Going after 'lazy money' with 4.25% checking

NEW YORK (Fortune) -- When Charles Schwab Corp. unveiled its new high-yield checking account Thursday, the most startling feature was its yield: 4.25 percent. 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.

Well, according to Charles Schwab himself, you'd be wrong.

In an interview with Fortune, the founder and CEO of his eponymous financial services firm talked about how hard it is to get consumers to switch banks - even if they know their rates are lousy and they're getting nickled-and-dimed with fees.

"The financial world lives off lazy money," said Schwab. "There is inertia, and in some respects that's exactly why we decided we had to make this a very powerful offering. Otherwise, it's just a ho-hummer."

The Schwab account includes free checking, free online bill-paying and free rebates on any ATM fees customers incur worldwide. While there are other checking accounts offering high yields - ING Direct has one with a 4 percent yield, and E-Trade's yields 3.25 percent - most have strings. ING's, for example, doesn't offer conventional paper checks, while E-Trade's has a $5,000 minimum account balance. Schwab's, on the other hand, is pretty straightforward.

The new checking account is clearly intended to attract new clients, something that's been a problem for Schwab of late. Even as Schwab's total client assets rose 18 percent last year, new-client assets increased only 4 percent. And the total number of active Schwab brokerage accounts actually fell, from 7 million to 6.7 million.

Each Schwab (Charts, Fortune 500) checking account will be automatically be linked to a brokerage account, into which customers can transfer funds in order to buy or sell stocks, bonds or mutual funds. Those who sign up for checking won't be required to trade, but Schwab still believes the account will serve as a gateway into the other brokerage and banking products Schwab markets.

"We wouldn't have offered it otherwise," Schwab said.

While an Internet-only checking account may appeal more to 25-year-olds than 55-year-olds with more money, Schwab sees a payoff long-term: "We want to be able to serve our younger investors - what I call 'our nursery' - so we make sure we have those people as investors 20 or 30 years out. And the way to do that is with a checking account, which is universal to everybody."

That said, Schwab insists that the accounts won't be a loss-leader - even with no-ATM fees and the 4.25 percent yield. "We feel very comfortable that the checking account is very economic for this firm, right now," he says. "If that's all you ever did with us, we'd have a very comfortable relationship with you. You'd still make us some money."