How can Schwab afford to refund all my ATM fees?

Question

I have had a combo bank account/investor account with Schwab for several years now. During this time they have refunded a lot of ATM fees for me. I haven't done any other business with them.

I am using my debit card regularly: in ATM's with a pin, in stores with my signature, and online.

I know that credit card companies make money on every transaction, by charging a per-transaction fee to merchants, and (often more importantly) by taking a percentage cut of every transaction. But from what I recall from starting my own business (a LONG time ago), for debit cards there's only a per-transaction fee of like $0.25, not a percentage cut.

Given that, I find it hard to see how Schwab could even break even with me, or the many other people who get Schwab accounts solely for the ATM refunds. So what do you think, am I an epic bad investment by Schwab?

Answer 1

I am using my debit card regularly: in ATM's with a pin, in stores with my signature, and online.

But later you say

But from what I recall from starting my own business (a LONG time ago), for debit cards there's only a per-transaction fee of like $0.25, not a percentage cut.

Only pin transactions have just a per-transaction fee paid by you to the merchant (and you are reimbursed by Schwab). If you use your card with just a signature or online without a pin, then it is a credit transaction from the merchant's perspective. The merchant pays a fee and Schwab gets its cut of that. So for two of the transaction types that you describe, the merchant pays Schwab (indirectly) out of your payment. Only when you enter your pin does it process as a debit transaction where Schwab pays the merchant.

Because check cards withdraw the money from your account immediately, you don't even get the twenty to fifty day grace period. So those merchant fees are pure profit for Schwab, offsetting the loss from the ATM fees.

You claim $4-5k in fees at $.25 each. That's sixteen to twenty thousand transactions. Assuming that several is four to five years, that's more than ten transactions a day. That seems like a lot. I can see three for meals, one for miscellaneous, and maybe some shopping. But if I go shopping one day, I don't normally go again for a while. I have trouble seeing a consistent average of five or more transactions a day.

Even if we use just the higher ATM fees (e.g. $2), that's still more than a transaction a day. That's an extreme level of usage, particularly for someone who also makes frequent purchases via card.

I haven't done any other business with them.

I find this confusing. How does money get into your account? At some point, you must have deposited money into the account. You can't debit from an account without a positive balance. So you must have done or be doing some kind of business with them. If nothing else, they can invest the balance that you deposit. Note that they make a profit off such investments. They share some of that profit with you in the form of interest, but not that much really.

Of course, Schwab may still be losing money on your transactions. We can't really tell without more information on how much of each transaction type you do and how much of a balance you maintain. Perhaps they are hoping that you will do other, more profitable, activities in the future.

I doubt there are that many Schwab customers like you describe yourself. As best I've been able to see, they advertise their banking services just to investment customers. So it's unlikely that many customers who don't use their investment services use their banking services just for ATM reimbursements.

Answer 2

Schwab is a highly diversified operation and has a multitude of revenue streams. Schwab obviously thinks it can make more off you than you will cost in ATM fees and it's probably safe to assume most Schwab clients use more services than the ATM card.

It's not worthwhile to discuss the accounting of ATM/Debit/Credit card fee norms because for a diversified operation it's about the total relationship, not whether each customer engagement is specifically profitable.

People who get Schwab accounts soley for the ATM fee refunds are in the minority. In 2016 10-k filing Schwab posted $1.8B in net earnings, 10 million client accounts with a total of $2.78T in client assets. A couple grand in ATM fees over several years is a rounding error. "ATM" doesn't even appear in the 2016 10-K.

Answer 3

Like a lot of businesses, they win on the averages, which means lucrative customers subsidize the money-losers. This is par for the course.

It's the health club model. The people who show up everyday are subsidized by the people who never show but are too guilty to cancel. When I sent 2 DVDs a day to Netflix, they lost their shirt on me, and made it up on the customers who don't. In those "free to play" MMOs, actually 95-99% of the players never pay and are carried by the 1-5% who spend significantly.

Acquiring a customer costs money

In business thinking, the overall marketing cost of acquiring a new customer is pretty big - $50 to $500. On the other side of the credit card swiper, they pay $600 bounty for new merchant customers - there are salesmen who live on converting 2-3 merchants a month.

That's because as a rule, customers tend to lock-in. That's why dot-coms lose millions for years giving you a free service. Eventually they figure out a revenue model, and you stay with it despite the new ads, because changing is inconvenient.

Servicing customers costs money

When you want to do a banking transaction, they must provide the means to do that. Normal banks have the staggering cost of a huge network of branch offices where you can walk in and hand a check to a teller. The whole point of an ATM is to reduce the cost of that. Chase has 3 staffed locations in my zipcode and 6 ATMs. Schwab has 3 locations in my greater metro, which contains over 400 zipcodes. If you're in a one-horse town like French Lick, Bandera or Detroit, no Schwab for miles. So for Schwab, a $3 ATM fee isn't expensive, it's cheap - compared to the cost of serving you any other way.

There may also be behind-the-scenes agreements where the bank that charged you $3 refunds some of it to Schwab after they refund you. It doesn't really cost $3 to do a foreign ATM transaction.

They make out on credit card transactions

Most debit cards have a Visa or Mastercard logo. Many places will let you run it as an ATM card with a PIN entry. However everyone who takes Visa/MC must take it as a credit card using a signature. In that case, the merchant pays 2-10% depending on several factors.** Of this, about 1.4% goes to the issuing bank. This is meant to cover the bank's risk of credit card defaults. But drawing from a bank account where they can decline if the money isn't there, that risk is low so it's mostly gravy.

You may find Schwab is doing OK on that alone.

Also, don't use debit cards at any but the most trusted shops -- unless you fully understand how, in fraud situations, credit cards and debit cards compare -- and are comfortable with the increased risks.

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** there are literally dozens of micro-fees depending on their volume, swipe vs chip, ATM vs credit, rewards cards, fixed vs online vs mobile, etc. (Home Depot does OK, the food vendor at the Renaissance Faire gets slaughtered). This kind of horsepuckey is why small-vendor services like Square are becoming hugely popular; they flat-rate everything at around 2.7%. Yay!