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How Does Charles Schwab Make Money (Business and Revenue Model)

The Charles Schwab business model

How Does Charles Schwab Make Money?
Here’s what you should know:
  • What is Charles Schwab?
  • How does Charles Schwab make money?
  • Interest Revenue (From Interest Earning Assets)
  • Asset Management And Administration Fees
  • Trading Revenue
  • Bank Deposit Account Fees
  • Other Revenue
  • Charles Schwab’s Subsidiaries, Acquisitions, and Exits
  • What is the Charles Schwab business and revenue model?
  • Charles Schwab’s profit and revenue
  • Charles Schwab’s funding and valuation

How does Charles Schwab make money if it’s free? Well, here is a full, in-depth, breakdown of their five (5) revenue streams and the different products and services they offer, as well as the Charles Schwab business model, their year-over-year revenue, and how Charles Schwab works.

What is Charles Schwab?

Charles Schwab, formally known as Charles Schwab & Co., is a financial institution providing banking and brokerage services.

Founded in 1971 by Charles R. Schwab, Schwab is the ninth largest bank in the US with 31.9 million open accounts and $6.64 trillion assets under management (AUM) by end of 2020.

How does Charles Schwab make money?

According to Charles Schwab, they provide services to roughly 31.9 million accounts.

So how does Charles Schwab make money from $0 commission “free” trading? Well, as you’ll see below, commission fees only make up for roughly $739 million of Charles Schwab’s $11.7 billion in revenue.

Below is a breakdown of how much money Charles Schwab makes and its revenue model. Including all revenue streams from every service that earns them money. Including what percentage of their total revenue each service accounts for.

Here are the 5 ways of how Charles Schwab makes money (in 2021):

Charles Schwab generates revenue for the company in five (5) ways.

#1. Interest Revenue (From Interest Earning Assets)

Charles Schwab makes more than half of its money from interest earning assets like margin loans, investment securities, and bank loans.

According to page 146 of Schwab’s latest 10-K Form, they brought in roughly $6.5 billion of revenue from interest. The breakdown of interest earning assets and revenue are as follows:

  • Available for sale securities: $4.5 billion
  • Receivables from brokerage clients: $848 million
  • Bank loans: $545 million
  • Securities lending revenue: $334 million
  • Cash and investments segregated: $141 million
  • Cash and cash equivalents: $120 million
How Does Charles Schwab Make Money? | Charles Schwab Business And Revenue Model
Source: Charles Schwab 2020 Form 10-K

Note: $6.5 billion (56%) of Charles Schwab’s total revenue comes from Interest.

#2. Asset Management And Administration Fees

Charles Schwab provides asset management services. Of which, Schwab receives an advisory fee based percentage of each eligible portfolio managed.

There are currently 10 Portfolio Management services available on the Charles Schwab website. In that, 8 of the 10 are percentage based advisory fees.

Charles Schwab Asset Management Fees:

  • Depending on the type of account and strategy, management fees start at 0.55% to 1.00% with account minimums between $25,000 to $1 million

Note: This is Schwab’s second largest revenue stream, accounting for 30% of total net revenues in 2020.

#3. Trading Revenue

Charles Schwab also makes money through trading revenue. Schwab’s trading revenue is revenue earned from commissions, order flow revenue, and principal transactions.

Contrary to the “commission free trading” sales pitch, this only applies to online, self-trades of stocks and ETFs. So if customers want to exchange in other asset commodities like Options, Mutual Funds, Futures, Futures Options, CDs, Corporate and Municipal Bonds, Commercial Paper, Foreign Bonds, and others – these will incur commission fees, trading fees, or both.

The trading fees and commission cost is a $25 service charge plus $0.65 to $2.25 per contract for each broker-assisted trade.

Trading Revenue:

  • Commissions: $739 million
  • Order flow revenue: $621 million
  • Principal transactions: $56 million

Note: Trading revenue accounted for roughly 12% of Charles Schwab’s total net revenue.

#4. Bank Deposit Account Fees

In 2020, Schwab’s bank deposit account fees totaled $355 million, or 3% of total revenue, for The Charles Schwab Corporation.

Charles Schwab has a number of money transfer options, all of which are free except wire transfers.

Charles Schwab Wire Transfer Cost:

  • $25 per wire transfer
  • $15 if transferred online

Note: About 3% of Charles Schwab’s total net revenue came from bank deposit account fees in 2020.

#5. Other Revenue

On Charles Schwab’s 2020 10-K Form, they list “Other” as their fifth and final revenue stream – responsible for 3% of Schwab’s total revenue.

Schwab says “Other” includes exchange processing fees, certain service fees, software fees, and non-recurring gains. This brings in another $332 million of revenue.

Charles Schwab’s Subsidiaries, Acquisitions, and Exits

The Charles Schwab Corporation has made a total of 10 acquisitions, including its largest acquisition of TD Ameritrade for $26 billion in November 2019.

To add to that, Schwab has also had 12 investments, 2 lead investments, and 4 successful exits.

Charles Schwab’s Subsidiaries, Acquisitions, and Exits
Source: Crunchbase

What is the Charles Schwab business and revenue model?

Charles Schwab makes money through a few revenue models that they combine within their company, they are:

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

Charles Schwab’s profit and revenue

In 2020, Charles Schwab reported $11.7 billion in revenue and $3.3 billion in net profit (as found on page 26 of the 2020 Form 10-K). (itemized breakdown on page 36 of Form 10-K)

Note: Because The Charles Schwab Corporation is a publicly traded company, under the Securities Exchange Act of 1934, they must file continuous financial filings with the U.S. Securities and Exchange Commission (SEC). You can find all of Charles Schwab’s publicly released financial reports through Charles Schwab’s 10-K Annual Report investors section on their website.

Charles Schwab’s funding and valuation

Back in 1971 when Charles Schwab & Co., now known as The Charles Schwab Corporation, was just getting started, Schwab used $100,000 from his uncle to open up the company’s first office in San Fransisco.

The $100,000 came from a land deal that Schwab brokered on behalf of his uncle. As a result, his uncle paid his past debts and gave him $100,000 extra to start his business.