Most people know that affiliated companies are somehow related, but few people know the exact legal definition of an affiliate and how it differs from a subsidiary company. Affiliated banks are very popular amongst investors and major corporations because they allow for easy entry into foreign territories and for unique marketing strategies.
The exact definition of an affiliate relationship means that one company or individual is connected to another company or individual via a minor stake in the latter entity. For example, Small Bank would be Big Bank’s affiliate if Big Bank has a 49 percent or smaller stake in Small Bank. The sway and power that the controlling company has largely depends on the stake it has with the affiliate company. At small percentages, it might just mean a friendly investing relationship. At larger percentages, the controlling company might have the power to make major decisions.
This is very common amongst credit card processing companies, banks and all other financial institutions.
Difference Between Affiliate and Subsidiary
These are two similar terms that both mean that one entity has a stake in another, but the difference is the amount of that stake. Affiliate means that one entity has a minor stake in another. Subsidiary means that one entity has a major stake in another, which means that it must control 50 percent or more of the company. In a subsidiary relationship, the other company automatically has the ability to control and sway major decisions. In an affiliate relationship, the power is much looser.
Reasons for Affiliation
Why would one bank or financial institute affiliate with another business that provides similar services, such as credit card processing and checking accounts? There are a variety of reasons. One of the most common is that it allows the bigger company to enter foreign markets with ease. They just have to buy a minor stake in another nation and they gain some sway in that territory.
This also allows one bank to target different demographics. For example, if the main company mostly speaks to older investors but wants to increase its share of young adult merchant accounts, they can do one of two things. They can either create marketing that appeals to this demographic, which can alienate their main audience, or they can purchase shares from a bank that currently appeals to young adults with merchant accounts.
Affiliate relationships are very common in the business and financial world. Aside from entering new nations or markets, this is also a wise investing decision because it gives the main company the ability to sway smaller companies and to siphon some of their profits.