Equity Broking Transformation in India
Banking Frontiers|October 2020
Equity Broking Transformation in India
Digital brokers like Zerodha, Upstox and 5 Paisa are gaining exponential market share at the expense of the full-service legacy brokers, focusing on millennials who have a larger risk appetite than traditional investors.

Their business philosophy of being smart fintechs in the BFSI domain has worked wonders to disrupt the business of full-service brokers by being able to identify and service the emerging clients’ needs at an optimum cost.

New clients today prefer working with service providers who use their business profits to give back to society in a large measure in terms of knowledge, training and development. It is this critical area of new customer education, where Zerodha has carved out an enviable niche for itself in the industry.

Zerodha has been growing at a pace that exemplifies the online no-frills digital model at minimal cost to the customer. Zerodha is and will be, for a protracted period in the future, the largest broker in the industry - followed by ICICI Securities and HDFC Securities. Zerodha’s growth has been accomplished on the back of clients’ trust, client education, ethics and transparency, and a zero-debt book. The sustainability of its success has been validated by the fact that it does not spend on advertising and promotion and the exponential growth can be ascribed to favorable referrals of existing clients. Its foray into a larger space in BFSI with NBFC and AMC licenses further empowers it to disrupt the market significantly and establish an enviable leadership position.

How do the numbers compare for discount and full-service brokers? A full-service broker typically spends ₹3000-4000 on customer acquisition and earns an average revenue of 6000-9000. For a discount broker, both figures are smaller: ₹500-700 and ₹1800-2000.

THE SECURITY FACTOR

There is clearly a market segment, of informed investors, who are willing to pay for the safety and services offered by a full-service broker. Established players like ICICI Securities, HDFC Securities, Axis Securities, Sharekhan (BNP Paribas), MOSL and JM Financial, cater to investors and traders who have an inherent comfort of the custody of their assets with bank brokers / brokers who have a significant brick and mortar footprint. These customers are educated, experienced in stock markets, have a conservative risk appetite, look at long-term capital appreciation and are willing to pay more to avail the safety associated with bank brokers and full-service brokers. Their number of transactions are fewer than the millennials with discount brokerages, but their transaction sizes and average revenue per customer are far higher than clients of discount brokerage houses.

Many full-service brokers have jumped onto the discount brokerage bandwagon to emulate the growth of new age discount brokerage houses – at the cost of cannibalizing their own profitable business and creating a fair amount of dissonance with existing high net worth customers. The success of managing high net worth clients has been enhanced by full-service brokers by incorporating digital channels.

FULL-SERVICE BROKERS

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October 2020