Merchant banking—a rapidly growing service in the financial world—is the small business alternative to investment banks (typically leveraged by large corporations). As the popularity of digital payments continues to grow, so does the merchant banking business model. The size of the US merchant banking services market was $73.56 billion in 2024, and it’s expected to grow at a CAGR of 17.42% between 2025 and 2034.
The industry is going through significant tech advancements, aimed at optimizing decision-making and operations for large merchant banks. Its main focus? Providing merchant bank clients—small- and medium-sized merchants—with bespoke payment processing solutions.
Merchant banking may be right for you if you’re a high-net-worth individual, or if your SMB processes high-volume international transactions. In this article, we’ll look at the functions, terms, and characteristics of merchant banks, and their differences with investment banks. We’ll also go over some of the most well-known merchant banks and some FAQs about merchant banking activities.
Let’s get started.
What Is a Merchant Bank?
A merchant bank is a financial institution or firm that provides the money for equity or debt financing of small businesses. They fill a few different roles, helping you raise funds, conduct underwriting, and manage portfolios and loans. Merchant banks also provide SMBs with advisory services and issue management. They’re kind of a one-stop shop for fundraising and advisory services for mid-sized businesses with international monetary affairs.
Although merchant banks relate to SMBs, they primarily deal with international businesses. Merchant banks work with private placements, not with publicly held companies. So, merchant banking also does not extend to companies big enough to have IPOs (Initial Public Offerings). Once a company gets big enough for an IPO, they’d work with an investment bank instead.
What Are Merchant Banking Services?
Merchant banking is a financial service that focuses on international financing, issue management, underwriting, and loans. Merchant bankers focus on private equity investments. Think of them as middlemen between mid-sized companies or very wealthy entrepreneurs and potential investors.
Investment banks are generally not well suited for the needs of small and mid-sized companies. These banks prefer to work with companies that meet a certain threshold for investment, i.e., ones that can invest a minimum amount of funds, typically well beyond the means of smaller enterprises and start-ups.
Characteristics of Merchant Banks
Merchant banks aren’t commercial banks. In fact, they do not provide any traditional banking services. Instead, they work the B2B angle, helping merchants with equity financing, trade finance, and investment decision-making. Merchant banks help prepare mid-sized merchants and start-ups for larger capital markets. In essence, they invest in retailers with a business plan they believe in and help those companies scale.
However, there are certain regulations around financial holding companies (FHCs) engaging in merchant banking activities in the US. While these companies can invest in up to 100% of a business’s ownership, they can hold these merchant banking investments for up to 10 years before being required to divest or sell such investments. In contrast, banking organizations are typically subject to stricter percentage limits of a company’s ownership when it comes to other forms of private equity investments.
What Are the Functions of Merchant Banking?
Merchant banking falls into its own unique category of financial services. Here are some of the core functions of merchant banks for quick reference:
- Merchant banks provide equity underwriting to help companies that need more capital before they hit the stock market.
- They often provide portfolio management and restructuring services by buying and selling assets to enhance value.
- Merchant banks also offer credit syndication services to assist small merchants with their loan applications.
- These banks may help borrowers find the right investors to finance their vision. Many even handle the legal negotiations necessary to move a business plan forward.
- Merchant banks make money from fees and commissions, rather than an outright payment structure. They often retain shares of the companies they assist, bridging the gap between venture capital and IPOs.
Merchant Banks vs Investment Banks: What’s the Difference?
Neither merchant banks nor investment banks handle traditional financial transactions. While these financial institutions share some similarities, there are a few core differences. The most notable one is scale. Merchant banks work with companies before they create an IPO, while investment banks work with them after they go public.
Merchant banks. Besides scale, merchant banks differ from investment banks in that the former don’t assist with mergers and acquisitions. Investment banks do. Merchant banks issue letters of credit and also provide business, financial, and technological consultancy to their clients. Furthermore, on behalf of corporations, these banks may issue and sell securities (via private placements) to investors requiring less regulatory disclosure. Their main focus is high net worth individuals and international businesses.
Investment banks. Most investment banks serve large companies and IPOs. They facilitate purchases of mutual funds and hedge funds. Investment banks also help companies with mergers and acquisitions, whereas merchant banks do not. Investment banks also underwrite IPOs, whereas merchant banks come in before the company scales.
Some Examples of Merchant Banks
The growth of foreign investments, international business growth, and corporate financing is driving expansion in the merchant banking sector. Since merchant banks operate internationally, you’ll want to review the top companies in the United Kingdom as well as the US.
With that said, Citi, JP Morgan Chase, Bank of America, and Goldman Sachs are some of the largest multinational merchant banks available to US-based businesses.
The Bottom Line
Every single dollar you save will help prepare your business to go international, at which point, you might require the services of a merchant bank. For most small businesses, managing payment processing fees is half the battle toward achieving long-term growth.
Finding a merchant bank may not be easy but it’s certainly possible to save a few hundreds of dollars a month on payment processing with Payment Depot. Learn how we can help by connecting with our award-winning customer service team today!
Quick FAQs about Merchant Banking
Q: What is merchant banking and how does it differ from traditional banking?
Merchant banking is a financial service that focuses on international financing, advisory services, and private equity investments. Unlike traditional banks, merchant banks do not provide standard banking services like savings and checking accounts. Instead, they offer bespoke financial solutions for small and medium-sized enterprises (SMEs) involved in international trade.
Q: What are the core functions of merchant banks?
Merchant banks perform several key functions including equity underwriting, portfolio management, loan syndication, and providing advisory services for mergers and acquisitions. They also assist businesses in raising capital before reaching the stage of an Initial Public Offering (IPO).
Q: How do merchant banks generate revenue?
Merchant banks typically earn revenue through fees and commissions for their services rather than traditional payment structures. They may also retain shares in the companies they assist, which aligns their interests with business growth and success.
Q: Who typically uses merchant banking services?
Merchant banking services are primarily tailored for high-net-worth individuals and small to medium-sized businesses that engage in high-volume, international transactions. These services are ideal for businesses that do not meet the investment threshold for larger investment banks.
Q: What distinguishes merchant banks from investment banks?
While both merchant and investment banks provide financial advisory services, merchant banks focus on private placements and smaller enterprises, whereas investment banks cater to larger corporations and IPOs. Additionally, merchant banks do not usually handle mergers and acquisitions, a key service offered by investment banks.
Q: What are some examples of leading merchant banks?
Prominent examples of multinational merchant banks include Citi, JP Morgan Chase, Bank of America, and Goldman Sachs. These institutions provide a range of financial services to support businesses with international operations.
Q: What are the regulatory considerations for merchant banking in the U.S.?
In the U.S., financial holding companies engaging in merchant banking activities must comply with specific regulations, such as investment holding periods and ownership limits. They are allowed to hold merchant banking investments for up to 10 years before divestment.
