March 5, 2019 5 min read

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Last month, when Zerodha replaced long-time market leader ICICI Securities as the country’s largest stockbroker with 8.47 lakh clients, it surprised many in the industry, who felt the need buckle up against the growing number of stockbroking startups and their disruptive business models.

From open outcry floor trading to few clicks on your cell phone, the stockbroking industry revolutionised in the literal sense. But can the zero-brokerage model be a game changer for the industry?

While traditional brokers continue to focus on ancillary services and the good old research-based investing wisdom, Shrini Viswanath, CTO and co-founder, Upstox feels that today, investors are far more well-informed and have data points on their fingertips than they were a few years ago.

This is what has brought about a change and has disrupted the way new-age brokers provide services to investors.

“While the basic nature of the services that are offered by brokers remain the same. Today, trading or investing has moved onto investors’ palms. That is where the difference lies. What investors need now is a smart trading platform right on their fingertips, which can allow them to complete their transactions instantly, from anywhere in the world,” Vishwanath shares.

Co-founder of Zerodha, Nikhil Kamath seconds Vishwanath’s opinion. He says “The new-age brokers are competing on technology and usability. Competition has moved away from price. Technology prowess of each participant has come to the forefront, and that’s what determines the market leaders in the broking space today.”

Addressing the Need

Opening a trading account is as cumbersome as a bank account. Since most of these processes include human intervention, the turnaround time is more and the cost of acquiring a new customer is higher for most of the traditional stockbrokers. However, fintech brokers have the same leverage as the other fintech startups.

With the increase in mobile penetration and technology, the new-age brokers have managed to tackle these problems aptly and are able to focus on creating more transparency in the trading system.

Most of these brokers, if not all, have employed great innovation in their offerings, which revolves around customers and their needs. Take an example of Zerodha, regardless of the ticket size of an intraday trade – be it Rs 100 or Rs 1 lakh, every trade will cost you flat Rs 20 or take for instance Upstox’s Margin Trade Funding, a solution for investors, which allows them to trade in a matter of 10 seconds. Thus, saving a lot of valuable time for the investor.

Secondly, brokers have a direct conflict of interest with their investors as the more a client trades the more a broker earns. However, Sarvjeet Singh Virk, managing director of Finvasia opines that the more a client trades the more are his chances of incurring losses due to laws of probability and market frictions.

Traders’ View

The industry is now witnessing shrinkage of the brick and mortar model. A new set of brokers have come to fore who believe Indian traders are fast learners as opposed to their global peers.

However, this also means the stockbroking industry needs to match its pace with the traders and focus more on innovation and adding customer-centric offerings in their portfolio.

Virk agrees that innovation is the biggest challenge for the new-age brokers as earlier it was easy for brokers to take inspiration from their peers in the UK or the US to emulate their business models. In this age and time, where survival of the fittest is the norm in the fiercely competitive stock market, everyone from investors to brokers is calling for a change.

“As traders’ community is getting more and more knowledgeable, they will demand real innovation and client service. Since the core of the new-age brokerage model is technology, true innovation will eventually emerge as the winner. Protecting intellectual property will be another major challenge,” he points out.

Nonetheless, even the regulators and the governments need to acknowledge the fintech brokers, like any other financial segment. Pointing their finger at one single policy, both Kamat and Vishwanath feel that the Centre should look into the security transaction tax (STT).

Vishwanath says, “One of the basic and most critical factors that drive Indian investors, especially in stock markets today is the high transaction costs. These get further compounded with taxes such as STT. This is where a low-cost model comes into play.”

While on the other hand, Kamat claims if STT is removed, it will not only improve the market penetration but will also add liquidity, which can attract further investments and make broking companies more efficient.

What Next?

With the penetration level of the industry sinking as low as 7 per cent, there is a scope for both the new-age and traditional players to learn lessons from the past and leverage on the upcoming technologies while focusing on ease of trading.

“2019 shall be the year of convenience. The next milestone shall be extending financial services such as stocks, mutual funds, insurances, etc to the masses. Since regulators are more liberal now, there shall be expansion in the baseline of new clients,” Virk shares.

And you never know the next unicorn from the financial services sector could be a fintech stockbroker.