Here’s a sobering thought: about 60% of Schwab’s revenues come from its banking subsidiary. Post-merger, it could be a major challenger bank.

Charles Schwab invests monies lying idle in customers’ accounts at higher yields, for example in government bonds. These funds are also lent out to customers availing of margin loans for buying stocks – again at a much higher rate of interest.

It doesn’t end there. Schwab Bank provides home purchase loans through Quicken Loans, refinancing of mortgages and a home equity line of credit. Customers may also avail of a flexible line of credit against their investment portfolio.

After acquiring TD-Ameritrade for $26 billion, Charles Schwab will get its hands on even more cash. TD-Ameritrade currently invests its customer cash through Toronto-Dominion Bank and other banks. Therefore, all that liquidity could now flow into the Charles Schwab bank, potentially earning much higher interest, according to the WSJ.

Charles Schwab’s banking products were probably already under-cutting big banks. Here’s a comparison on the Schwab Bank High Yield Investor Checking Account:

Charles Schwab’s muscle after the merger

After the merger, Charles Schwab-TD Ameritrade will be a $100 billion behemoth, with enough financial muscle to challenge the biggest US banks and wealth managers.

“Potentially, both Charles Schwab, TD Ameritrade and TD Bank (the Canadian bank that owns 43% of TD Ameritrade) may be playing an exceptionally long game and seeing that 10 years from now, Schwab competitors are not going to be TD Ameritrade but players like Bank of America Merrill Lynch, Morgan Stanley and Blackrock,” says Morningstar analyst Michael Wong.

ETF.com managing director Dave Nadig told CNBC on Monday that the combined firm would be twice the size of BofA Merrill Lynch. It would also have the biggest adviser network in the world.

“I think we see a firm like Schwab become a default banking provider in this country,” Nadig said. “It’s where I do all of my banking.”

Also, according to Wells Fargo analyst Christopher Harris, TD Bank’s banking agreement with TD-Ameritrade is due for renewal in 2021. This is likely to be dissolved, in his opinion. This would help Schwab monetize TD customers’ cash.

Banks should worry.

[Related Story: Bonanza of New Accounts at Charles Schwab After Zero-Commission Trading                                        ]