Discount broking was a novelty item, a curio animal in the overall scheme of things of the Indian equity markets. However, the past 3-4 years have seen this curio concept take firm roots and grow faster in scale compared to the overall equity brokerage sector growth.
The reasons behind this are not far to seek. While most market observers talk of cost differential as the main reason, the fact is that cost cuts alone have never turned a market on its head. The online space is full of stories, from 1999 to 2-16, where businesses have offered service at lower costs, often at zero or negative costs, and none have been able to sustain. It is always the service element, at the price point, which makes the difference. So then what exactly is it about the discount broking business that can provide a good service experience?
The primary need is client convenience. Prakarsh Gagdani, CEO, 5paisa.com elucidates that account opening ease is a paramount need in the industry where a mere 3-5% of the population has demat accounts. Bank accounts, with the Jan Dhan trigger, are today around 40-45% of the population and that in itself is a challenging procedure for the financial non-literate population. Therefore, ease of procedure is the key. As Gagdani asserts, if documentation is in place, a client can have an account opened at 5paisa in an hour. Indeed, with the e-KYC process in place, hardly any physical signatures are needed and most of the work can be done on the basis of Aadhar, bank account documents and similar verifiable papers.
Likewise, the speed and ease of transaction in the case of a technology-driven discount broking business with minimal human interface is another influencer. Like in the case of account opening, speed, simplicity and convenience are big factors.
Cost is no doubt a vital influencer. From the investor viewpoint, the flat cost per transaction, irrespective of size is a cost saver. It also means that any investment advice given by the broker does not have any element of greed because the transaction fee is the same irrespective of the size of the transaction. With no push from the brokerage side, the individual will actually experience a more relaxed transaction. The equity market is rife with instances where the broker pressure actually unbalances the client and he loses sight of his original aims and gets into transactions which are regretted later.
Then comes the post-transaction processes, here again discount brokers have their digital interfaces in place. As Gagdani explains, when the MIS in the form of contracts and ledgers is put online and available on demand, the comfort factor is expanded. This process, which has much investment behind it, is a massive organisational convenience for both the company and the customer.
Everything said and done, the Indian equity market is absolutely ripe for the discount broking model. In the US equity market, where retail is 40% of total volumes, discount broking is 70% of the retail volumes, which indicates that it has a quarter of the total market. In India, by contrast, while the retail volume is comparable, discount broking is barely 7-8% of the total volume.
Therefore conceptually, given the growth visible in equities, the massive potential for rise in equity-holding households (as evinced by the gap in bank and demat accounts) and then the potential for discount broking as a proportion of total brokerages, the business case for discount broking is highly exciting.
With its multi-product offering and a platform giving much convenience to the client at any stage, 5paisa.com is definitely a differentiated player in the broking space. Apart from the discount broking services, it also includes other value-added products like mutual funds and insurance. 5paisa.com has invested around Rs.10 crore in its infrastructure, including in robotics. It has created a Robo Advisory platform, where investors get options for their investment allocations with zero or minimal human interface, in a very convenient and user-friendly manner.
Apart from the ease of account opening and operations, 5paisa.com also provides education on myriad aspects of the product bouquet that it offers to investors. It is effectively a full-service product offering to investors at the cost level of discount broking. 5paisa.com also intends to grow its product offering to other areas like personal and vehicle loans, where its technology investment can be properly leveraged for online transaction fulfilment.
Given the immense scope visible for discount broking and the differential position that 5paisa.com is creating for itself, it also offers tangible value for those investors who would want to have exposure to discount broking as an investment. This is because it is the first such business to be listed on any domestic exchange (as a spin-off from its parent).
