If you’re trying to determine which type of banking job or career path is right for you, it’s important to understand the key differences between investment banking and commercial banking. While both facilitate various financial transactions and services, their business models, job functions, clients, and cultures can vary quite a bit.
In this guide, we’ll compare and contrast investment banking and commercial banking across several factors to help clarify the distinctions.
Defining Investment Banking
An investment bank is a financial institution that assists corporations, governments, and other organizations in raising capital by underwriting and issuing securities. This allows companies to have additional funds that they can invest into new projects or expansions.
Beyond helping clients raise investment capital, some key functions of investment banks include:
Mergers and Acquisitions (M&A) Advisory
Advising organizations on potential mergers or acquisitions and helping facilitate M&A deals. This may involve activities like valuation analysis, deal structuring, negotiation support, regulatory compliance, and transaction closing.
Equity and Debt Capital Markets
Helping corporations issue new equity shares or bonds through Initial Public Offerings (IPOs) or secondary offerings. Investment banks market new securities issuances, provide pricing and structuring advice, underwrite the transactions, and help sell the newly issued shares or bonds to investors.
Proprietary Trading and Investing
Using an investment bank’s own capital to take positions in various asset classes like public company stocks, bonds, derivatives, real estate, private equity, currencies, and more. The goal is to earn trading revenue and investment returns for the firm itself.
Research
Producing equity research reports, macroeconomic analysis, quantitative modeling, industry trends reports, and other information that in-house personnel and external clients can use to guide investment decisions.
The large, full-service investment banks like Goldman Sachs, Morgan Stanley, and JPMorgan Chase have expertise across all these areas. Boutique investment banks may specialize in only one or a subset of these functions.
Defining Commercial Banking
A commercial bank is a financial institution that provides services to consumers, small businesses, corporations, and governments. Their primary offerings include:
Deposit Accounts
Providing checking and savings accounts to customers. Commercial bank deposits are FDIC insured for safety and these accounts allow for convenient access to cash, check writing, debit card spending, online transfers, and more.
Lending
Using the large deposit base to issue various types of loans and lines of credit to individuals and businesses for any needs they may have. This includes mortgages, auto loans, small business loans, revolving lines of credit, equipment financing, and more. Underwriting standards are applied to assess creditworthiness and set terms accordingly.
Cash Management
Offering cash management tools for corporate and government clients that facilitate transactions, provide fraud detection, enable global money movement, automate payroll, simplify balance reporting, integrate billing, allow for online bill pay, and more.
Trust and Wealth Management
Managing assets for high net worth individuals to help preserve and grow their wealth over generations through investments, tax strategies, estate planning, charitable giving, and more. This may involve teams of investment managers, tax experts, financial advisors, accountants, and lawyers.
Some of the most prominent U.S. commercial banking institutions include Chase, Bank of America, Wells Fargo, Citibank, PNC, and US Bank. Credit unions and community banks focus heavily on commercial banking services as well but on a more local scale.
Now that we’ve defined both, let’s analyze some key differences between investment banking and commercial banking across a few dimensions:
Business Model and Revenue Sources
Investment banks make most of their money by charging fees and commissions for the services they provide in raising capital, trading securities, providing M&A advice, distributing research, and more. Their engagements typically last from just a few days to several months, after which they collect their contracted fees. Proprietary trading and investment activities also make up a portion of revenues.
Commercial banks predominantly earn ongoing income from the net interest margin they earn between deposit interest expenses and interest income from loans and credit facilities. They also collect account fees, payment processing fees, wealth management fees, and various other service charges. Their revenue streams are highly recurring since their banking relationships with retail, business, and institutional customers can last for many years or decades in some cases.
Capital and Regulation Requirements
Investment banks are structured as broker-dealers regulated by the SEC. They hold less capital relative to assets since their business models don’t involve significant lending activity. Investment banks increased capital cushions after the 2008 financial crisis but still operate with higher leverage compared to commercial banks.
Commercial banks hold much higher levels of Tier 1 capital as a percentage of risk-weighted assets. They are regulated more stringently by government agencies like the Federal Reserve and FDIC. Recent regulation has forced improved capitalization levels, liquidity management, internal risk controls, stress testing procedures, and more financial discipline.
Compensation and Work Hours
Front office investment banking roles are infamous for paying higher base salaries and bonuses but demanding 80-100+ hour work weeks and volatile hiring/firing based on economic cycles. The lifestyle puts strain on health, relationships, and personal lives. The appeal comes from the intellectual stimulation, high pay, and fast career advancement.
Commercial banking offers better work-life balance for most roles other than M&A advisory. The hours are still long compared to corporate jobs but more reasonable than investment banking. Commercial lending and relationship management roles deliver a steady paycheck, bonus potential, and long-term career stability without as much pressure.
Skill Sets and Education
Investment bankers need financial modeling, detailed company and industry analysis, valuations, capital markets, M&A, and client communication skills. Most hold undergraduate finance degrees or MBAs from top 15 or top 30 universities alongside internship experience. Technical and interpersonal abilities are both crucial.
The required credentials for commercial bankers are often not quite as intensive. Company and credit analysis, industry expertise, risk management, and relationship-building skills are vital. Formal education spans a wider spectrum with companies hiring from state schools alongside Ivy League universities.
Clients, Customers, and Stakeholders
Investment banks serve corporations, institutional investors, governments, non-profit organizations, ultra-high net worth individuals, and their own proprietary trading desks. Deliverables center around transactions, investment performance, and actionable insights. Stakeholder relationships are often short-term and fast moving.
The client base for commercial banks consists of consumer households, small businesses, middle-market companies, and larger corporations. Products and services provide banking, borrowing, and wealth management utility for customers over multi-year time horizons. Personal relationships and trust building are paramount.
Corporate Cultures
Given the transaction-oriented business model, investment banking culture is intensely competitive and driven by financial performance. Bankers try moving up the ladder quickly from analyst to associate to Vice President to Director/Managing Director. This breeds insecurity, politicking, and high turnover.
Commercial banking has more collaboration across business lines to serve clients. Relationships, teamwork, and communication are valued alongside analytics and sales skills. Slower career progression allows for developing well-rounded bankers and longer tenures at firms.
Conclusion
Deciding between careers in investment banking vs commercial banking depends largely on your skills, interests, values, and professional lifestyle preferences.
If you thrive on complex problems, enjoy stressful performances, want high compensation, and can survive the volatility, then investment banking may better suit your personality.
If you prefer relationship management, serving customers, collaborating in teams, and having good work-life balance, then commercial banking is likely the better fit.
Whichever path you take, be sure to choose the one that best matches your abilities and passions! Mastering your specialty, delivering great results for clients and stakeholders, and managing stress effectively can lead to a long, prosperous run.