Save Your Money At 4.25% - Charles Schwab's Formula To Success

Going after 'lazy money' with 4.25% checking

In his article, Mr. Charles Schwab has offered consumers an incredible deal; to deposit their money in his bank with 4.25% interest, no ATM costs, and free checking. Good deal, right? But as the article points out, "With the average interest-checking account now yielding only 2 percent, you wouldn't think Schwab would have to double that to make a splash."

Schwab identified that there is a lot of "lazy money" in the market: money that people want to invest, and watch 'grow'. With his interest rate at twice that of the average, he is attracting a lot of this money.

Consumers have two options;
1) Place the money in the bank (like Schwab's) and gain profits on the interest, or
2) Invest the money stocks and bonds and risk profit or loss or invest in capital.

The opportunity cost of putting the money in the bank is that you forego a potentially higher return in the stock market or wherever you have invested the money. The opportunity cost of investing the money is that you forego the stable, assured interest rate return.

Looking at the graph, where "The Y-axis represents the real interest rate, and since an increase in the real interest rate makes households and firms want to place more money in the bank (and more money in the bank means more money to loan out), there is a direct relationship between real interest rate and Supply of Loanable Funds," (Mr. Welker's Blog (Welker's Wikinomics)).

The direct relationship between the real interest rate and the Supply of Loanable Funds means that as the real interest goes up, as has happened in this article, so will the amount of money that people place in the banks. In other words, the higher interest rate means that people would rather place their money in Mr. Schwab's bank, than invest it. In addition to the costumers gained as transfers from other banks, due to the higher interest rate, this can account for Charles Schwab's success.