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Zerodha, Upstox demolish traditional broking biz; customers the ultimate winners

The top two players - Zerodha and Upstox - now have over 26 lakh and nearly 14 lakh active clients, respectively on the NSE as of October-end, while ICICI Securities has 12.15 lakh clients

Aprajita Sharma December 2, 2020 | Updated 21:46 IST
Zerodha, Upstox demolish traditional broking biz; customers the ultimate winners
As the disruption in the broking industry goes on, pricing structure is no longer the differentiating factor

Key Pointers

  • After Zerodha, now Upstox pushes ICICI Securities a pedestal down
  • Full-service brokers also shift to flat-fee/zero brokerage model
  • The next wave lies in personalised subscription-based models
  • ICICI Securities already has it; new players like Paytm, Groww launched it
  • Customers seek a wide-range of services at low cost
  • Cross-selling of products with transparent approach needed
  • Getting UI, UX game right becomes key to success in broking industry

The disruption in the broking space is far from over. After Zerodha established itself as India's biggest broker in terms of active clients in 2019, surpassing ICICI Securities' decade-long pole position, another discount brokerage Upstox has shifted it to the third spot. Backed by a spurt in retail participation in the stock market, especially after COVID-19 crash, discount brokerages now account for two-third of market share in incremental NSE active clients. As per Spark Capital, from 4 per cent market share in FY14, the share of discount brokers rose to 28 per cent by FY20, which touched 36 per cent as of five months into FY21.

The top two players - Zerodha and Upstox - now have over 26 lakh and nearly 14 lakh active clients, respectively on the NSE as of October-end, while ICICI Securities has 12.15 lakh clients. The total number of active clients stood at 1.47 crore as of October-end. It was 1.07 crore as of March-end.

"We at ICICI Securities cater to a much larger need set of our clients rather than only equity. Our company is moving purposefully on its chosen path of high growth with sharp focus on quality customers. We have made progress on a holistic set of parameters which gives an indication of our journey on our chosen path, rather than just focusing on a single metric with no colour on quality and value," says Vijay Chandok, CEO, ICICI Securities.

Also Read: NSE cancels Karvy's brokerage licence, declares it as defaulter

The disruption

In his initial days as a sub-broker of a bigger broking firm, Nithin Kamath, founder & CEO, Zerodha often wondered why to pay a huge amount of brokerage in an online world where one doesn't require physical presence. A new service by the National Stock Exchange just at the right time, and it sowed the seeds of what Zerodha has now become.

"NSE launched a free trading platform called NSE Now for all exchange members, which we utilised as a base for a flat-fee trade model. The model was not unique. Charles Schwab had already done it in the US in 90s, but it was a new concept in India," says Kamath.  

Initially, Kamath built the business for active traders, but realised its limitations. There were not more than 5-10 lakh traders at that time. To address a larger investor audience, Zerodha introduced zero-brokerage on delivery trades in December 2015. "We were getting labelled as a broker for active traders not long-term investors. So, zero-brokerage gave us virality. Then demonetisation was a tipping point for us. Earlier the moat in the broking space lied in the number of branches. Post-demonetisation, with Aadhar revolution, digital on-boarding of customers gave us a big pull-up," says Kamath.

Zerodha kept on innovating. It launched another trading platform KITE, followed by a mutual fund platform COIN. Zerodha Versity has become one of the largest capital market education portals that is free of cost. The broking firm's KITE Connect API helps financial start-ups build an investment or a trading platform.

The innovation translated into revenues too. Zerodha quoted over 1,000 crore revenues in FY20. It has already surged to Rs 1,058.55 crore as of September-end. Profit before tax that stood at Rs 592 crore in FY20 has surged to Rs 627 crore in six months into FY21.

Upstox, meanwhile, has crossed the 2 million customer milestone recently. It achieved the 1 million customers mark in June 2020 and added the next 1 million customers in less than five months. While it didn't share its revenue and profit figures, it says it has a healthy mix of brokerage and non-brokerage revenue.

"Brokerage revenue is derived from a fee we charge on intraday trades. Non-brokerage is a mix of fees we may collect for various value-added services," says Ravi Kumar, Co-founder & CEO, Upstox.

Also Read: Burger King India IPO opens: Should you subscribe to the share sale?

Subscription-based model makes way

As the disruption in the broking industry goes on, pricing structure is no longer the differentiating factor. Even traditional brokerages have launched flat-fee services. So, the industry as a whole has moved from ad-valorem to flat pricing. The next wave lies in the subscription model. Newer players like Bajaj Financial Securities, Groww and Paytm Money have launched subscription plans, while ICICI Securities already has it since 2019.  "Penetration of our Prime and Prepaid subscribers among our NSE active customers has now reached nearly 44 per cent, crossing 5 lakh customers who now contribute more than half of our revenues. We have very recently updated the Prime plans as well as launched a new Prime plan. One of the interesting features of this Prime, (we call it "Chota Prime"!)  is Rs 299 plan with a smaller instant liquidity limit. This was introduced to attract the newer and younger customers entering the market," says Chandok of ICICI Securities.

So, the personalised brokerage services at competitive rates for customer acquisition could be the next differentiating factor in the broking industry.  

Digital disruption

After demonetisation, the coronavirus pandemic gave a sudden push to digitisation in the industry. "There is clear and irreversible shift in customer and investor behaviour towards consuming services digitally. All cross sections of clients, including HNIs driven by health concerns, have adopted or are adopting digital mode of interacting with us and making investments. Such behavioural shifts typically take many years which have happened in just six months. The regulator too has been proactive and has taken steps to enable the industry to acquire and service customers digitally while simultaneously de-risking the market with regular regulatory interventions," says Chandok of ICICI Securities.

The new breed of investors entering the stock market is digital savvy and seeks quality user interface (UI) and user experience (UX).  "At Upstox, our digital-first approach helps us grow and build a rich user experience and advanced features, which our customers love. We have been growing at a rapid pace mainly due to our products and positive word-of-mouth by our customers," says Kumar of Upstox.

Also Read: Sebi extends deadline for submission of reports; eases compliance for brokers

Zerodha has been ahead of the curve thanks to constant innovation. It has an NBFC licence. It has started lending against stocks on its platform. "Our customers demanded such a service. We are starting out with our own capital to test if the idea works," says Kamath. Zerodha has applied for insurance broking and AMC licence too. "Our aim is to curb miss-selling in the insurance and mutual fund space. We would like to sell a term insurance along with a direct mutual fund kind of a product," says Kamath.

In the interests of its customers, Zerodha has launched a feature called 'nudge' on KITE that alerts them if they take a divergent buy or sell action against basic trading rules. For example, if a user took a buy call on Lakshmi Vilas Bank after RBI moratorium on it, Zerodha gave them the following 'nudge' on the KITE platform: "LVB is merging with DBS and has been placed under moratorium by the RBI. There is a significant risk of you losing your entire investment by trading in this stock."

"Essentially every nudge is hurting our revenues. This is a feature that is tough for competitors to copy as it reduces revenues and trading size. But, it is in the benefit of our customers," says Kamath.

ICICI Securities has launched a new website interface, which is witnessing higher traffic. "We have re-engineered our mobile application of which the first phase has already been launched and the second phase, which would give a completely new UI and UX, will be launched shortly. A mutual fund only application with some unique features is also to be launched soon," says Chandok.

Among other digital initiatives, the brokerage launched a trading strategy formulation and back-testing tool for derivatives traders; a comparison tool for buying appropriate insurance policies to help clients choose between various insurance policies; tying up with Interactive Brokers Inc. from US for providing seamless investing in US stock markets through ICICI direct platform and launching One click portfolios for equity and mutual funds based on themed ideas.

"Several more initiatives are work-in-progress, including robo-advisory and AI-based features."

What lies ahead

Market watchdog SEBI recently introduced regulatory changes on margin compliance that will be implemented phased wise over the next 10-11 months. This is expected to hit broking income across the industry. The move may lead to potential consolidation in the broking space in favour of digital-first broking firms as small offline brokerages may shut shop. Once the transformation settles the real winners will turn to be the ones that get the product and pricing right and keep innovating to attract new-age investors.

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