How does Charles Schwab make money with zero commissions

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Written By Soliu

 

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How does Charles Schwab make money with zero commissions? Fret not, as this article is on the verge of unraveling the Charles Schwab business model.

Without any iota of doubt, Charles Schwab is one of the largest and highly patronized brokerage firms in the whole of the U.S.

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From the brokerage point of view, Charles Schwab has millions of accounts registered under its care and trillions of dollars as its client assets.

Looking it from the banking services angle, billions of dollars can be found as deposited monies in Charles Schwab Bank.

All these figures will definitely beg for so many questions, and one of them could be how does Schwab make money with zero commissions?

What is Charles Schwab?

Charles Schwab was formally doing business as Charles Schwab & Co., before its changed to what it’s known for today in the banking and brokerage industry.

Thus, Charles Schwab is a famous financial institution in the United States that provides and renders banking and brokerage services.

It was established by Charles R. Schwab in 1971, Schwab is ranked as the ninth largest bank in the whole of the United States with 31.9 million open accounts.

Not limited to that, another figure that makes Charles Schwab to be ranked that high is that the Bank has $6.64 trillion assets under management (AUM) in 2020.

That being said, Charles Schwab Corp. is a public company registered under the Securities Exchange Act of 1934, making it obligatory on the firm to file continuous financial earning with the SEC.

Charles Schwab business model

How does Charles Schwab make money?

Going by the statement made by Charles Schwab, they’re currently rendering unending services to 31.9 million accounts on average.

Having such huge numbers of customers, Charles Schwab claimed to be providing its banking and brokerage services with $0 commission.

If that is so, how does Charles Schwab make money from zero commission “$0″ and free trading? Whether it’s real or not, you’ll know soon.

Below is, however, Charles Schwab business model and how its generate its revenue for running the firm smoothly without any problem.

In 2021, Charles Schwab revenue model was traced and five (5) distinct ways was found to be its way of making money.

These revenue generation models includes:

1. Interest Revenue

One of the ways through which Charles Schwab make money out of its $0 commission is via Interest revenue from Interest Earning Assets.

This popular financial institution generates substantial amount of its revenue from interest earning assets such as margin loans, investment securities, etc.

Page 146 of the Charles Schwab’s latest 10-K Form provides that the business organization accumulate $6.5 billion of revenue from interest.

The breakdown analysis of revenue and interest earning assets generated by the firm are shown below:

  • Money receivables from brokerage clients are estimated to be $848 million.
  • Available for sale securities is roughly $4.5 billion.
  • The Bank loans generated revenue is $545 million.
  • Securities lending revenue is estimated to be $334 million.
  • Cash and investments segregated is $141 million.
  • And lastly, cash and cash equivalents, $120 million.

When sum up together, that’s $6.5 billion amounting to 56% of Charles Schwab’s total revenue. All of it were made out of Interest.

You can find all of Schwab’s released financial reports via Charles Schwab’s 10-K Annual Report investors section on their webpage.

2. Asset Management And Administration Fees

Equally, the firm makes money out of its free trading business model from assets management and other administration fee.

What this means is that Charles Schwab provides asset management services. As such, charge a certain percentage as advisory fee on eligible portfolio.

Depending on the account type and strategy, the firm’s management fees start from 0.55% to 1.00% with minimum of $25,000 to $1 million in the account.

This revenue model is, however, Schwab’s second largest revenue stream, as it account for 30% of its total revenues in 2020.

3. Trading Revenue

In the same vein, Charles Schwab also makes money through a revenue model known as trading revenue.

This trading revenue is the revenue earned from order flow revenue, commissions, and principal transactions.

While this may look contrary to the $0 commission or free trading campaign made by the company, this revenue is not applicable to all.

Trading revenue is only applicable to sales pitch, online, ETFs, self-trades of stocks, in that order.

So you want to exchange Mutual Funds, Futures Options, CDs, Corporate and Municipal Bonds, Foreign Bonds, etc., you’ll pay either commission fees or trading fees or both.

4. Bank Deposit Account Fees

According to research, Schwab’s bank deposit account fees was estimated to be $355 million (3% of total revenue) in 2020.

That’s for the Charles Schwab Corporation. The corporation has several money transfer options, and all of them are free excluding wire transfers.

5. Other Revenue

Yes, Charles Schwab business enterprise has a revenue model known as “Othet Revenue” and the firm is making money out of it.

Going by the wordings of the Charles Schwab’s 2020 10-K Form, it mentioned “Other” as her fifth and last revenue stream.

And these “Other” revenue stream is brought in $332 million and that’s 3% of the financial institution net total revenue.

Most importantly, Schwab says this “Other” revenue sources are exchange processing fees, software fees, certain service fees, and non-recurring gains.

What is the Charles Schwab business and revenue model?

Essentially, Charles Schwab Corporation claimed to have zero commissions and free trading business model but yet, makes money through a few revenue stream.

These revenue streams include:

  • Fee-for-service (FFS) business model
  • Interest revenue model
  • Commission based business model
  • Freemium i.e upselling business model
  • Mergers & acquisitions (M&A) business model

Summary

In conclusion, Charles Schwab is currently rendering unending services to 31.9 million accounts on average.

Having such huge numbers of customers, the Corporation decided to be rendering its banking and brokerage services with $0 commission.

So if you’re wondering as to how does Charles Schwab make money with zero commissions, the above analysis should clear your doubt.


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