The quick success of online broking firm Zerodha has caught the broking industry off guard. At a time when most brokerages offer personal questions based two-factor authentication for login, Zerodha has replaced this with a six digit PIN, which also supports a mobile authenticator based TOTP (Time-Based One-Time Password) system for added security. Just last month, Zerodha had surpassed traditional brokerages such as ICICI Securities, Motilal Oswal Securities to become the largest broking firm in terms of number of clients.
Be it price conscious Indian investors, a demographic shift in customer base or power of technology, Zerodha has caught the game right capturing the market share from the full services brokerages. Other discount broking firms such as Upstox, Samco Securities, 5paisa and SAS Online also understood the rules of the game well to make a disruption in the brokerage industry. With new age investors flocking to the stock market, traditional broking firms are waking up to the fact that they have a big threat in the new breed of online broking firms. Their no-frill basic accounts and services have resulted in a realignment of the pricing strategy across the industry and have helped expand the market by bringing on board a large number of first-time investors.
Dhirendra Kumar, Founder and CEO of Value Research points out that a new trend has emerged where on one hand you have brokerages charging low to nil commission, on the other, independent advisory services offering quality knowledge content for free to those interested.
"Independent advisory has emerged as a separate business, for example, Equitymaster and Launcher Services. We see great traction there. When you get advice independently and when you get execution very cheap, then why would investors go to big broking firms. All the people with primary brokerages are because of legacy of being there for a very long time. Otherwise, they could very well do the same thing on platforms offered by discount broking firms. So, the threat to big broking firms is very real," he says.
Rising to the top
The data available with National Stock Exchange (NSE) showed Zerodha had 8.47 lakh active clients as of December 2018-end compared with ICICI Securities' 8.45 lakh customers, followed by HDFC Securities (6.74 lakh), Sharekhan (5.49 lakh), Axis Securities (4.17 lakh) and Angel Broking (4.16 lakh).
Other big players including Kotak Securities, Motilal Oswal Financial Services, Karvy Stock Broking and IILF Securities had 2.32 lakh-4.96 lakh clients.
What seemed to have worked for Zerodha is not just low-cost, but also the rise of millennial investors who are tech savvy and found Zerodha's trading platform easier and efficient to work on. Zerodha's success also coincided with the secular bull run that India saw post global financial crisis starting 2009. Zerodha was established in 2010.
"Today we have better products than what market has to offer and combining the product with the low cost is what making us different than others. Our focus is to keep building products and improving the existing ones," Nithin Kamath, Founder & CEO Zerodha says.
Can Zerodha and others keep at it?
Product innovation is key, points out Kamath and Shrini Vishwanath of Upstox. They understand that pricing alone would not help them hold their ground against big broking firms. "After pricing, you would see a lot of fin-tech innovation happening in product and process space. For us to grow, we'll start releasing better product so that the end user gets more value than just saving brokerage fees," says Vishwanath.
"So far we have not seen introduction of AI in the fintech space as a whole. With its introduction, discount brokerages can build core competencies in their operations. A lot of customers come from regional cities and many of them do require regional language support. Most basic thing one can do is to introduce chatbots in their own language," he adds.
The challenge with online brokers is that investors may exit the platforms in droves when market crashes because thin margin and heavy discounts lead to traders losing big amount in a short span.
"We are actively focusing on releasing products with better risk management process so that when market moves up or down quickly, investors can get out quickly. We have released most of the tools on mobile, which soon will be available on desktop."
Broking industry on cusp of sea change
Globally, what discount brokerage Charles Schwab did in US, the likes of Zerodha and Upstox are doing it here i.e. putting pressure on big brokerages to bring down the prices. Among big broking firms, JP Morgan has already started offering 100 commission-free stock or exchange-traded fund trades in the first year.
That said, brokerage houses have realised broking income will gradually recede as India's broking industry is moving towards zero to nil commission era. "Initially broking charges used to be 3 per cent, which has come down to 0.5-0.7 per cent. With the discount firms entering the segment, very soon brokerage charges will come down to zilch," points out Suresh Sadagopan, founder, Ladder7 Financial Advisories.
Besides, in the mutual fund space, investors are increasingly being aware of direct mutual fund plans, which have negligible to nil expense ratio as compared to between 2-3 per cent expense ratio on regular mutual fund plans. Zerodha has its Coin platform for direct MF plans, among others. Paytm has its app Paytm Money and ET Money sells direct plans to their customers.
Brokerage profitability to moderate in FY19
Broking firms may have recorded good profitability in FY18 thanks to increased retail participation amid favourable market conditions; growth in FY19 is expected to moderate because of pricing pressure and volatility in the stock market.
Rating agency ICRA's study of nine broking firms-- Emkay Global Financial Services Limited, HDFC Securities Limited, India Infoline Limited, Karvy Stock Broking, Kotak Securities Limited, Motilal Oswal, Reliance Securities Limited, Sharekhan Limited and Phillip Capital-reveals that the industry brokerage income increased to nearly Rs 18,500 in FY18, registering a growth of over 30 per cent from Rs 14,000 crore in FY17. The rating agency expects the industry brokerage income to moderate to 5-10 per cent in FY19, with an estimated revenue projection of Rs 19,500-20,500 crore.
"The income growth rate is expected to moderate in FY2019 with the markets expected to remain range bound with an extended period of profitability, coupled with the base effect, given the strong growth in the prior fiscal. Along with pricing pressure, this is expected to result in a moderation in the profitability level, especially when compared to the supernormal performance in FY2018, though it would continue to remain healthy," says ICRA in a report.
Big brokers and rich investors
While discount broking firms are indeed capturing the market share from the traditional ones, the latter will continue to rule the roost in the private wealth management as online brokers have absolutely nothing to offer to ultra HNIs and other big-pocketed clients.
Besides, while they may not innovate much due to a legacy that makes any experimentation tough and cumbersome on their platforms, they are still at an advantage thanks to their big book size.
"Most of big guys also have banks and a strong balance sheet. In this business, money rules, and money will be made via lending, which they have. Secondly, the products that we sell, they again belong to their sister companies. Every broker has AMCs, and we are selling their products. So, eventually business will go back to them, may be not as retail broking fees but in other manner," notes Kamath of Zerodha.
That said, discount broking firms have indeed made a disruption in the broking industry, but conventional broking firms have nothing much to fear as their private wealth management, and PMS services will make up for any losses retail broking services may cause them. As for customers, they indeed tend to gain thanks to low price fee structure on the back of competition.