Commercial Banking vs. Investment Banking (2024)

The difference between commercial banking vs. investment banking is that investment banks typically raise money by selling securities (like stocks and bonds). On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank. Ultimately, there’s considerable overlap between these two types of financial institutions. Both offer financial services and products to businesses, corporations, government organizations, and institutions rather than individuals or families.

In this guide, we’ll go over:

• Commercial Banking Definition
• Investment Banking Definition
• Careers in Commercial Banking vs. Investment Banking
• Bottom Line: What’s the Difference?

Commercial Banking Definition

Commercial banking involves a range of financial services and products for businesses, governments, and institutions. Large commercial banks often have several subsidiaries or subdivisions, each with specialized products and services. For example, investment banking is sometimes a subdivision of commercial banking — JPMorgan Chase offers commercial banking under the Chase Bank name but investment banking under JPMorgan. Retail banking is also a common subdivision of commercial banking.

>>MORE: Learn more about commercial banking.

A key function of commercial banks is to provide a place for businesses and institutions to store money in checking and savings accounts.

“Banks also offer cash management services to businesses, helping them to manage their cash flow and optimize their financial operations,” adds Sanat Patel, co-founder and chief lending officer at AVANA Companies.

Businesses also use commercial banks for loans and lines of credit. For instance, companies can often access “commercial and industrial lending, commercial real estate, equipment loans, leases, business credit cards, and merchant credit card processing for point of sale transactions” at commercial banks, says Patel.

Some larger commercial banks also have financial planning divisions, which can involve portfolio management, asset management, and personal finance assistance. These financial advisory and investment services sometimes cross over with investment banking functions.

Investment Banking Definition

Many of the largest banking institutions have investment banking subsidiaries or subdivisions, and most of the top investment banking companies are interconnected to commercial and retail banks. For example, Citi has investment banking operations under Citigroup Global Markets, Inc. and retail banking under Citibank.

While commercial banks make profits by collecting interest on loans, investment banks usually rely on selling financial products (such as stocks and bonds) through underwriting,” says Robert R. Johnson, professor, Heider College of Business, Creighton University.

Underwriting is a core activity at investment banks. Underwriting boils down to risk evaluation: When a bank offers a mortgage to a customer, it assumes a risk that the customer may not repay it. In investment banking, underwriting involves the bank taking on the risk of purchasing a stock or bond and finding a buyer. If the stock or bond doesn’t sell, the bank loses money.

>>MORE: Learn more about investment banking.

However, investment banks have a wide range of functions besides underwriting, including:

• Facilitating between companies, finding companies for buyers, and buyers for companies looking to sell
• Assisting private companies in becoming publicly traded through initial public offerings (IPOs)
• Providing investment advice and management to clients
• Performing market analysis and research to keep the bank profitable and inform client decision-making

Careers in Commercial Banking vs. Investment Banking

Commercial Banking Roles

Commercial banks offer many similar roles as retail banks, including careers for tellers, branch managers, and loan officers. However, many jobs in commercial banks focus on one area or product. For example, some people work exclusively on mortgages for commercial real estate, underwriting applications, and even helping clients source properties. Others work in portfolio management, assisting clients with raising money through smart investing decisions.

Investment Banking Roles

In an investment bank, many people hold the title of financial analyst, but their day-to-day duties depend heavily on what area of investment banking they work in. Some investment bankers may specialize in foreign exchange markets, using currency exchange rates to gain profits. Others work in M&A, guiding companies through purchasing or being purchased by other companies.

>>MORE: Experience what it’s like to work as an investment banker with Forage’s Investment Banking Career Path.

Many roles at commercial banks overlap with investment banking careers. Both types of banks need support and office workers in administrative services, information technology, and software engineering to keep internal and external sites and applications functioning.

Both types of banks also need customer service representatives and relationship managers who aim to keep clients happy and solve any problems.

Education and Certifications

Some roles at investment and commercial banks may only require a high school diploma. For example, customer service representatives and tellers usually don’t need college degrees for entry-level positions. Most careers in banking, though, require at least a bachelor’s degree in finance, economics, accounting, or a related field.

Many finance professionals in both commercial and investment banking go on to get master’s degrees in a finance discipline or a Master of Business Administration (MBA). These advanced degrees can help you become more marketable and improve your options for career advancement.

In investment banking specifically, certifications are vital. For instance, financial analysts often need a chartered financial analyst (CFA) designation to work at certain companies. Having a CFA shows an in-depth understanding of investment management, economics, and the ethics of investing.

Other finance professionals at commercial banks may benefit from less investment-focused certifications, like a certified financial planner (CFP) or certified public accountant (CPA). These designations show a deeper understanding of finance.

Skills

Skills needed for a career in investment or commercial banking include:

• Communication
• Interpersonal skills
• Analytical thinking
• Problem-solving skills
• Mathematical skills
• Collaboration

Investment bankers need a higher degree of knowledge in areas like financial analysis, technical analysis, and financial modeling. Commercial bankers, though, need skills in risk assessment, sales, generally accepted accounting principles (GAAP), and asset management.

Bottom Line: What’s the Difference?

Professor Johnson explains that the difference between investment banking and other types of banking is how money is transferred between entities: commercial banks take in deposits and use that money to fund loans for other clients. In contrast, investment banks raise capital by selling stocks and bonds.

The division of functions in commercial banking vs. investment banking is a remnant of the (later repealed) Glass-Steagall Act, which said commercial banks can’t handle investments and investment banks can’t take deposits.

Since that act was repealed, the lines between these banking functions have blurred, causing considerable overlap in the types of careers you can have at either kind of bank.

Ultimately, Patel says that “taking on an internship in a commercial bank and building a core understanding of banking” can help in the job search, but it can also give you a clearer idea of what types of roles and functions you enjoy. The same goes for investment banking —- internships and networking provide invaluable experiences and help you determine if it’s a career you want to pursue.

You can start exploring your career options today with Forage’s free finance job simulations.

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