The Indian stock market has seen a massive influx of new retail investors over the past few years. According to data from the Securities and Exchange Board of India (SEBI), India’s market regulator, nearly 2 million new accounts were opened just in November 2022. Brokers love that, but it’s hard to please younger investors, many of whom want a single app for all their financial needs.
Brokerages, large and small brokers have recognized this trend. Traditional full-service brokerages, which offer trading facilities in addition to other value-added services like research and distribution, are aiming to become one-stop financial services platforms where one can, among other things, trade in the markets, obtain loans, invest in mutual funds and fixed deposits, look into retirement planning, or purchase insurance products. On the other hand, newer brokerages lure new investors with zero brokerage fees.
Naturally, there is yet another reason why the large, established brokerages are proceeding in this manner. Let’s take a look at some numbers: According to Sebi, there are more than 1,300 registered brokerages in India that provide investors with a trading platform for the stock market. A second set of data, also from Sebi, shows that nearly half of trading turnover is handled by the top 10 broking firms.
On the NSE and BSE, the top 10 accounts for 38.7% and 56% of all trading volume, respectively. As a result, only a small number of the other people have a meaningful identity. Even though traditional full-service brokerages are among the top 15-20 players, the most active users are found among the newer entrants, primarily discount brokers (see Bargain Bounty).
Even though all of the established older players have switched to digital platforms, they are aware that solely engaging in pure-play broking activity will not help them survive in the long run. As a result, they are reorganizing themselves to accommodate the new normal, in which they provide a wide range of financial services and charge no fees for broking. The majority of traditional, but entirely digital, brokerages have adopted value-added services, such as stock market investment advisory and research, as well as overall financial planning or wealth management.
Even though ICICI Securities, IIFL, Motilal Oswal Financial Services, Axis Securities, and HDFC Securities are still among the top 10 players in terms of the number of active clients they serve, almost all of them have seen their share of their overall income from broking decrease over time while the other segments have steadily increased their share.
Our brokerage revenues have increased significantly in absolute terms. However, “since we have built a strong focus on the distribution business and also offer margin trade financing,” says Ajay Menon, MD & CEO of Broking & Distribution at Motilal Oswal Financial Services, “the share of broking revenue has been gradually coming down on the total revenue.”
The domestic major’s share of non-broking revenue increased from 20% in FY13 to 30% in FY18, while it was approximately 40% in H1FY23. Menon says, “We believe that the key to profitable and sustainable growth going forward will be acquiring quality clients that generate revenue and providing strong value-added services.”
In a similar vein, ICICI Securities, which was once the largest brokerage in terms of the number of active clients it served, has seen its share of broking revenue decrease from more than 58% in 2020-21 to less than 40%. Interestingly, the brokerage firm supported by ICICI Bank made it a conscious effort. We were also being told by the competition that we had to change because we could not remain the same.
ICICI Securities’ MD and CEO Vijay Chandok says, “In this context, we started our transformation.” We chose to concentrate on three opportunities zones rather than just equity services: investments, savings, and wealth management; distribution of protection services (including assets for health and life); and borrowings (including credit cards, loans, and other forms)
ICICI Securities, for example, was one of the first brokerage firms to embrace technology decades ago and provide customers with a digital trading platform through its website. As a result, while some people may have found it easier to adjust to the new normal, others have also taken the transformation journey slowly.
Take, for example, Axis Securities. Even though it tries to change the mix by improving its product line, the broking business accounts for as much as 70% of its top line. According to B. Gopkumar, MD and CEO of Axis Securities, “We want our products to have a bigger piece of the pie in revenues, supplementing the pure brokerage transaction fees.” We believe that brokerage houses looking to increase their income should consider offering high-quality products. We want to offer our clients a variety of investment options based on their risk profile because we are a full-service brokerage.
Even though IIFL Securities continues to concentrate on providing high-quality research in addition to bespoke services, its share of broking revenue has fluctuated between 42% and 49% over the course of the past five years. While discount broking is a good place to start investing, investors turn to full-service brokerage and advisory firms for wealth creation and preservation, according to IIFL Securities Chairman R. Venkataraman. He adds that investors are happy to pay a small advisory fee for long-term sustainable wealth creation.
The most common type of diversification that brokerages are considering is fee-based income from areas like distribution, loans, and advisory because they believe there is sufficient demand for these services, particularly at a time when the markets are seeing a steady inflow of new investors. Brokerages can increase their income and diversify their portfolios in a variety of ways. This could be accomplished by developing a variety of distribution businesses, such as mutual funds, insurance, debt instruments, the National Pension System (NPS), and other products that can assist customers in their financial journeys, claims Ashish Rathi, Whole-Time Director at HDFC Securities.
Distribution accounted for approximately 18% of ICICI Securities’ revenue in Q2FY23, and the brokerage anticipates seeing a much larger share in the future. In contrast, traditional brokerages, according to Gopkumar of Axis Securities, are in a much better position to charge customers a fee due to their expertise and variety of offerings. Given that retail investors in India currently require assistance due to low levels of financial literacy and penetration, our position as a full-service brokerage house is ideal. The majority of standalone brokers will always have an advantage over discount brokers because they will focus on customer education and providing the appropriate investment products.
According to SEBI data, depositories NSDL and CDSL added 1.8 million demat accounts in total in November 2022, bringing the total number of demat accounts to 29.9 million at NSDL and 76.2 million at CDSL. This makes this significant. The concentration factor must also be taken into account, as the BSE’s and NSE’s top five broking firms had trading volumes of 40.8 percent and 25.2 percent, respectively, during the current fiscal year until November. Additionally, the BSE share of the top 25 and 50 brokers was estimated to be 80.7 percent and 71.3 percent, respectively; on the NSE, and 60% and 77.2 percent, respectively. Simply put, the independent brokerage firms do have a group of devoted and enduring clients, the vast majority of whom are even willing to pay for high-quality research and advisory services.
“Mature investors seeking advice to generate alpha or create long-term wealth will not mind spending for services with a full-service broker or wealth manager… We at IIFL will continue to focus on full-service broking and advisory services for the mass affluent segment,” according to Venkataraman of IIFL Securities.
ICICI Securities’ Chandok is optimistic about the future and believes that the brokerage industry is in a strong structural position. The young people in this group are all digital natives. In addition, as opposed to their slightly older counterparts, whose savings preferred physical assets like real estate and gold, their savings are more likely to go toward financial assets. Then there is the unfolding growth story of India. The structural undertone will be very constructive for the next five years, he says.
In addition, all full-service brokerages are betting heavily on the “financialization quotient.” As a result, their apps currently offer equity, debt, mutual funds, bank deposits, insurance, retirement, and loans, in addition to serving as merely platforms for stock trading.
Experts also believe that while many new investors will begin their investing journey with discount players due to the low cost of trading, a significant portion will move to full-service players for value-added services. According to Venkataraman, the rapid expansion of the Indian economy will lead to an increase in the number of investors and mass affluent clients seeking advisory services. As a result, there will continue to be ample room for full-service brokers, while discount brokers will also have sufficient space to introduce investing and trading to new investors.
However, full-service players will need to be aware that discount competitors are also evaluating various business models in order to maintain a steady income stream, and value-added services can also be provided unbundled—pay as you use. Investors can only benefit from the healthy but fierce competition that will exist as a result of both types of brokerages coexisting in the brokerage industry.