Inc42 UpNext: Can Zerodha’s Million-Strong Investor Base Hold Its Digital Investment Fort?

To celebrate India’s rising startups, Inc42 is profiling a new soonicorn every Friday in the Inc42 UpNext: Unicorns Of Tomorrow series. For the next few months, we will be speaking to founders and cofounders at these potential unicorns and shining light on their journeys and growth stories. We begin the series with a closer look at stock investments platform Zerodha.

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International companies have been eyeing India’s burgeoning middle-class population and income with bated breath for years and many have ventured in to grab a slice of the pie, as the economy grows — even in the context of a slowdown. But what is also becoming a flip side to this scenario is that India’s overall household savings rate has declined over the past few years thanks to the rise in consumption, and as pressure builds on job creation and economic slowdown front, Indian households might just be looking at saving in the short term rather than spending.

But selling financial products in such a climate is still a peculiar task, as it requires consumers to shed their inhibitions to saving instruments such as mutual funds — we have all seen those ads. This means spending to reach consumers, who also need to further spend in the retail, entertainment and digital space to discover these ads.

And the challenge is compounded for online stockbroking platforms. Here, the risk is several times higher despite the commensurate rewards.

Recently that risk was exposed, when a technical system outage on its website for nearly 30-35 minutes caused lakhs of losses for its user with customers taking to social media to vent against the company.

For Zerodha, apart from the technical complexities, an equally important challenge is to convince the increasing number of sophisticated digital consumers whose purchases today are based on what they will earn tomorrow.

“We haven’t solved the problem yet and I don’t know how to solve it yet,” Nithin Kamath told Inc42 frankly.

From Recession To Digital Boom

The Zerodha founder has seen the worst of it. The online discount broking firm has become the biggest broking firm in the country going by the number of clients. But it was incepted in the days following the 2008-09 economic recession, much before the digital wave swept India.

In 10 years, it has garnered over a million active clients who trade and invest (as per the NSE), the highest for any broker in India, ever. and has raised no external funding to date. It generates 15+ lakh revenue-generating trades daily, according to a recent blog post over a brief downtime, which caused huge consternation in the stockbroking fraternity.

So when he’s baffled by the problem of arresting over-consumption in the digital-first audience and getting them to putting money back in the markets, it’s not a trivial matter. If changing behaviour is a monumental task, asking the younger sections of the population to invest in equity markets is equally massive.

A YouGov-Mint Millennial Survey conducted in July of 2018 showed that one-third of working millennials put their money only in risk-free instruments, such as fixed and recurring deposits, without investing anything in the stock market.

A big problem for the working millennial population is the lack of a sound stockbroking model, which combines execution with advisory. Consumers don’t simply want to invest — or rather as Kamath pointed out later they can’t — but they also want advice on what to invest in. Zerodha is a pure-play execution platform, and in its 10-year life, the company has stayed away from any kind of advisory services. The simplicity and single doggedness of its approach have borne great results but that strategy could change now, Kamath indicated.

“Yes, we won’t stay off for too long (on advisory services). Right now at Zerodha, the two most held stocks are YES Bank and Tata Motors, the worst performing stocks of the last three years, if you let people on their own in the stock market, they will keep making mistakes,” said Kamath, when talking about why people need advisors.

Zerodha is slowly charting its approach in this direction, and Kamath pointed out that the competition is not any closer to figuring out the balance of advisory and execution.

Fighting Off Legacy And New-Age Competition

With over a million active clients, Zerodha has the numbers on its side, but in terms of high net worth income (HNI) clients, it is still the banks that rule the domain. Zerodha may be the leading brokerage firm, but in terms of the amount of investments and transaction value, banks command the largest share.

“The customer is still parking crores of amount with them [banks] and has a lot of trust in the banks. We are still a young company and the younger crowd anyways does not care so much about the brand and is all about the product which is where we score high,” said Kamath.

Kamath went on to add that in terms of new client addition, the banks, with their existing bunch of products are not able to position themselves as an attractive place to invest money digitally.

But it isn’t only the banks that Kamath is wary of. Like Zerodha which was an outsider before it became a leading player, Paytm with ‘Paytm Money’ offers a similar zero-commission investment platform. Paytm has claimed to have accrued over one million users within eight months of its launch, though how many are active clients is still unclear.

Paytm Money, which Kamath has himself said is his closest competitor, is reportedly planning to raise $1.2 Bn at a $5 Bn valuation. What does that mean for the segment?

While Kamath expressed his doubts over the veracity of these reports, he said it would make Paytm the number one player in the segment but more importantly it could attract more interest overall in the segment, which Zerodha would welcome.

The ecosystem isn’t growing. Until we find the ecosystem, it’s not a big industry; it is dominated by offline-driven business – Kamath

But spending money to acquire customers is not half the job done, a concept familiar to all in the consumer services world. It holds especially true in this segment because customer stickiness is a problem. When people lose money in the stock market, the activity drops and leads to customer exits. And businesses have to spend again to regain this customer.

Building The Zerodha Ecosystem

Before diving deep into the Zerodha ecosystem, we wanted to check about the speculation of a Zerodha IPO. “We have no plan and I don’t know what I would do with the extra cash,” said Kamath, dismissing such reports.

“When people can increasingly get to invest into companies that they use and consume that is when capital markets really start to expand. In India we haven’t had that in the last 10 years. So I wish OYO,  Flipkart, Paytm and others list so that they help the ecosystem grow bigger,” Kamath added.

Speaking of the ecosystem, one of the core selling points of Zerodha is the suite of products it offers which includes allowing the purchase of Indian government securities. It is working on expanding that further by allowing users to buy stocks listed in the United States, which it hopes to roll out in the next few months.

Kamath said Zerodha will also offer loans against security where people can borrow against stocks they hold with the company at a rate compared to unsecured loans, which is a good innovation for the credit market which has room for plenty of players.

“We are trying to work with a startup on fixed income platform which is better than deposits. For example, in terms of returns, a State Bank of India bond is better than a fixed deposit. Retail in India does not have access to these kinds of assets and this is something we are working on,” Kamath added.

The company is also looking at investor education and has an app called ‘Varsity’ which has over 100K downloads on Android’s Google Play Store. Through the app, users can learn about stock trading basics, keep track of their learning progress and also take tests to see how much they have picked up. It has an app for stock market news as well and the intention is clearly to get more involved in the consumer buying decision —  something that was up to the consumer so far in the Zerodha ecosystem.

A crucial part of the fintech ecosystem is innovation from other startups and nurturing these ideas to boost the overall sector. Zerodha is doing this by investing through its Rainmatter incubator programme, which offers workspaces, mentorship, and funding between $100K-$1Mn to startups operating in the capital markets space in exchange for minority stakes.

This also gives startups access to a sandbox that includes access to a large client base for its product and service testing. Zerodha has invested in the likes of Streak.tech, smallcase, GoldenPi, SensiBull and other fintech startups through Rainmatter.

One thing that would also catch the eyes of consumers is if Zerodha becomes a unicorn, a feat that no other discount broking platform has yet achieved in India.

“We made INR 350 Cr pre-tax profit, we are more than a soonicorn based on that. Forget the new age ones where profitability is not valued, we are growing at about 50% YoY,” said Kamath.

In an age where investors are more than ready to fund startups that show any sign of promise, Kamath doesn’t get why companies that are not able to earn “that much money” raise a tonne of money, so he relies on his sense of humour to deduce it: “if someone is giving you money, you should probably take it.”