Taking Stock

Technological Advantages

Schwab also knew the industry was changing rapidly, and that today's innovators would be tomorrow's leaders. He intended to be one of them. "I didn't want to fall into a rut and stay in one place," he says. "The key was to continually offer better service. And one of the most efficient ways to do that is through technological innovation."

In 1979, he shocked his competitors by spending $2 million to buy a used IBM System/360 mainframe computer and software. "At the time, it was a lot of money to invest in technology, but I knew it would pay off," says Schwab. He was right. Two years later, financial reporters heralded Schwab as an innovator, one who offered better technology than the average Wall Street firm.

Even though the business was growing rapidly, Schwab needed large amounts of capital to fuel plans for expansion. "I was at a point where I needed talented people," he says. "But I couldn't afford them. Without a lot of reserve capital, it was hard recruiting people away from big companies. They had no reason to leave a secure job and take a gamble on a fledgling company."

In an attempt to raise money quickly, Schwab sold his company in 1983 to BankAmerica Corp. for $55 million in the bank's stock. In 1987, Schwab began to regret the move, as the giant bank was sinking in loan losses. "After coming that far, I was not about to lose everything I had worked for," says a determined Schwab. He bought his company back for $175 million in cash and $105 million in bonds. Six months later, (just one month before the October, 1987 stock market debacle), he took his company public, with a price tag of $100 million more than he had paid BankAmerica for his company.

Once again firmly positioned in the fast lane, Schwab intended to stay there by continually upgrading his technology. In 1989, he introduced TeleBroker, an automated 800-number touch-tone telephone system that handled more than 14 million client calls and more than 640,000 trades in its first year. He also spent an additional $20 million to upgrade software. Today, 25 percent of Schwab's trades are made through the TeleBroker service.

Judging by his sales, credibility and market penetration, you'd think Schwab would feel untouchable. Yet, he still worries about his competitors. "We have competitors at every level of the business," he says. "That's the way the American system works. Maybe it's a good thing, because it keeps us fresh and on our toes."

Schwab adds that a crowded marketplace keeps him humble. "Early on, I learned the importance of keeping in touch with the core of my business. Once you lose sight of that, you're not doing your job. No matter how big my business gets, I still ask myself how I can do better."

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This article was originally published in the November 1996 print edition of Entrepreneur with the headline: Taking Stock.

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