Brokerages eye bank tie-ups to bring in customers

The expenses of drawing in clients from the banking channel are 75% lower, say industry officials

Brokerages with a higher focus on offline expansion are considering pushing through bank tie-ups to reduce the cost of customer acquisition.

By industry officials, the customer-acquisition cost through banking channels could be as low as about one–fourth of that through the broking channels. Banks provide an available customer-base for these broking firms, who would otherwise have to set-up physical presence and deploy additional sales personnel to reach out to more customers.

Recently, broking firm IIFL announced a tie-up with Federal Bank for a similar client-sharing relationship. Kotak Securities and Geojit BNP Paribas are also in discussions with some of the lenders, both private and public.

“We are also aggressively looking towards bank tie-ups. Already, we have two-three banking channel partnerships, which are doing very well and are hoping to tie-up with others as well, both in the private and public sector,” said C J George, managing director, Geojit BNP Paribas Financial Services.

While bank tie-ups in the brokerage industry have been common, the recent rally has brought in the need for acquiring customers at a low cost to avoid the excesses last one seen in the stock-market rally of 2007-08.

In the rally seen six years ago, brokerage firms went on a physical-expansion blitzkrieg, with offices and franchisees opened in various corners of the country. But when the market returns turned sour, so did these investments for these brokerages. Many small and large brokerages had to scale down operations and shut down their offices to reduce operating costs.

With market-interest among retail investors coming back into the market, brokerage firms want to be more prudent in acquiring new clients.

“Banks have a large customer-base, which can easily be tapped by brokerages that want to widen their presence. Similarly, for banks as well, it is an advantage because they get to extend broking services to their clients,” said Sandeep K Nayak, executive director and CEO, Centrum Broking.  

While both private and state-owned banks are tapped for such tie-ups, industry players said the preference was more towards the private sector names due to their inherent business models.

“Private banks typically have large third-party product services. They also have wealth management arms, financial advisory and investor education programmes. Public sector banks on the other hand, tend to be more single-party product service providers and generally do not have financial advisory services,” said B Gopkumar, head of broking of Kotak Securities.

Officials said private banks tend to have a technological edge, though in the last six-years, state-owned too have been catching up.

The tie-ups are usually on a revenue-share basis and consist of two popular models: First, where the bank merely recommends clients to broking firms and the second, where banks provide ready-made clients to brokerages.

In the first, the brokerage still does the legwork of acquiring the client and opening the trading account for them after the bank tags the client. The brokerage bears the cost of acquisition in this case. This model is more popular among public sector banks, officials said.

The second model, more popular among private banks, is one where the entire process of acquiring a client, opening accounts and completing know-your-customer formalities is done by the bank. In such cases, the bank commands a higher share of the revenue.