Top five digital brokers corner over half of industry's active client base

The top five digital-only brokers have cornered more than half of the industry’s active client base, signifying a seismic shift in the pecking order among domestic brokerages. 

Zerodha, Upstox, Angel One (formerly Angel Broking), 5paisa, and Groww had cornered a market share of over 53 per cent until the end of July, with a cumulative tally of 12.6 million active clients. This figure stood at 17 per cent at the end of FY19. The share of the top five traditional brokers whittled to 22 per cent, from 33 per cent during the same period. 

The Covid-19 pandemic was a tipping point for digital brokers, with nearly 70 per cent of the current client base being added after the outbreak. Twenty- and thirty-something investors with a do-it-yourself mindset have signed up in droves because of the simplicity of the online trading platforms, flat-fee structures, and quicker account opening process. 

“The increase in the number of active traders has largely come from tier-2 and tier-3 cities/towns, with a vast majority being first-time investors. The trend has only intensified in the pandemic period, with more individuals and households looking for additional sources of income beyond traditional instruments,” said Ravi Kumar, co-founder and CEO of Upstox, which counts Ratan Tata and private equity firm Tiger Global among its investors. 

“We have grown 180 per cent in terms of customer acquisition after the pandemic. This financial year, we expect to beat that number,” said Prakarsh Gagdani, CEO and executive director, 5paisa.com, which has added 6,55,792 active customers over the past 16 months. 

A few years ago, brokers, such as Zerodha, had disrupted the industry with their discounting model, which remains the mainstay of digital brokers to this day. Most digital brokers charge a flat Rs 20 for intraday and F&O trades. Traditional brokers, too, have slashed their charges since and pricing is no longer a key differentiator.

“The distinction between discount and traditional brokers has reduced substantially, and it’s all about the ‘best product’ experience,” said Nithin Kamath, founder and chief executive of Zerodha, which has been constantly innovating to stay relevant and recently got approval from the market regulator to set up an asset management company. 

The broker has introduced features, such as equity SIPs, GTT (good till triggered) orders, basket orders, and stock gifting in the past two years and revamped its mobile app Kite at least twice. This year, it launched ‘Nudge’ -- a stream of alerts that help clients better the odds of winning when trading. The broker plans to offer NPS on its platform and foray into the advisory space soon. 

Others have expanded their offerings, too: 5paisa and Groww offer US stocks, digital gold, and mutual funds on their platforms. Angel One has integrated third-party products, such as Streak, smallcase, Sensibull, and Vested on its platform. The retail broker, which had re-engineered its business model and shuttered its physical branches in 2019, plans to foray into the asset management space with passive products modelled on artificial intelligence and machine learning. 

Despite breakneck growth, not all brokers are consistently churning out a profit. 5paisa reported a net profit of Rs 14.7 crore for FY21, after posting a net loss of Rs 8.1 crore in the previous financial year. The latest profitability figures for Upstox and Groww were not available but the brokers had posted a net loss of Rs 38 crore and Rs 7.92 crore in FY20, respectively, according to reports. 

Angel One and Zerodha appear to be in better health, posting a profit of Rs 290.4 crore and about Rs 1,000 crore for FY21, respectively. 

“We were making losses as we were scaling up and acquiring customers. But with a base of over 1.5 million customers and low overhead costs, we have become profitable,” said Gagdani.

Market observers believe the focus on acquiring customers may impact margins and profitability until one starts gaining operating leverage. It’s a strategy being employed by start-ups globally and it remains to be seen how this plays out for these brokers, they said. Also, to be sure, several traditional brokers have also shifted their focus to acquiring a bulk of their customers digitally.

The average revenue per user of digital brokers lags that of traditional brokers. "These brokers have captured a large chunk of volumes in intraday and F&O. But while the share of incremental client acquisition for a large digital broker would be 20-25 per cent, the share of incremental brokerage would be 5-6 per cent,” said Deepak Jasani, head of retail research at HDFC Securities.

Another criticism gaining ground is that brokers are aggressively tapping social media influencers to add to the customer base and doling out free exchange-traded funds to users who may not be active.