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Charles Schwab Said to Buy TD Ameritrade as Discount Brokers' Biz Model Collapses

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Charles Schwab is reportedly planning a $26 billion purchase of TD Ameritrade in an unsurprising response to the industry's tectonic shift to zero-commission trading fees.
Both companies, as well as Fidelity Investments, E*Trade Financial, Ally Invest, and Interactive Brokers, eliminated commission fees on online trades last month, which cost them a combined $20 billion of market cap, according to CB Insights. The impact was significantly larger for Ameritrade, which makes significantly more of its revenue from commission fees, than a Schwab making most of its revenue from interest on assets under management.
"Schwab has a bank charter and some 12 million brokerage accounts — they're not making their primary income on fees," Lindsay Davis, senior intelligence analyst at CB Insights, said at the time. "Fees are just extra revenue they make because they can."
It's unlikely Schwab will compete on high-interest savings accounts, one of the biggest customer acquisition trends of the year before the Fed began cutting rates this year, but as Schwab makes money on deposits rather than fees, Davis added it would be interesting to see the company put pressure on competitors there.
TD Ameritrade made 36 percent of its overall revenue in 2018 from commission fees, according to company data. Schwab reported just 8 percent of its 2018 revenue as coming from commission fees but 57 percent from interest on AUM.
"It makes sense going forward for a company like Schwab to buy Ameritrade," Merlin Rothfeld, investment strategist and instructor at Online Trading Academy, said in an interview at the time. "Basically all they want is clients' capital, the assets under management. If you have $10,000 sitting in an Ameritrade account, Ameritrade will make a little bit off of your capital sitting there in interest — they loan your money out and pay you a little in interest and they keep the difference."
Charles Schwab, the founder and chairman of his namesake company, echoed that idea.
"We've been on that quest for a long time, taking those rates down, down, down making it easier for people to invest, making it cheaper and adding efficiency," Schwab, founder and chairman of the Charles Schwab Corporation ($SCHW), told Cheddar in an interview late last month. "Technology was our savior. We adopted technology very early on so today we're able to go to zero in terms of commission. We've lost about four percent of our revenue [when Schwab cut commission fees], so we've got to make it up with new business. We're already seeing lots of new accounts coming in, people adding to their accounts, adding help or management of their accounts."
The company added 142,000 new brokerage accounts in October, 31 percent more than the number of new accounts added in September, bringing its client assets to $3.85 trillion.
"That's why Schwab [dropped commission fees]. They said we know it's gonna hurt the others, it's gonna sting us a little bit, but that's fine because we'll probably get more people to come to us anyway," Rothfeld said. "Ameritrade is shaking in their boots, so is E*Trade because their models are predicated on big commissions. It's a totally different business model."
Neither Schwab nor Ameritrade responded to requests for comment on reports of the merger. A formal announcement on the deal is expected as early as Thursday, according to Fox Business, which first reported the story.
A merger of the two would also allow Schwab, which is also a bank though it's best known as a stock brokerage firm, to compete against megabanks like JPMorgan Chase "that are viewed as top tier above Schwab and Ameritrade," Jeff Socha, managing partner at Ark Financial, told Cheddar Thursday.
Just the potential of the merger represents the impact of fintech "disruptors" which are often scoffed at by bigger players and industry observers because so many find difficulty acquiring customers and finding a sustainable business model. Much of fintech isn't about re-creating financial products — a checking account is still just a checking account whether you get it from an old bank or a year-old startup — but more about the digital experience around them. Nevertheless, it only took Robinhood six years to shake up the investing world.
While many argue that value proposition wasn't innovative enough to truly "democratize" investing, the company was the first to make anyone rethink the business model for investing, which is what led the major brokerages to drop their fees to zero last month, according to Davis. There was another real scare when Square launched investing for its 15 million users on its person-to-person payments app Cash App, she added. SoFi, another fintech startup, launching active and automated investing for its 1.5 million accounts had a similar threatening effect.
Zero-commission offerings lower the barrier for consumers with small-dollar accounts, but for people with money, it's not a new feature, said Jannick Malling, CEO of the investing app Public.
"The brokerages tend to cater to the power users because they have all the money and they use the margin product and the options trading, but those people have had zero-commission for 20 years," Malling said. "If you have more than $20,000 you could go to Bank of America and get 100 free trades with Merrill Lynch."
"There's still a ways to go, but Robinhood has fundamentally disrupted the way the industry operates and that change was driven by consumers," Davis said. "This is very similar to how robo-advising cracked the passive investing market. Robinhood is similarly doing the same for the active investing market."
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