Commercial banking vs investment banking differences

By Indeed Editorial Team

Updated 25 January 2023

Published 29 September 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Commercial banking and investment banking are two branches of our financial industry, with each institution providing unique fiscal services to clients. Commercial banking has customers such as the general public and businesses who use it to obtain loans, make cash deposits or withdrawals and safeguard their assets. Investment banking, however, serves large businesses or investors in a number of functions including mergers and acquisitions, helping with financing business projects and issuing securities. In this article, we compare commercial banking vs. investment banking to help you understand the different services they offer and the types of career paths available.

What is commercial banking vs. investment banking?

Commercial banking is a branch of the financial services industry that works for the general public and companies, including individual clients and small to medium-sized businesses. Generally speaking, their work revolves around managing client bank accounts and providing services such as loans and financial advice. Transaction fees, service charges and interest on loans are what generate the profit.

An investment bank helps corporations and investors by handling any financial work required during large projects. This might take the form of mergers and acquisitions, advice on stocks or offering financial capital for projects. The best way to look at investment banking is by breaking it down into two categories: trading securities and financial advice. Trading securities are fungible assets that can raise capital in the stock markets. An investment bank underwrites these securities before buying them and then selling them at a profit. Other services include:

  • Asset management and portfolio research

  • Advisory services for mergers and acquisitions

  • Support with proprietary trading

  • Liaison with stock sellers and buyers

Related: How to become an investment banker

Skills found in successful investment bankers

There are a lot of skills that are of great benefit to individuals working in investment banking. From a savvy understanding of spreadsheets to understanding how to build financial models, investment banking tends to be on the cusp of financial innovation. Some of the skills that are useful in investment banking include:

  • Conducting business valuations, or being able to bring different valuation methods to clients such as precedent transactions and comparable company analysis.

  • Applying financial modelling, including building discounted cash flow models and 3-statement models for clients.

  • Preparing transaction documentation such as investment teasers, term sheets and confidentiality agreements.

  • Assembling and compiling pitch books to win over prospective clients.

  • Negotiating skills to facilitate buyer and seller transactions with the client's profit margins in mind.

  • Developing relationships with clients to support their business, pitch ideas and provide a valuable overall financial service.

Related: What to include in your banking cover letter

Ways to become an investment banker

Entering the world of investment banking requires an undergraduate degree, although you do not need to have studied finance. It is a highly competitive field and institutions set a high bar of acceptance for candidates, usually looking for at least a 2:1 undergraduate degree and a well-rounded education. Alongside an undergraduate degree, you need to gain sufficient work experience within the banking industry.

Internship programmes in the larger financial institutions and investment banks can help with this. A common route of entry is to work at an internship until a full-time position is offered to you. Expect to be able to demonstrate solid back-office experience in an investment bank before moving into a permanent role. This is a vital part of the process as it gives new bankers an opportunity to learn about the inner workings of the firm.

Related: Common Investment Banking Interview Questions

The differences between commercial banking and investment banking

Although commercial and investment banking is in the same industry, their operations and services are quite different. From the clients they work with to the level of service they offer, investment banking and commercial banking serve two different types of customers within the world of finance:

Different customer profiles

One of the most apparent differences between commercial and investment banking is their clientele. Investment bankers work closely with large corporations and investors, usually on an international level. Their role is to help these businesses profit financially from investments and secure funding for large-scale projects. Commercial banking works with smaller businesses and individuals to facilitate daily financial transactions and offer advice. Generally speaking, these customers are less knowledgeable about finance and the type of work is less complicated as a result.

Related: Investment banking Q&A: how do investment banks make money?

Different approaches to capital

A commercial bank is able to offer customer loans as and when they need them as the bank has the funds in reserve. This allows a commercial bank to readily offer loans to customers for all types of purposes. By contrast, an investment bank needs to obtain capital for its clients. Here, a customer may ask an investment bank to sell off any debt in exchange for capital. The investment bank needs to find suitable investors to buy the stocks and make capital for their clients.

Related: Corporate finance vs. investment banking (with careers)

Variable levels of risk

Investment banking is more volatile and has a greater risk than commercial banking in terms of investment. There are other factors, such as government regulation, that ensure commercial banking is a safe, low-risk model for customers and investors. Investment banking, by comparison, is relatively high risk due to the nature of its clients. An investment bank only sees profits if their clients do, which means that if something goes wrong with a deal then the bank loses out, too.

Related: What are the different divisions in investment banking?

Job roles in commercial and investment banking

Both commercial and investment banking sectors have a large range of available positions. Some of the most common jobs in the two sides of banking include:

Commercial bank positions

Some of the most common commercial banking jobs include:

  • Sales associates: front-facing employees responsible for performing everyday banking transactions and offering bank services and products to customers.

  • Bank tellers: responsible for handling account transactions including deposits, withdrawals and loan payments.

  • Loan officers: responsible for investigating a customer's financial history to assess eligibility for loans and other financial services.

  • Technical programmers: responsible for developing new applications and maintaining current systems within a banking institution.

  • Trust officers: responsible for taxes, investments, estate planning and trust services for customers.

  • Branch managers: responsible for a bank branch, including all staff, their business relationships and the branch's overall activities and prospects.

Related: What Does a Banker do? (Essential Skills)

Investment bank positions

Some of the most common investment banking positions include:

  • Associates: mid-level employees that have a customer-facing role that helps clients with the preparation of financial models and marketing presentations.

  • Analysts: use financial data to make prudent investment recommendations to clients by analysing metrics like stock performances and market trends. They are also responsible for creating new financial models, creating pitch books and encoding data.

  • Capital market analysts: focus on market trends to look for possible investment options, while also compiling reports for investors.

  • Trading specialists: work to coordinate and roll out financial and credit operations for banks and their clients.

  • Consultants: responsible for financial support and advice to clients in order to help them profit from investments. A consultant often specialises in a specific field of investment banking.

  • Vice presidents: responsible for the overall development and management of the firm and its employees.

Related: What does a banking associate do? (Duties, skills, salary)

Commercial banker's salary

Commercial bankers in the UK generally start earning around £18,000 to £25,000 per year when they first start. With some experience, salaries can reach up to £40,000 per year with bonuses for good performance. Working your way up to the role of a senior manager in commercial banking can boost your earnings to £80,000 per year. In some branches, part-time and flexible job opportunities are available for commercial bankers.

Related: How to become a business banker (with definition and skills)

Investment banker's salary

Investment bankers earn a higher salary from the start of their career when compared to commercial bankers - it is not uncommon to start on a base salary of £30,000 to £40,000 per year. With sufficient experience, investment bankers can comfortably earn £150,000 per year. Due to the nature of the work investment banking normally pays out bonuses as well, which can be much higher than your base salary. Although investment bankers receive a higher salary, working hours are normally much tougher than commercial banking.

Related: How Much Does an Investment Banker Make?

Salary figures reflect data listed on Indeed Salaries at time of writing. Salaries‌ ‌may‌ ‌‌vary‌‌ ‌depending‌ ‌on‌ ‌the‌ ‌hiring‌ ‌organisation‌ ‌and‌ ‌a‌ ‌candidate's‌ ‌experience,‌ ‌academic‌ background‌ ‌and‌ ‌location.‌

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