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Here's why traditional stock-brokers are diversifying their business

Here's why traditional stock-brokers are diversifying their business

Traditional full-service brokers are quickly diversifying to offer a bouquet of financial services to address the decline in broking income and new players and investors entering the market

Traditional full-service brokers are quickly diversifying to offer a bouquet of financial services to address the decline in broking income and new players and investors entering the market Traditional full-service brokers are quickly diversifying to offer a bouquet of financial services to address the decline in broking income and new players and investors entering the market

The past few years have seen the Indian stock market attract new retail investors in hordes. For instance, nearly 2 million accounts were added just in the month of November 2022, as per data from markets regulator, the Securities and Exchange Board of India (Sebi). While that is music to the ears of brokerages, it is difficult to satisfy new-age investors, many of who want a single app for all their financial needs.

Brokerages, big and small, have cottoned on to this trend. While newer brokerages entice new investors with zero brokerage fees, the traditional, full-service brokerages—which offer trading facilities along with other value-added services like research and distribution—are aiming to become one-stop financial services platforms wherein one can not only trade in the markets but also get loans, invest in mutual funds and fixed deposits, look at retirement planning or buy insurance products, among other things.

There is, of course, another reason why the big, traditional brokerages are taking this route. Let’s look at a few numbers: Did you know that there are more than 1,300 registered brokerages in India, per Sebi, that offer investors a platform to trade in the stock market? A second set of data—again from Sebi—shows that the top 10 broking firms account for nearly half of the trading turnover. In terms of trading volumes, the top 10 account for 38.7 per cent and 56 per cent on NSE and BSE, respectively. This effectively means that only a fraction of the others have a meaningful identity. And while traditional full-service brokerages do figure among the top 15-20 players, the new-age entrants—mostly the discount broking entities—have the most active users (see Bargain Bounty).

While all well-known older players have gone digital, they have realised that pure-play broking activity will not sustain them in the long term. Hence, they are restructuring themselves to adapt to the new normal wherein broking charges are at zero, and they offer a bunch of financial services. Value-added services, including advisory and research related to stock market investment and also overall financial planning or wealth management, have become the mantra for most of the traditional, but fully digital, brokerages.

While names like ICICI Securities, IIFL, Motilal Oswal Financial Services, Axis Securities and HDFC Securities still figure among the top 10 players in terms of the number of active clients, almost all have seen the share of their broking income—as a proportion of their overall income—dip over the years with the other segments steadily enhancing their share of the total pie.

Shrinking Pie

“In absolute terms, our brokerage revenues have grown substantially. But on the total revenue pie, the share of broking revenue has been gradually coming down since we have built a strong focus on the distribution business and also offer margin trade financing,” says Ajay Menon, MD & CEO of Broking & Distribution at Motilal Oswal Financial Services.

For the domestic major, the share of non-broking revenue has increased from 20 per cent in FY13 to 30 per cent in FY18, while in H1FY23 it was about 40 per cent. “We believe that acquiring quality revenue-generating clients and providing strong value-added services will be key to profitable and sustainable growth going ahead,” says Menon.

Similarly, for ICICI Securities, which was once the largest brokerage in terms of the number of active clients, the share of broking revenue has dipped to less than 40 per cent from more than 58 per cent in 2020-21. Interestingly, it was a conscious effort on the part of the broking firm backed by ICICI Bank. “The competition was also telling us that we cannot continue to be what we were and we had to change. In this context, we began our transformation,” says Vijay Chandok, MD & CEO of ICICI Securities. “Rather than just providing equity services, we decided to focus on three zones of opportunities: savings, investments and wealth management; distribution of protection services (health and life assets); and borrowings (all kinds of loans, credit cards, etc.)”

Incidentally, ICICI Securities was among the first players in the broking arena to embrace technology decades ago and offer its customers a digital trading platform through its website. So, while one could say that it was easier for it to adapt to the new normal, others have also embarked on the transformation journey in a steady manner.

Take Axis Securities, for instance. As much as 70 per cent of its top line comes from the broking business even as it attempts to change the mix by improving its suite of products. “We want our products to have a bigger pie in revenues, supplementing the pure brokerage transaction fees,” says B. Gopkumar, MD & CEO of Axis Securities. “We see offering quality products as the way forward for brokerage houses seeking to boost their income. As a full-service brokerage, we want to provide our customers with an array of investment options they can select from based on their risk profile.”

For IIFL Securities, the share of broking revenue has been between 42 per cent and 49 per cent during the past five years even as it continues to focus on offering bespoke services and a diversified product suite, along with quality research. “While discount broking is a good place to begin one’s investing journey, for wealth creation and preservation, investors turn to full-service broking and advisory firms,” says R. Venkataraman, Chairman of IIFL Securities. For long-term sustainable wealth creation, investors are happy to pay a small advisory fee, he adds.

Pricing Power

Fee-based income from segments like distribution, loans and advisory is the most common form of diversification that brokerages are looking at as they believe that there is enough demand for such services especially at a time when the markets are seeing a steady inflow of new investors. “There are various ways for brokerages to diversify and boost their income. This could be through building various distribution businesses like mutual funds, debt instruments, insurance, NPS (National Pension System) and other such products that can help customers in their financial journey,” says Ashish Rathi, Whole-time Director at HDFC Securities.

For ICICI Securities, distribution accounted for around 18 per cent of the revenue in Q2FY23 and the brokerage is eyeing a much larger proportion in the times to come. Meanwhile, Gopkumar of Axis Securities believes that compared to discount broking firms, traditional brokerages are in a much better position to charge customers a fee given their expertise and array of offerings. “As a full-service brokerage house, we are in a sweet spot, given that retail investors currently require handholding due to low financial literacy and penetration levels in India. With most standalone brokers building capabilities around customer education and offering the right investment products, they will always have an advantage over discount brokers,” he says.

This assumes significance since as per Sebi data, depositories NSDL and CDSL cumulatively added 1.8 million demat accounts in November 2022, bringing the total number of demat accounts to 29.9 million at NSDL and 76.2 million at CDSL. One also needs to take into account the concentration factor as the share of the top five broking firms in trading volumes in the current financial year till November was pegged at 40.8 per cent on BSE and 25.2 per cent on NSE. Further, the share of the top 25 and 50 brokers was pegged at 71.3 per cent and 80.7 per cent, respectively, on BSE; and 60 per cent and 77.2 per cent, respectively, on NSE. Simply put, the standalone brokerage firms do have a loyal and sticky set of customers with a vast majority of those even ready to pay for good quality research and advisory.

IIFL Securities’ Venkataraman believes that “mature investors seeking advice to generate alpha or create long-term wealth will not mind spending for services with a full-service broker or wealth manager... We at IIFL will continue to focus on full-service broking and advisory services for the mass affluent segment”.

A Positive Future

Chandok of ICICI Securities has a positive outlook and believes that structurally, the broking industry is in a great position. “The demographic is young and they are all digital natives. Plus, their savings are more likely to go towards financial assets, compared to their slightly older counterparts who preferred physical assets like gold and real estate. Then there is India’s growth story playing out. For the next five years, the structural undertone is very constructive,” he says.

Incidentally, all full-service brokerages are betting big on the ‘financialisation’ quotient and hence their apps currently offer everything related to investing—equity, debt, mutual funds, bank deposits, insurance, retirement, loans—and are not merely platforms to buy or sell stocks.

Experts also believe that while many new investors will start their investing journey with the discount players due to the low cost of trading, a large chunk will migrate to the full-service ones for value-added services. “As the Indian economy is growing rapidly, more investors and mass affluent clients will seek advisory and there is enough space for full-service brokers going ahead, while discount brokers will also have enough space to introduce investing and trading to new investors,” says Venkataraman.

But full-service players will have to be mindful of the fact that their discount counterparts are also looking at different models to generate a steady income flow and value-added services can also be offered in an unbundled manner—pay if you use. With both kinds of brokerages set to co-exist in the broking space, the healthy but aggressive competition can only be good for investors.

 

@ashishrukhaiyar

Published on: Jan 18, 2023, 11:55 AM IST
Posted by: Arnav Das Sharma, Jan 18, 2023, 11:50 AM IST