CompanyGraph
Charles Schwab Corporation
SCHW · NYSE Arca · United States
An OCC banking charter converts swept brokerage cash into FDIC-insured deposits, funding net interest income and making zero-cost equity trading possible.
The OCC banking charter licenses a subsidiary to receive cash swept from brokerage accounts as FDIC-insured deposits, which makes that cash safe enough to attract retail and advisor custody at scale and deployable into interest-earning loans and securities, generating a spread that lets the broker-dealer price equity trades at zero. Zero-cost trading draws asset inflows that replenish the deposit base, so each new account expands both the custodial asset base and the pool the bank lends against, with the two subsidiaries amplifying each other through the same cash flow. That integration is also the structure's central tension: the OCC's Tier 1 leverage ratio caps how much the bank can hold on its balance sheet regardless of deposit volume, and the entire deposit base depends on clients leaving cash idle on the platform rather than moving it to external alternatives, so a rate-driven shift in client cash behavior drains the deposit pool and collapses the spread at the same time the capital constraint tightens. Switching costs — ACATS transfers across thousands of advisor accounts, lost tax-lot cost basis records, and broken portfolio automation — slow attrition, but cannot prevent the outflow if the rate differential between platform cash and outside options grows wide enough.
How does this company make money?
Money flows in through four mechanics: net interest on client cash balances swept to Schwab Bank; asset-based fees charged on advisory accounts and proprietary ETFs; securities lending, in which client shares held in margin accounts are lent to other market participants for a payment; and payment for order flow, in which equity trading volume is routed to market makers who pay for that order routing.
What makes this company hard to replace?
Advisor clients who want to leave face ACATS transfer procedures — the standardized brokerage account transfer process — applied across thousands of underlying client accounts, and must also rebuild automated portfolio management integrations that connect to the custody platform. Retail clients who switch lose tax-lot-specific cost basis tracking (the record of exactly what price each share was purchased at, which matters for tax purposes) and automated dividend reinvestment settings, both of which require manual reconfiguration at a new custodian.
What limits this company?
OCC-imposed Tier 1 leverage ratio requirements — rules that cap total assets relative to regulatory capital — limit how much the bank subsidiary can hold on its balance sheet. When deposit inflows from client cash sweeps exceed that capital-constrained capacity, excess cash cannot be deployed into higher-yielding loans or securities, directly capping the net interest income the mechanism can produce regardless of how many new accounts are opened.
What does this company depend on?
The mechanism depends on five named upstream inputs: FDIC deposit insurance covering client cash swept into the bank, Federal Reserve payment systems that allow the bank subsidiary to operate, SIPC protection (the Securities Investor Protection Corporation, which covers brokerage account assets against firm failure) for the broker-dealer side, the OCC banking charter that permits interest spread capture on those swept deposits, and Schwab Bank's Utah state banking license that enables nationwide deposit-taking.
Who depends on this company?
Independent Registered Investment Advisors rely on the custodial infrastructure for their practices; if custody services disappeared, they would need to rebuild client reporting systems from scratch. Retail investors who use automated portfolio rebalancing and tax-loss harvesting depend on the integrated trading platform — those processes would halt without it. And 401(k) plan participants whose payroll contributions flow automatically into investments depend on the workplace plan administration layer; that automation would break if the administration infrastructure were removed.
How does this company scale?
Client onboarding through digital platforms and standardized custody operations replicates efficiently across millions of accounts. The bottleneck that persists at scale is the FDIC deposit insurance cap of $250,000 per client: above that threshold, cash management requires manual intervention for high-net-worth clients that cannot be fully automated.
What external forces can significantly affect this company?
Federal Reserve interest rate policy directly determines how much the bank earns on swept client cash balances — the core mechanism of the structure. Department of Labor fiduciary rule changes alter the compliance obligations and relationships of independent advisors who custody assets on the platform. Demographic aging is increasing demand for retirement plan services while concentrating assets among retirees who are more sensitive to the costs charged on those assets.
Where is this company structurally vulnerable?
Deposit funding depends almost entirely on retail investors choosing to leave cash idle inside the platform rather than moving it to external alternatives. During rising-rate environments, a sustained shift of client cash toward higher-yielding outside options drains the deposit base the bank subsidiary lends against, collapsing net interest income at the precise moment the OCC leverage constraint also tightens — the same integration that makes the charter valuable makes the structure acutely dependent on client cash remaining parked on the platform.