Schwab enjoys record Q3 profits because of cash you're doing nothing with
The OG Bay Area disrupter... Charles Schwab (real guy) is a Stanford MBA who founded the 1st discount brokerage in 1971 to disrupt the NYC ones. It just cut stock-trading commission fees to $0 — and Fidelity, TD Ameritrade, and E-Trade followed ASAP. But yesterday Schwab announced record 3rd quarter profits, which don't look that threatened by its fee-less future.
It's kind of like going on a no-éclair diet... when you don't eat many éclairs. Here's how Schwab made $2.7B in revenue last quarter:
- Trading revenue: That's just 6.3% of the total — it's from the $5 Chuck charged for each buy/sell stock trade. That will drop next quarter.
- Asset management: Schwab manages your money for a fee. And sets up retirement funds... for a fee. It made 30% of its revenues on those fees.
- Interest revenue (its secret profit puppy): When you place money in a Schwab account and don't invest, it's open season for Schwab to invest the cash for you on its own behalf. Chuck made a whopping 60% of its revenue by investing and lending out customers' uninvested cash, which was just sitting there.
That profit puppy is under threat... Econ textbooks suggest that banks should pay you for the privilege of holding your money, because that's the same money banks use to make loans. But the national average interest rate is just 0.01% for bank accounts. Schwab offers 0.2% to customers for giving it their cash. Now some publicly traded banks offer higher-yield accounts to win those bucks away from Schwab:
- Citizens Bank: 2%
- Goldman Sachs' "Marcus": 1.9%
- Ally Financial: 1.8%