Is Zerodha the Apple of Fintech? Business Model Breakdown.
🗯️ Zerodha is indeed like the Apple of Indian FinTech industry! The parallels are uncanny. Hear me out:
Zerodha is revolutionizing the Indian FinTech industry which was once off-limits to most households.. By disrupting traditional stock market trading, Zerodha has made investing accessible to everyone. Through its user-friendly online platforms and commission-free trading model, Zerodha has simplified stock market access, breaking down barriers that previously made investing exclusive. Its innovative approach, including platforms like Kite and Coin, has earned Zerodha a valuation of $3.6 billion and 7.5 million active users.
Sounds familiar right? Just like how Apple made computers accessible to masses in the 80s with the introduction of Apple II, Zerodha opened up the Indian Stock Market to everyone. Zerodha's portfolio which includes platforms like Kite and Coin, are the Macintoshes of trading. They provide both new and experienced investors with an easy and enjoyable experience, garnering the company a whopping $3.6 Billion in market value and 7.5 million active users. The founders, the Kamath Brothers, even engraved the company's ethos in its name: Zero and "Rodha", the Sanskrit word for "barrier”, stating everyone should have equal freedom to invest their hard-earned personal savings from the comfort of their home for intuitive control over their financial future with an ecosystem of services including institutional and retail brokerage, currency and commodity trading, mutual funds and bonds.
“When you can't beat the odds, change the game” - Leigh Bardugo
And that's exactly what Zerodha did! They changed the game and flipped the odds. Back in 2010, observing hardly 1.4 percent of the Indian population traded in the Indian capital markets, Zerodha saw an opportunity and seized it.
Altered the conventional brokerage landscape by introducing a discount brokerage model which was already popular in the US. The model involved zero commission on equity delivery and a flat fee of ₹20 or 0.03% (whichever is lower) for F&O trades breaking the traditional brokerage firms with a high brokerage fee and an unwillingness to reduce fees due to their high operational costs.
💡 So, how did they manage such a model?
In a nutshell: First-Mover Advantage, Technology-Focus, and a Strong Community.
They were the first major discount broker in India, establishing brand recognition and a particular sense of customer loyalty. Since they didn’t have to manage physical offices like traditional brokers, they had much lower operating expenses. In the initial stages they utilized NOW (Neat on Web) platform from NSE, although it had limitations, such as lack of customization and exclusivity to NSE trading, this initially alleviated the development costs of building their own software infrastructure allowing them to provide the highly attractive terms. Later on, they collaborated with Omnesys Technologies (developers of NOW) to making their own best in class trading platform focusing on providing an intuitive and simple user experience so that even a child could use them.
(I mean, a child wouldn’t be interested in stocks but you get my point.)
This user-centric approach paid off. Zerodha’s platforms, like Kite and Coin, known for their sleek design ensured that both novice and seasoned investors could navigate their systems effortlessly.
This democratization of trading tools helped Zerodha amass a strong user base which gave them regular feedback and in turn solidified its position in the market. ****By 2019, Zerodha was India's largest retail stock broker by active clients, contributing up to 2% of daily retail volumes on Indian stock exchanges. ****As of May 2024, Zerodha boasts an active client base of 7.5 million customers registered with the NSE, holding a market share of 17.5%.
Not to mention, Education is Key. Zerodha didn't just want to sell stocks; they also wanted to teach how to fish. Their free educational resources through a platform called Varsity, empowered a new generation of investors from diverse backgrounds.
💵 Let’s talk about numbers now. After all it is the measure of success for most businesses
Zerodha's revenue channels are as varied as its clientele. Initially making waves in the industry with zero brokerage for equity delivery, they still apply a nominal fee of ₹20 or 0.03% (whichever is lower) for intraday, F&O, commodity, and currency trading. Their income sources also encompass subscription fees for trading tools, interest from margin lending, depository fees, partnerships and sales of software. In 2023, Zerodha reached a valuation of $3.6 billion (approximately ₹30,000 crores), a substantial jump from the $2 billion valuation in 2021. The net profits saw an increase of 37% amounting to ₹2,908 crore in the financial year 2022-23. All of this with no ads and largely relying on word of mouth and quality of its service to attract customers. Through Rainmatter, they actively invest in fintech startups to foster innovation. Additionally, they introduced True Beacon, an Alternative Investment Fund targeting returns in volatile markets, and Zerodha Fund House, which provides index mutual funds with direct plans, broadening investment opportunities for the Indian market. The collaboration with other fintech companies like Smallcase to offer complementary services creates additional revenue streams. This diverse array of revenue streams ensures consistent financial inflow.
The Indian online brokerage sector is projected to grow at a Compound Annual Growth Rate (CAGR) of approximately 8% from 2024 to 2029. This figure shows a substantial opportunity for Zerodha, given its well-known brand, existing user base, and technology-focused approach. Zerodha is well poised to attract a good portion of these new investors as the market expands although it is now facing stiff competition from new players like Upstox, Groww, and Angel One, who are rapidly gaining traction leveraging technology, offering innovative features, and targeting specific niches to carve out market share. Established traditional brokers like ICICI Direct and HDFC Securities are also adapting to the digital landscape.
To be honest, I kept something from you, there is some not very pleasant news. The competition is now ahead. As of September 2023, Groww overtook Zerodha as the largest stock broking platform. Groww’s active investor increased to 9.5 million active investors (23% Market Share approx.), while Zerodha having 7.3 million (18% Market Share approx.) in March 2024.
But it's not all bad. Interestingly, Zerodha’s revenue is more than five times that of Groww. During FY 23, Zerodha reported a 39 percent growth in revenue, reaching Rs 6,875 crore compared to the previous financial year. It also reported identical growth in profits, which stood at Rs 2,908 crore during the last fiscal. So if this growth of Groww is sustainable or not is something we have to wait and see.
📈 Now what?
The company must keep growing and innovating to not lose more ground to its competitors. So what is its growth strategy?
Well, it can explained as a three-pronged approach:
- Aggressive Digital Marketing: Zerodha leverages digital marketing to reach a broader audience, utilizing social media, SEO, online campaigns, and content marketing to attract new users.
- Expanding Product Mix: They continuously innovate by introducing new platforms and features, with a strong focus on mobile-first solutions to cater to the growing number of mobile users. It now offers gold investing, global equity trading, debt instruments, and mutual fund investments, all supplementing their primary brokerage services.
- User Education: Zerodha places a significant emphasis on educating their users through their Varsity platform, Q&A forums, and webinars. This helps users make informed trading decisions and builds trust in their platform.
Since there is no particular barriers to entry other than completing mandatory KYC and other procedures which all by the way is paperless. Zerodha can get a continued influx of new users if their growth strategy keeps working. But they have to think twice about retention as competitors are closing in. The company has a strong community of users through active social media engagement, user forums, and it keeps users engaged in the loop with gamification and with personalized recommendations for investors to keep them coming back for more.
📉 So is it all safe?
Well its tricky. Zerodha's technology leadership, strong brand reputation, and commitment to education gives them a good edge over its competitors. But coming back to our Apple analogy, even Apple once came to the brink of bankruptcy largely because they stopped innovating after Steve Jobs left the company. Apple had at least a 10 year head start with the Macintosh’s graphical UI but still the competition caught up with them when Microsoft copied the GUI and Typefaces from the Mac. Similarly if Zerodha stops innovating, it could be in trouble in the future. On top of that, it should wary of the potential regulation changes by the government which could alter how the business works.
July 2, 2024 (Reuters) - “Zerodha, India's largest discount broker, said on Tuesday it will in all likelihood have to abandon its zero-brokerage model and raise derivative trading fees after the market regulator mandated uniform charges that are not based on volumes.”
Securities and Exchange Board of India (SEBI) wants to curb the continuing surge in trading across segments like derivatives which is largely attributed due to the increasing number of retail investors. The number of registered investors on the National Stock Exchange saw an exponential the growth of these investors since Covid. In July 2010, the number of registered investors was 1 crore and by April 2024 this increases to 9 crore. The new stock brokerage apps including Zerodha, Angel One, Groww and Upstox have made it easy for many Tier 2 and Tier 3 customers to invest in the stock market. Also a vast majority of customers are from non-metro, non-tier one town. Most of whom being first time investors.
Deepak Shenoy, The founder of Capitalmind, said that for the first time in 20 years, individual investors and mutual funds control more of the stock market than foreign portfolio investors and these individual investors are very young, 40% of them are under 30 years of age.
Many experts fear that increased control by individuals in the stock market could be one reason for the ongoing long bull run of the Indian Stock Market reaching all-time highs. Many publicly traded companies are believed to be overvalued with very high P/E (Price to Earnings) Ratios and higher Warren Buffet Indicator than historical average indicates overvaluation of the entire stock market. Market is actively turning a blind eye to this phenomenon and might result in devastating crash in the future. SEBI and the Government already started introducing new regulations to keep the market safe. According to 2024 Union Budget, Long-term capital gains tax rate on all financial and non-financial assets will rise from 10% to 12.5%, with an exemption limit set at ₹1.25 lakh per year. Short-term gains from certain financial assets will see a tax increase from 15% to 20%.
All this could affect Zerodha’s business. They must learn to face all the contingencies and changes in the market, and the regulations in the future. Apple suffered a huge setback during the dotcom bubble burst era. Let’s hope Zerodha reinnovates itself to face the new challenges.