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Customer bargaining power

Charles Schwab’s clients’ bargaining power generally is believed to be lower than the
industry’s average due to higher switching cost. Schwab offers comprehensive services with
customization, ranging from advisory to brokage. It creates great convenience for clients to
perform every action using Schwab highly digitalized services. Moreover, with the “Through
clients’ Eyes” strategy, it is able to build trust and loyal relationships with clients by
understanding clients better than themselves. Such customer-focused corporate philosophy
delivers great client experience and increases likelihood of client referral, begetting a
network effect that strengthens the “virtuous cycle”. This kind of IT-embedded customer
first strategy helps Schwab’s client to achieve long term success. It is unique and hard to
replicate, client cannot find substitutes easily, resulting in Schwab’s attrition rate is around
7%, comparing to the industry’s average of 15%.

Suppliers bargaining power

Two major suppliers of the banking industry are the financial markets and employees.
Schwab's main sources of income come from trading, interest income and asset
management, which are primarily based on market performance. Since its fluctuation and
volatility is very high, bargaining power of the financial market is high. Regarding suppliers
of labor, the power ranges between medium and high for different positions. Schwab’s
business model is providing services and building relationships, employees play an
indispensable role even when many services are provided online. Financial talents are not
rare, but the company culture is irreplaceable, deriving “Schwoomerangs”. It describes
employees who left and returned to Schwab, knowing other companies are not as
attractive, which offsets some of the bargaining power of financial talents. Employee with
particularly high power is the R&D team. They are sought after by different industries, such
as Google and Facebook, as they are necessary to innovate in this digital era.

4. Main customer segments and room for improvement

The main customer of Schwab retail banking aged above 40 to mid-50s as investors at this
age have most substantial levels of investable assets and have the most interest in investing.
People aged under 40, especially 20s and 30s, is the key for Schwab’s future growth. Clients
aging under 40s only constitutes 17% but this is a huge market potential. Millennials are
more open-minded to technology so their financial literacy can be improved easily. Their
risk tolerance level is also relatively higher with a longer time horizon. These show that
millennials can potentially bring considerable capital and deposits for Schwab to grow. It is
believed a major concern of low engagement in investment for millennials is debts, like
student loans and housing cost. Yet, Schwab waits for these customers to realize the need
of investment instead of actively reaching. As an active disruptor, Schwab should try to
develop services or products to solve the millennials’ challenges, such as developing a
product mix of student loan backed securities.