Investment banking and commercial banking are two core sectors of the banking industry, each serving distinct roles in the financial system. Investment banks help organizations raise capital in capital markets and provide advisory services for complex transactions, while commercial banks serve ordinary consumers and businesses by accepting deposits and extending loans. These sectors differ in functions, clientele, income sources, risk profiles, and regulation. Below, we examine each in turn with up-to-date examples and sources.
Core Functions
Investment Banking
Investment banking is a financial service sector focused on helping corporations, governments, and institutions raise capital and manage complex transactions. Investment banks underwrite stock and bond issuances, act as intermediaries in securities markets, and advise on mergers and acquisitions, restructurings, and other corporate finance deals. For example, investment banks underwrite new stock and bond offerings by buying them from issuers and selling them to investors, effectively assuming the risk of distribution. They also provide advisory services: for instance, guiding a company through an IPO or merger process. In short, their core functions are raising and arranging funding for large clients and providing strategic financial advice. Investment bankers often work on capital markets and advisory activities rather than taking retail deposits or making ordinary loans.
institutional clients. Historically in the U.S., investment banking was kept separate from commercial banking by the Glass–Steagall Act of 1933, which barred commercial banks from underwriting securities. That separation was largely repealed by the Gramm-Leach-Bliley Act (1999), allowing universal banks to combine services. Today, many large financial institutions operate both divisions (e.g. JPMorgan Chase has Chase for retail/commercial banking and JPMorgan for investment banking).
Commercial Banking
Commercial banking refers to banks that accept deposits from individuals and businesses and use those funds to make loans and provide payment services. . Their core functions include offering checking and savings accounts, extending various loans (such as commercial loans, mortgages, personal loans), and providing payment and cash management services. For example, a key function is safekeeping customer deposits – offering checking and savings accounts – and making those funds available for loans. Commercial banks may also issue credit cards, process payments (electronic transfers, wire transfers), and offer business cash-management services
In essence, commercial banks focus on serving the everyday financing needs of consumers and businesses. They make profits primarily by earning interest margin – the difference between interest
received on loans and paid on deposits – and by charging fees on accounts and services. They also keep customers’ money safe and provide liquidity (e.g. allowing withdrawals on demand).Regulatory deposit insurance (e.g. FDIC insurance in the U.S.) protects consumers’ deposits, distinguishing commercial banking’s retail orientation
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Services Offered
Investment Banking Services
Investment banks offer specialized capital markets and advisory services. Chief among these are underwriting securities: helping companies and governments issue new stock and bond offerings to raise capital They structure, price, and distribute new issues, often guaranteeing funding through underwriting commitments. Mergers and acquisitions (M&A) advisory is another core service: investment bankers identify potential acquisition or merger partners, value companies, and negotiate deal terms For example, a firm like Goldman Sachs or Morgan Stanley might advise on a multi-billion dollar corporate merger or acquisition.
Other services include financial advisory and capital markets services – such as arranging leveraged buyouts, restructurings, and private placements – and wealth and asset management for high-net- worth and institutional clients Many investment banks also have trading desks and research departments: they buy and sell securities on behalf of clients, provide market-making in stocks or bonds, and publish equity and fixed-income research In sum, investment banking services revolve around large-scale corporate finance, structured financing, trading and sales, and sophisticated financial advice for institutions.
Commercial Banking Services
Commercial banks offer a wide range of retail and business banking services. For individuals and families, this includes deposit accounts (checking, savings, CDs), consumer loans (home mortgages, auto loans, personal loans), credit cards, and payment services (debit cards, online/mobile banking, electronic fund transfers). For small to medium businesses, commercial banks provide business loans and lines of credit, commercial real estate financing, equipment leasing, and payroll and cash- management solutions. For example, a local small business might take a term loan or overdraft facility from its commercial bank, or use its cash-management products to handle payroll.
Commercial banks may also offer foreign exchange services, trade finance, and treasury management for corporate clients. They facilitate everyday banking – accepting deposits, processing payments, and providing credit – for the broad public. Many commercial banks now also provide basic investment services (e.g. mutual funds, financial planning) through private banking divisions, but their primary focus remains traditional deposit-taking and lending. As the Forage blog notes, commercial banks “make profits by collecting interest on loans,” and they may also provide services like business investment portfolio management.
Target Clients and Customer Relationships
Investment Banking Clients
Investment banks serve large corporations, institutional investors, governments, and wealthy individuals Their clients tend to be organizations seeking capital or strategic transactions. For instance, pension funds and hedge funds may hire investment banks for underwriting or trading services, while corporations engage them for mergers/acquisitions or equity/debt issuance. Governments and municipalities also use investment banks to issue bonds or advise on privatizations. In wealth management, investment banks may serve high-net-worth individuals (often through private banking arms). These relationships are typically one-to-many (serving large clients) or many-to-one (handling large fund flows), with a strong emphasis on advisory and specialized service.
Indeed, an overview notes that most people will never directly interact with investment banks, since their clientele include “pension funds, corporations, governments and other financial institutions.” Investment bankers build relationships by offering expertise and global market access. For example, a corporate CFO might work closely with an investment bank’s M&A team during an acquisition process, or with its equity capital markets team during an IPO. These client relationships are generally high- touch and deal-oriented, often involving long-term contracts or retained advisory roles.
Commercial Banking Clients
Commercial banks have a much broader and mass-market customer base20. Clients include ordinary consumers, families, and small to medium-sized businesses. In retail banking, everyday customers open checking and savings accounts, take out personal loans or mortgages, and use credit cards – services often facilitated through local branches or online platforms
On the commercial side, small businesses rely on banks for business accounts, term loans, lines of credit, and merchant services. For instance, a restaurant owner might have a business checking account and a loan from a commercial bank. The nature of these relationships is one-to-many and ongoing: individuals typically maintain a single retail bank for everyday needs, and small businesses deal with their bank as a day-to- day financial partner.
In summary, commercial banks serve the broader public and local economy, while investment banks serve larger financial entities and markets. Commercial banks often emphasize customer service, convenience, and trust, managing many customer relationships (tellers, branch managers, relationship managers). In contrast, investment banks focus on a smaller number of large clients, with business driven by deal flow and institutional mandates
Revenue Models and Sources of Income
Investment Banking Revenue
Investment banks generate revenue primarily through fees, commissions, and trading profits. Key revenue sources include underwriting fees (charged for arranging stock or bond issuances), advisory fees for M&A and restructuring services, asset management fees, and trading commissions.
For example, when an investment bank manages an IPO, it earns a large fee based on a percentage of the capital raised. Similarly, if it advises on a merger, it charges a retainer or success fee. Investment banks also earn income from market-making activities, e.g. trading stocks or bonds for clients and capturing bid-ask spreads.
As Investopedia explains, “investment banks make money on the investment services they provide,” such as assisting a company with issuing stock in an IPO and charging for those services. Many investment banks also have proprietary trading (subject to regulatory limits) and may earn revenue from their own investing activities. The income profile is therefore fee-driven and market-driven, and can be volatile (since it depends on transaction volumes and market conditions).
Commercial Banking Revenue
Commercial banks’ income is mostly from net interest margin and service fees. The largest component is interest earned on loans minus interest paid on deposits. For example, a bank might lend at 5% interest while paying 1% on savings accounts; the 4% spread generates profit. Additional revenues come from fees on account maintenance, ATM usage, overdrafts, transaction processing, and other services. Commercial banks may also charge loan origination fees, penalty fees, and fees for investment services or insurance products they offer.
As one source notes, commercial banks earn money by “accepting deposits, furnishing loans... and the principal income source is service fees and interest from loans and advances”. Another highlights
that “commercial banks make profits by collecting interest on loans”. In short, commercial banks
largely depend on a steady margin between lending rates and deposit rates, making their revenue relatively stable and linked to the size of their loan and deposit books.
