What is the Origin of Merchant Banking?
A merchant bank isn’t a regular bank. Ordinary banks – sometimes called retail banks – are probably what you’re more familiar with. They process your salary, hold your savings, offer mortgages, provide car loans, and issue credit cards. Merchant banks rarely deal with customers on an individual level. Instead, they issue capital to medium corporate entities.
When someone wants to start a business, they might seek funding from family, friends, outsourcing platforms like Kickstarter, or venture capitalists. Other times, they might get financial support from merchant banks. The bank gives them seed money in exchange for shareholding. So in essence, the merchant bank buys a stake in the company.
Early days in Italy and France
You’ve probably heard about the Merchant of Venice. It’s a play written by Shakespeare about a money-lender. Back then, when people needed business funding, they would go to such money-lenders, because the church didn’t allow people to loan money for interest or profit, so this profession was one of the few avenues that historically remained open to individuals who were members of minority religions, who were often discriminated against when they sought other forms of employment.
Over time, money-lenders evolved into merchant banks. These banks would invest in businesses like sea-faring and wholesale trading. They introduced hard currency and formalized the barter system, replacing it with precious metals and prized gemstones. This eventually grew into a cash system based on coins and currency notes.
Expansion of merchant banking in Europe
The first ever merchant banks were established in Italy and France. They were not used by ordinary people, since only rich traders had the liquidity to do business with them. Over the centuries, retail banks developed to serve ordinary individuals. Back then, in the 18th and 19th centuries, trade with colonies was a rich source of income.
The industrial revolution spread the popularity of merchant banking. Inventors and machinists needed funding for their revolutionary discoveries, and merchant banks got involved, creating a class of industrial tycoons. Today, merchant banks don’t just offer cash. They also offer advisory services, oversee IPOs, and preside over acquisitions and mergers.
Merchant banks are not commercial banks
When you look at the situation from this perspective, you might think that merchant banks are ‘business banks’ as opposed to ‘customer banks.’ That’s not true. Commercial banks primarily deal with business entities rather than individual customers. They can process transactions, issue credit cards, and offer loans.
This means commercial banks deal in customer-facing cash. Corporations can deposit cash in their commercial bank and withdraw it at will. Merchant banks don’t deal in deposits or withdrawals. They offer funding in exchange for shares in your business.
In some places, merchant banks and investment banks offer the same service range. Here in the US, merchant banks have the distinct function of issuing venture capital to entities that are either too large for individual investors, or inaccessible for other reasons. They go beyond venture capitalists, offering financial services that capitalists can’t.
For more information on the importance of merchant banking, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.
