In 2019, Charles Schwab Corp. shocked the financial world by eliminating trading fees, compelling its rivals to do the same in order to stay competitive.
Charles Schwab’s strategy was grounded in the idea that their banking division, rather than their well-known discount brokerage services, would be the primary driver of the company’s profits. The company aimed to attract more customers and rely on its banking services for revenue generation by eliminating trading fees.
This strategy proved successful, particularly with the pandemic aiding the organization’s growth while interest rates hovered near all-time lows. The company’s banking arm effectively compensated for the loss of fees it had abandoned, generating earnings.
However, the recent failure of American banks, marking the sector’s most severe turmoil since 2008, has upended that gamble significantly.
Bloomberg reports that Schwab, the largest publicly listed US brokerage, now faces one of the biggest obstacles in their organization’s history. The interest rate spike caused deposit levels to drop and unrealized losses to balloon. Consequently, the company’s stock plunged 33% in March, experiencing its worst month since 1987.
Before moving further into this, let us familiarize ourselves with the organization and the zero-fee landscape that it introduced.
Charles Schwab Corporation is a leading financial services company based in the United States. Founded in 1971, it offers a wide range of services and products for individual investors, financial advisors, and institutions. These include:
- Charles Schwab provides brokerage services, including trading platforms and services for stocks, bonds, options, exchange-traded funds (ETFs), mutual funds, and other investment products. The company stands out for offering a discount brokerage with zero fees and commissions, as opposed to traditional full-service brokers.
- Banking services: Through its subsidiary, Charles Schwab Bank, the company offers banking products such as checking accounts, savings accounts, certificates of deposit (CDs), and home lending services.
- Wealth management: Charles Schwab provides financial planning, investment advice, and portfolio management services to help clients achieve their financial goals.
- Retirement services: The company also offers Individual Retirement Accounts (IRAs), 401(k) plans, and other retirement savings solutions for individuals and businesses.
- Custody and trading services for independent registered investment advisors (RIAs): Charles Schwab supports RIAs by providing access to trading platforms, custody services, and practice management resources.
Charles Schwab Zero Fee Initiative
In 2019, Charles Schwab Corporation launched a groundbreaking initiative by eliminating trading fees for stocks, exchange-traded funds (ETFs), and options trades on its platform. This move was a significant departure from the industry norm, as trading fees had been a major source of revenue for brokerage firms.
The zero-fee initiative had several important implications:
- Increased competition: Charles Schwab eliminated trading fees, which intensely pressured other financial services firms to do the same to stay competitive. Consequently, many rival brokerages, such as TD Ameritrade, E*TRADE, and Fidelity, also cut their trading fees, causing an industry-wide shift.
- Attracting new customers: Charles Schwab removed trading fees to draw more customers to its platform, targeting younger and cost-conscious investors who found the zero-fee model particularly appealing. This action also boosted customer loyalty and satisfaction.
- Focus on banking services: The zero-fee initiative was based on the belief that Charles Schwab’s banking arm, rather than its discount brokerage, would become the primary driver of the company’s earnings. By eliminating trading fees, the company hoped to offset the potential loss of revenue by attracting more customers to its banking services, such as checking and savings accounts.
- Impact on the industry: The move to zero fees marked a major shift in the brokerage industry, as firms had to find new ways to generate revenue and stay competitive. This led to an increased focus on offering a broader range of financial services, enhancing digital platforms, and exploring other revenue streams, such as order flow payments, interest on cash deposits, and lending services.
What is the situation moving forward for Charles Schwab Corp?
Deposits are a crucial aspect of Schwab’s business, and a significant decline could force the company to sell securities at a loss. Recently, CEO Walt Bettinger and founder Charles Schwab have issued joint statements to reassure investors that the chances of this happening are near-zero. They highlighted $53 billion of client assets that arrived in March, marking the record’s second-largest inflow for that month.
Independent advisors who work with Schwab are increasingly focused on getting the best returns for their clients’ cash, which may influence the remaining deposits. The company has assured investors that it can increase profitability in the coming years as low-yielding assets mature, allowing for investment in higher-yielding securities. However, this strategy depends on the assumption that deposit flight will decrease.
Schwab has been relying on loans in the short term to support its business and has continued to reward shareholders by increasing dividends and repurchasing shares. Despite the concerns, most Wall Street analysts remain confident in Schwab and maintain “buy” ratings on the company’s stock.
Is Charles Schwab Corp’s Stock Halal?
Charles Schwab Corporation is a financial services company that offers wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. It is involved in interest-based financial services, which is a huge concern from an Islamic perspective.
So is Charles Schwab Corp’s stock halal? No. In order to establish if a stock is halal or not, specific guidelines must be employed. Let’s have a look at the criterion involved in determining whether a stock is halal or not.
Organization’s Name – Charles Schwab Corp
Compliance Status – Not Halal
Ticker – SCHW
Criterion 1: Business Activity
The combined value of Not-Halal and Doubtful sources should not exceed 5% of the Total Revenue.
According to the company’s 2022 annual report, there is 0% Halal Revenue from Charles Schwab Corporation, which automatically makes it not qualified for halal status.
Criterion 2: Interest-bearing securities and assets
Total amount of interest-bearing securities and assets, whether short or long term, should not exceed 30% of the market capitalization of the company to be Shariah compliant.
In this context, the interest-bearing securities and assets percentage for Charles Schwab Corp exceed 30%, to be clearer, it is 392.95 %.
Criterion 3: Interest-bearing debt
Interest-bearing debt, whether long-term or short-term, should not exceed 30% of the company’s market capitalization.
The exact total interest-bearing debt percentage for Charles Schwab Corp is 356.60% which falls too much above the set criteria.
By considering the criteria outlined above, we can determine whether a stock is halal or not and you can make sure to invest your money in the right stock.
Why Conventional Banking is More Volatile than Islamic Banking?
The recent failure of American banks, which led to the sector’s most severe turmoil since 2008, disrupted Schwab’s Zero Fee strategy. This external event was unpredictable and significantly impacted the company’s business model.
It shows the volatility of the conventional banking system and makes us think if any alternative such as Islamic Banking is a good choice for many.
Conventional banking and Islamic banking differ significantly in their underlying principles and operational methods.
First, conventional banking is interest-based, which means that banks charge interest on loans and pay interest on deposits. An interest-based system inherently creates a speculative environment, as banks are motivated to extend credit to generate profits. In contrast, Islamic banking operates on profit and loss sharing and risk-sharing principles, which discourages speculation and excessive risk-taking.
Furthermore, conventional banks rely heavily on leveraging and debt financing, which can amplify both gains and losses. The dependency on leverage makes conventional banks more susceptible to economic shocks and downturns, as even a small decline in asset values can lead to significant losses for banks. On the other hand, Islamic banking promotes equity financing and asset-backed transactions, reducing reliance on leverage and promoting a more stable financial environment.
Last but not least, the ethical and moral principles that govern Islamic banking contribute to its stability. Conventional banking, however, does not follow these ethical guidelines, which can lead to investments in volatile and high-risk industries that can negatively impact the financial system.
The fundamental differences between conventional and Islamic banking in terms of interest-based transactions, leverage, financial instruments, and ethical principles contribute to the higher volatility observed in conventional banking. Islamic banking, with its focus on profit and loss sharing, risk-sharing, asset-backed transactions, and ethical investments, offers a more stable and resilient alternative to the conventional banking system.