawals at a low cost and involves no hidden cost. It generally provides the loan against some security.

What are the advantages of a commercial bank? ›

Using a commercial bank comes with plenty of benefits. This includes the ability to get loans, safe keeping of funds, and electronic transactions. These things are important to get from a bank.

What are the benefits of a commercial bank? ›

Commercial banks tend to charge low prices for services. This makes it easier for most people to open and maintain bank accounts and access other services such as loans. Commercial banking allows customers to get loans at low-interest rates.

What is the largest source of income for commercial banks? ›

Interest income is the primary way that most commercial banks make money.

What is a commercial bank's largest source of income? ›

A bank's primary source of income is from loans to customers who pay interest at either fixed, or variable rates.

What is the largest source of funds for commercial banks? ›

Answer and Explanation: The main source of funds for commercial banks is deposits of businesses and individuals.

What is the highest paying job in commercial banking? ›

What are Top 5 Best Paying Related Commercial Banker Jobs in California
Job TitleAnnual SalaryMonthly Pay
Vice President Commercial Banking$164,547$13,712
Director Commercial Banking$155,547$12,962
Commercial Banking$142,579$11,881
Associate Banker$141,263$11,771
1 more row

Is commercial bank a good career path? ›

While there are advantages and drawbacks in every field, working in commercial banks can be good when it comes to stability. Commercial banks offer financial products and services to businesses, which is something that will likely always be in demand.

What type of investment banking makes the most money? ›

10 high-paying investment banking jobs
  1. Fixed income analyst. ...
  2. Financial analyst. ...
  3. Portfolio manager. ...
  4. Investment banker. ...
  5. Asset manager. ...
  6. Wealth manager. ...
  7. Equity trader. ...
  8. Equity analyst.
6 days ago

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