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Attended a webinar on Brokerage industry moderated by @varinder_bansal. Lots of insights about the industry and must-listen for those who are invested in this industry or are tracking it. Highlighting some important points from the discussion. (Thread
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The biggest enabler of Discount Broking success in the Indian market was online onboarding of account which previously was a cumbersome process and that was protecting traditional brokers and was moat for those who had more branches.
But this got disrupted after E-KYC started, and majorly all the business growth for discount brokers happened after 2016 due to this reason.
Eg –Zerodha had 1,00,000 customers in 2016 and today have around 30-35 lakh customers.
Eg –Zerodha had 1,00,000 customers in 2016 and today have around 30-35 lakh customers.
Why does innovation in India happens more in the unlisted space? (Little offtopic from brokerage industry but good points)
Few reasons – one is due to investors in India not as mature in accepting innovation compared to countries like the USA.
Few reasons – one is due to investors in India not as mature in accepting innovation compared to countries like the USA.
In the USA the average growth rate of industries has reduced to the range = GDP growth and so to generate alpha, companies need to get aggressive in terms of innovation and so even the mindset of investors has developed accordingly in the USA.
In India, industries have been able to grow at higher rates without taking such risks and so are not comfortable in getting out of the way in terms of innovation.
The size of Brokerage Industry in terms of revenue pool ranges between 10K-15K Crs, and the disruptive guys are reducing the pie.
Optically, the volume data looks high, but the breakup of the volume is almost 90% of the volume is F&O where revenue is not as high as cash segment.
Optically, the volume data looks high, but the breakup of the volume is almost 90% of the volume is F&O where revenue is not as high as cash segment.
No inflation in brokerage rates – Zerodha started in 2010 with Rs20/per trade and Nifty = 3000, today Nifty = 12,000 and they still charge Rs20 due to fear of competition.
Robinhood’s revenue = 100% of Indian broking volume and the opportunity to grow is huge, hence valued at $8.5bn.
In the USA, a larger pool of revenues for brokers comes from areas like float income, payment for order flows, selling data to HFTs which is not allowed in India.
In the USA, a larger pool of revenues for brokers comes from areas like float income, payment for order flows, selling data to HFTs which is not allowed in India.
One way to look at opportunity size is that out of 130 CRS Indians, 5 crs filed income tax returns and 3Crs paid taxes. So this 3crs number can be taken as opportunity size and hence the scope for 4x-5x expansion in the market from current levels of 70-80 lakhs customers.
The scope of market expansion is huge but that can happen when the pricing pressure reduces in the industry.
But, Nithin indicated towards lower chances of Zerodha increasing prices due to increasing competition from VC backed players.
But, Nithin indicated towards lower chances of Zerodha increasing prices due to increasing competition from VC backed players.
The other problem faced in expanding the market size is that financial literacy in India is abysmally low and Zerodha is working on this.
Another issue is the conflict of interest of distributors who earn commissions from mfgs. which leads to bad experience and misselling.
Another issue is the conflict of interest of distributors who earn commissions from mfgs. which leads to bad experience and misselling.
Interesting data - % of people hired for maintaining tech in brokerage institutes – Icici Securities – 2%, IIFL – 15%, Zerodha – 3%, Upstox- 55%
Consolidation in this industry will be not only due to product but also due to SEBI Regulations like the recent one where investors need to provide upfront margins and so every broker will be able to give same leverage which previously was a function of relationship with clients.
One aspect where Discount brokers failed was to onboard rich folks– 70% of wealth lies with people >50 yrs and they will stick with traditional brokers as they do not trust newer brands in the business of money and do not care about product and pricing.
Fun fact- Nithin’s Dad still prefers traditional broker so that he can call and place the order with his broker.
Getting good valuations is a function of how good one is in selling stories, Eg– BSE Star powers 30-40% of MF Transactions and is valued less than MF selling comp.
Getting good valuations is a function of how good one is in selling stories, Eg– BSE Star powers 30-40% of MF Transactions and is valued less than MF selling comp.
Similarly, discount brokers might have been able to get such huge valuations due to the story of a huge young population in India Vs narrative of traditional brokers who target older segment which is not growing but is also wealthier than youngsters is what one may miss out on.
