Differences Between Banks Merchant Banks And Insurance Companies

Published Date: 02 Nov 2017

Commercial Banks

Merchant Banks

Insurance companies

Generally accessible to anyone

Provide loans for individuals and small businesses

Provides fund to run business

Collects deposits and charge interest on

loans to raise funds

Meant for rich individuals or large corporate companies and governments

Gain funds by investing and managing the assets of customers

Provides services in international finance and long-term loans

Provides fund to run business

Provide funds to secure the business

Risk covered

Protection

Prevent losses

One of the differences between commercial banks and merchant banks is that commercial banks will directly deal with its customers while merchant banks do not. Merchant banks can access to market that normal individuals or companies are unable to reach. Commercial bank provides loans while merchant bank provides capital in terms of share ownership. For example, ANZ Bank holds a license (Australian financial Services License) which enables them to provide capital in terms of investment, banking and insurance.

Commercial banks also provide a wide range of services to fulfill customer’s needs. The services include saving accounts, payment transmission services, loans, credit cards etc. These products are to prepare extra money for emergency purposes. For example, ANZ Bank provides loans such as home loan, business loan and overdrafts. While one of the credit cards (for business) provided in ANZ bank is the ANZ Business One Visa.

Besides, Commercial banks also provide other services. For example, ANZ Bank has its own customized webpage, which enable individuals to do internet banking. Especially for businesses, this service will definitely simplify the processes and thus productivity increases. In fact, ANZ Bank has introduced the e-trade online share trading, which is also known as the online stockbroker. Brokerage services are also provided to individuals for buying and selling stocks. Retirement plans, college savings programs and financial planning services are also offered by commercial banks.

Merchant banks are also known as investment banks. Finance services are not only provided in the form of investment, business banking, advisory but also institutional, corporations etc. Merchant banks will guide a business to achieve its long term goals by providing the cash flow and capital requirements. Commercial banks will never provide these services. As a finance provider, merchant banks will fund capital and lend money to businesses against physical business assets. However, they will charge a certain amount of interest rates. For example, Macquarie Bank provides cash management funds, which can control the cash flow through online visibility.

Macquarie Bank is also always up to date with the technologies. The very good example will be the MAStech. It is a technology team of the bank where they conduct workshops or make publications to provide technical solutions and strategies to the advisers. These people are given sufficient training, considered as professionals, they are able to assist their clients. Thus, it also shows that Macquarie Bank practices Corporate Social Responsibility as their staffs have good interaction with the clients. The Macquarie Advisor Services is a top class customer service for guidance of the business growth and it is made to control the business finances. Their whole idea is to create good working environment as it is directly linked to its productivity.

Even though they provide service of finance, the function of commercial banks and merchant banks with insurance companies are completely different. Insurance companies do not provide finance like how commercial banks and merchant banks do. Insurance companies work this way – charging of premium from their customers. In the business world, there will be a chance where they encounter technology breakdown, or public liability. Hence, QBE insurance company provides a financial assistance through the Business Package Insurance, where the businesses will be protected and secured.

In short, commercial banks provide their services to the public, and merchant banks will only provide their service to the wealthy individuals and large corporate companies. Insurance companies are meant for everyone but it provides its services through insurance instead of banking system. All these are only applicable if the person/business got in trouble. Commercial banks and merchant banks provide their services for the business to run, while they do not guarantee any security for the business. Insurance companies assure and secure the business from large risks by paying a lesser amount of capital.

Advantages and Disadvantages of obtaining Finance

Advantages from commercial bank

The commercial bank that I have investigated is ANZ Bank and there are number of advantages. The first advantage is the extensive retail network. ANZ Bank is a large and global company that benefit in more location with more than 70 branches in 28 countries. This helps user to access money and accounts from any location. With the advantage of branch are widespread, it branch off other advantages like better of services and lower transaction costs. Since the bank has spread over the branches, it is easier, cheaper and efficient to transfer funds from one branch to another. Because of ANZ Bank is a huge company, they achieve specialization and separation of work. They hire the professionals with specialize service of banking to provide better service to their customer as they concern and concentrate well on the customers needs and provide the best and suitable plan to the customers. By having direct contact, it also helps customer and banker relations closer to understand the customer needs. Other than that, ANZ has better public confidence and trustworthy in community. With large financial resources and more than 70 branches around the 28 countries, it deserves the greater public confidence than the small bank.

Furthermore, ANZ helps small business and company to manage the financial problems easily day by day. By having a commercial account in ANZ Bank will make it more accessible to borrow loan when planning to develop in the business. Small company can set up direct deposit or pre-paid card for their employees as well as to manage the expenses such as invoices with card control and amount limits, which help to save time. Another advantage is providing discounts. ANZ offer more product and services to their customer. They act as a wholesaler buying in large quantity and selling at a discount. They may offer discount on service fees and will not charge fees to start up or maintain checking and savings accounts. The loans they provide are like term loans and Small Business Administration (SBA) Loans.

In addition, online and telephone banking make customers easier to check balances, make deposit, transfer funds and loan payments. With online banking, customer can check account balances, deposits, withdrawals and history details and transfer funds between accounts throughout the country. In telephone enquiry, ANZ has categories the services and the enquiry number and it has list in their official website

Disadvantages from commercial bank

The disadvantage of obtaining finance from commercial bank, ANZ Bank is loan approvals. It is difficult for customer to have a loan approval. This is because the loan application has to go through a number of different departments and signed by credit committee to make a final decision on approval or rejection of the loan. This may lead to many people can make decision on the loan approval and rejection to the loan and more bargaining between the bank. In result, it may slow down the speed of loan approval

Besides that, the disadvantage is amount of loan. The loan provide by commercial bank are not in huge amount and it is limit. The loan is just suitable for small business or personal to purchase asset or renovate house. It will be not suitable for those public companies that needs a huge amount to starts a project

Furthermore, government authorities will set rules and regulations to bank and they have to follow it. Commercial bank such as ANZ bank is able to add in additional rules and regulations due to the absolute control and power they have within the economy. These additional criteria are usually added in the loan application process that may be difficult for approve and try to get credit.

In addition, Security is also a limitation. Customers always concern about the risk whether their money in the bank may not insure. If the bank goes bust, all the savings in the bank will not be able to take back. For example United States government start Federal Deposit Insurance Corporation (FDIC) insurance which guarantees $100,000 of the savings so the savings is insure whether the bank goes bust or other reason.

Advantages of Merchant Bank

The merchant bank that I have investigated is Commonwealth Bank. There are many advantages when we obtain finance from Commonwealth Bank. One of the advantages is Netbank from Commonwealth bank that is that first choice online banking for more than 7 million customers at Australia. It is a way to make banking life easier for everyone. It also helps us to handle all our account from a place.

We also can do our banking anytime and anyplace .It also helps everyone to transfer their money with the easiest way. It also provide security guarantee , it make sure our number and password are protected and inform us right away if there is any problem on our account.

Other than that, Commonwealth bank is one of the Australia’s main suppliers of integrated financial service. In Australia’s financial service industry, the most recognized brand is Commonwealth bank brand. Besides that, Commonwealth bank also have financial planner to give customer advice and more information .They can help to achieve your goal for your future. Commonwealth bank is also one of the biggest financial services and it has the most customer approach to because it has over than one thousand branches and over than three thousand post agency nationally.

Furthermore, their bill facility provides some option such as repayment to assist you with the financial needs. By the date set by them that is maturity date, we only need to pay back the interest add on the price. The loan helps us to handle our cash flow because they make sure we pay the bill on the maturity date only and it also provide us protection in the interest rate .For example , we only can borrow 500,000 as a minimum borrowing . It also fixed the rate up to 7 years.

Besides that, Commonwealth bank provides many variety and ideas that are unlike with others. There solve customer solution and achieve their vision for growth in their business. They also provide all stage of one’s business cycle to customers and help their customer to solve problem .For example, whenever they need to free up their working capital, they help customers with leasing solution.

Disadvantages of Merchant Bank

There is some disadvantage of obtaining finance from a merchant bank. For example, Commonwealth Bank is it is available for large corporate customers and some small businesses that are wealthy that are owned by individual client.

Other than that, there is also always some risk when we obtain finance from Commonwealth bank .For example, if the guarantor of the loan are not able to achieve the requirement of the loan repayment, the company’s director might be liable in their capacity as the guarantor of the loan. This may cause the lender to take the risk.

Besides that, not all agreement is success carried out by merchant bank. However, merchant banks also provide and offer their services to companies that are too big for venture capital firms to serve properly, but are still too small to make a compelling public share offering on a large exchange. In order to bridge the gap between venture capital and a public offering, larger merchant banks tend to privately place equity with other financial institutions, often taking on large portions of ownership in companies that are believed to have strong growth potential.

Advantages of Insurance

The advantage of QBE insurance group is one of the biggest international reinsurance group and general insurance. It is a trusted insurance company for everyone and it offer many products with their good service too. They offer many type of product for different industry and this help small business or large business decrease their level of risk. This will encourage them to expand their business and it also help people to find out which bank there are able to obtain finance.

Other than that , QBE insurance group also helps to protect our businesses from risk and help us to solve the problem when we are having risk .We won’t know what will happen in the next minute because life is full of uncertainties. Therefore, by buying insurance from QBE insurance group, we can operate our businesses without worrying and make sure those risk wont interrupt our business. QBE have commercial packages insurance that will protect our business exposed to risk. This package includes machinery breakdown, electronic equipment, business interruption and more. It does not matter whether you are a small business o medium –sized business, QBE give everyone the choice to choose their package according to what they need. It secures a business against the risk in the future and changes that uncertainty to certainty in our business.

Besides that, QBE have accident and health insurance too. For example , individual personal accident and illness , group personal accident , voluntary work and more .Nowadays , there are many unexpected accident happen in our daily life .Insurance can prevent us from spending too much in our health expense especially hospital expense . They will protect us when we are sick and injured with QBE accident and health. Therefore, we don’t have to worry about the cost we need to spend when we are injured or sick.

QBE insurance also helps people to achieve their goal in the future easily and save more money for us. It helps us to have a better standard of living especially after retired. By the time we are earning, our money is saved too and we can get that money after we retire. It is one of the best investment when we are still working because it a unique and easy investment. Therefore, we don’t have to worry when we are old because we can get money when we need. We can also make our child and our life better because it guarantees our life. Furthermore, asset is the most important thing for us but it is easy to spoilt or damage when we use a lot .QBE insurance group also provides property insurance. Therefore, it can make sure our asset is protected and lower down the loss of profit.

Disadvantages of Insurance

The disadvantage of QBE insurance group is it expensive and not everyone can afford to buy it. Although insurance helps and protect a business a lot but some small company that wanted to be protected and secure by insurance are not able to get their business a commercial business which is not cheap. Commercial insurance also have restriction and it might also respond to the claims slowly.

However , we need to pay commission to the agents that work for us , and the commission might be very expensive that will cost us to pay more than we have too .It is also waste of money if we didn’t injured but we pay for the insurance.

Other than that, QBE insurance group offer some insurance that does not cover business in all aspect. The total amount and type of insurance carried by them is not completed. The business’s owner has to choose the things that they want to be insured to lower down the cost.

Some insurance such as Life insurance policies only cover for some limited time. It only pay for you before the policy term is expires if you die but if the policy is expired the policy term than you won’t get anything from them .

Differences between short-term finance and long term finance

Short term finance

Capital deficit businesses funds provided for a short time frame is known as short term finance. Short term finance usually last for a year or less and is used by people who need short term cash requirements. Many people opt for short term finance due to its benefits. Overdraft, credit card, trade credit, business loan and lease are the few source of short term finance.

Overdraft is the extension if a credit when money withdrawn has exceeded the available balance. Essential payment can be made while chasing up the lender’s own payment. Overdraft also helps to maintain cash flow. Overdraft is can be arranged easily and quickly thus providing a good cash flow with minimal fuss. The disadvantages of overdraft are the high interest rate charged mainly to reduce the risk of the bank for not getting their money back from small firms. The bank can refuse to pay the creditors of the business and the business will be hit by a hefty charge for exceeding the limit. Overdraft might need to be secured by business asset and that asset will be at risk if the business fails to make their payment. If the lender violates the terms and conditions of overdraft, the bank also has the power to take back the whole overdraft amount.

Line or credit and credit card is known as a pre-approved loan. Credit line is the amount of money it allows each individual borrower to borrow. As long the total amount of purchases does not exceed the credit limit, the card user is able to make as many purchases within the credit line. Company credit card is common in many businesses. It can be used to manage expenses and a cheap source of short term finance. Credit card can be used to pay purchases made through the internet and over the telephone. This is useful when the buyer does not want to carry large amount of cash because it can be access any time of the day. Credit card offers protection of purchases. If the goods bought is damaged or stolen, the credit card statement can proof the purchase of the product if the original receipt is lost. Credit card benefits are used to attract customers such as discount from a particular store or companies or travel discount. There are credit card companies that offer insurance when large purchases are done. One of the main disadvantages of using a credit card is overspending. High interest rate is charged on each balance that is not paid at the end of each month. Credit card fraud can happen is the card is stolen or someone might steal the owner’s credit card number and use the credit card without the owner’s acknowledgement.

Trade credit is when customers are given time limit to pay their debts. People use trade credit when they do not pay for their delivery of materials, equipment or other valuables on the spot. The buyer is usually given 30 to 60 days to pay back the funds. Trade credit is useful for new business that just starts up and do not have enough capital. Goods can be bought first and payments can be made later with the profit made from the sold goods. Instead of worrying about the business’s cash flow, improvement in areas like marketing, sales and other research can be focused by the business. The term and conditions of the trade credit varies based on the custom and usage of trade. Interest will be charged after exiting the due date. When the company often delay its payment of credit, the business will get a bad credit history that can caused difficulty in obtaining loan in the future.

Leasing is the way of acquiring equipment, machinery or other asset without having the buy it. The benefits of leasing are the cost might be lesser than buying the asset. Leasing can reduce initial cash flow. The entire amount is not needed to be paid upfront because the cost is speeded over a number of years. Leasing is usually a fixed contract which can be worked into the business budget more easily. The main disadvantage of leasing is you are not the owner of the product. Therefore, the product cannot be sold. Lease is hard to terminate early because you are committed to making payment for the entire leas period even when usage of the property stopped. Maintenance of product is also not provided for leasing.

There are a few advantages of short term loan. Short term loan can be obtained in several days or even hours due to the quick application. As long the borrowing company has a relatively stable rate, it requires little paperwork without having amount of collateral. Examination of company’s account is not necessary for short term loan. Short term load are useful to small and medium size companies who do not have a big capital reserve to overcome unexpected financial changes and emergency funding needs such as non-payment or bankruptcy.

Short term finance provides flexibility to the company. It is useful for those who need cash urgently for a short period of time. The maturity date for short term loan is flexible. Seasonal variations in cash flow are often faced by small companies. The cash flow from sales might be insufficient for expansion of business such as hiring new sales staff and building new facilities. Companies check, electronic debits and cash withdrawal with a certain amount is paid by a back when companies apply for overdraft protection. A fee for this service and interest on any balance outstanding is charged to the lender. Furthermore, management has more flexibility in operating their business because the interest rate for short term finance is much lower than long term finance. In short term financing, lenders have no interference in the company’s management or involved in decision making of capital investment. Loans can be paid in a shorter time length when using short term loans. The maturity date is determine by the lender’s personal circumstances and ability to repay.

There is also a drawback of short term loan. When recession happens, small businesses or infant businesses might borrow funds too often on a short term basis. The borrower will faced a huge risk because lender might renew the contract in a much less favourable term than the original contract. The company will be in a weak position and there will be a high chance of facing bankruptcy when the business is not able to overcome the high cost of capital and cannot cope with the accumulated debt.

Long term finance

A debt with a maturity of longer than a year is known as long term finance. Projects such as expansion of business purchase of assets like machinery, land, building that have an indefinite or long time date will use long term finance. The time duration for long term finance can be more than 5 years. The scale of business and nature of business determine the amount of long term capital. Sources of long term finance are mortgage and loans, shares, venture capital and debentures.

The main source for long term finance is shares. Shares are percentage of companies that a person own. There are two types of shares that are private shares and public shares. Private shares are investment in a private company that cannot be obtained by the public though a broker. After the fixed rate of the dividend is paid by the preference share, the dividend on the equity share is then only paid. The advantages for equity share are the shareholder is the residual claimants of the profit. These shares are transferable units. As for the disadvantages, equity shares do not provide a stable income. If the company does not have enough profit, the shareholder might not get the dividend. The profit of the company will decrease and the dividend will also decrease during recession period. Speculation in the stock market often occurs in equity shares of well-known companies. Public shares are shares that carry initial rights over the equity shares. Preference share provides a fixed income as the dividend payable on the shares is fixed. It is less risky because the preference shareholders will get the dividend first. Public shareholders do not have voting rights. They have no rights to claim on surplus amount.

When investors buy a part of the company, it is called venture capital. Money is placed in a company that is high risk and has a high potential growth by the venture capitalist. The period for this investment is usually five to seven years. Venture firms have consultants that can help to avoid the pitfalls that happen with start-up business. A venture capital will offer a loan but want to add a member of their team to the company’s management. Although it gives long term benefits, this can also create internal problems.

Debenture is the loan from public. Debentures are issued by financially strong companies, corporations and governments. People who apply for debenture will receive a prospector detailing the company’s financial performance and future plans. The speciality of the debenture is the applicant is required to pay a fix amount of interest over a period of time. The advantages of debentures are the interest paid on the debentures is consider as an expense and is a profit to the company by saving on income tax. Debentures are more secure. Debentures holder will receive payment before it is paid to the shareholders when the company is in trouble. Interest of debentures can be a burden when company faces loses. Interest might not be paid if the profit of the company decline. This can lead to closure of the company.

Mortgage loan is the loan given base on a person’s property value. The lender has to fully understand the terms and conditions when getting a mortgage loan. Compared to commercial lending, mortgage loans attract lesser interest rate. If you have a mortgage, income tax deductions are available. Mortgage loan improves credit score which determines the interest rate that is offered on other credit products. When you sign up for a mortgage, it will be a long term financial commitment. People who uses mortgage have to bare the risk of losing collateral. The mortgage company has the rights to take back the property if the mortgage is not paid.

Long term finance enhances the buying power of buyers in the amount of buying. With the longer range of the timeline provided to monthly repayment scheme of the buyers, they are able to make more purchases in the buying process. This is because, when the repayment period becomes longer, buyers will have a longer span of time to gather the repaying amount before meeting the due date. Stocks will have enough time to turnover and gain profit for the repayment. Hence, buyers will feel less burdened to increase the buying amount. Another benefit for long term finance is it provides opportunity to undertake large projects.

On the other hand, having an unnecessary long period of repayment may not be good for buyers. This is because when buyers having longer term of loan, the repay interest in between each month of repaying period will be accumulated into a larger amount. Although the interest rate may be low, but as it counts, small amount will be sum up to a certain large amount that spells heavy burden to the buyers. Besides, buyers might also face another problem when purchasing new assets with debts, in other words, the buyers facing very little equity in the asset. As equity is the value owned free and clear by the owners, if it takes longer period to associates with the asset, longer time will be taken to increase the equity and to own the asset free and clear. Another disadvantage would be only large scale, creditworthy firm can obtain long term finance.