Charles Schwab is not only the dominant player in the discount brokerage industry, it's also a story about how to create a high-growth, high-profit financial company.
It's a story banks should heed.
There are many lessons to be learned from the company's highly focused management entrepreneurial culture and use of technology. But one important aspect that is relevant to all financial services is how Schwab manages its delivery of innovative products and services with back-office efficiency.
Schwab's delivery channels, including PC on-line services, telephone call centers, and a nationwide ever-expanding branch network, provide customers with a complete spectrum of convenience-convenience as defined by the customers. Schwab maximizes its share of the customer's wallet by providing a broad range of innovative products and services, including brokerage, no-fee mutual funds, and cash management accounts which it produces in a low-cost environment.
What can we learn from Schwab? The first lesson is that brand identity can be powerful. Schwab is the best-known discount brokerage company in the United States, which is particularly relevant to its on-line brokerage customers.
Being at the cutting edge of product development and pioneering the no- fee mutual funds supermarket allowed Schwab to leverage its brand name and continue to refresh itself by reinventing its product line and distribution.
In 1985, Schwab was the first company to provide an electronic brokerage in the United States. Unlike others, the company has continually invested in technology to ensure it has state-of-the-art products and delivery capabilities. As a result, Schwab can boast a highly functional private network and Internet-based products at competitive prices. While its electronic delivery is not a sustainable competitive advantage (it could easily be wiped out by a merger between one of the merging electronic brokerage companies and a software communications company), it is the mix of products and delivery channels that makes Schwab a formidable competitor in the asset-gathering business.
The company currently uses three highly efficient distribution channels: Online services, telephone services, and branches. Today, telephone services and branches account for 7% of transactions. Schwab continues to expand its already extensive 225-branch network nationwide. The company's branch strategy is to utilize the branches for account acquisition and the development of brand equity.
Currently, approximately 60% of Schwab customers open their accounts in the branch. In addition, many customers still value physical presence as a symbol of security and accessibility. Schwab has a branch located within five miles of 70% of the personal wealth in the United States. Despite this penetration, management believes the company is still a long way from saturation and plans to open 15-25 more branches in 1997 alone.
But a Schwab branch differs from the typical bank branch in at least two important ways:
The branches are used primarily as a point of sale-a place where customers can buy securities.
Branches are rarely in stand-alone buildings and are located in high- density population areas. They're not mausoleums-just business offices.
While initial-account opening takes place primarily at the branch, customers typically transact with Schwab by telephone. Schwab currently has four call centers with 1,500 employees and is on its way to implementing new technology to automate simple inquiries and trades. The company's Telebroker telephone brokerage system provides clients with a 10% discount from standard commission rates and has been on the market for eight years. More recently, a voice recognition quotation system was introduced. The system is expected to be expanded beyond quotes to full trading capabilities in the future.
Schwab has a clear idea in mind of what its delivery channels are designed to do and shares the cost advantages associated with electronic delivery with its customers through reduced fees. That clarity of vision and focused execution is lacking in most banks today.
Schwab capitalizes on this not only for efficient execution and delivery channel maximization, but for better understanding of customer behavior and sweep of wallet share.
The company's affluent clients comprise 25% of its customers and account for more than 50% of its assets. Schwab offers these customers better pricing and access to specialized services such as trusts. As with brokers at full-service firms, the goal is to solidify relationships with clients.
In summary, Schwab concentrates on providing customers with low-cost, high-value solutions to their asset accumulation requirements. As retailers of financial services, we strive to achieve the same results and can learn much from Schwab's strategy and execution.