Why Paytm and other startups are turning to stock broking, what it means for traditional brokerages and other questions answered

Take the example of Paytm. It started with payments, moved into banking with payments bank and ultimately forayed into wealth management through Paytm Money.

Even for Groww, it started selling mutual funds. For Groww stock trading was an obvious adjacent business opportunity. For all these players in the financial services space, stock broking has become a plus one product which is a must have.

What does this mean for the stock market ecosystem?

In India, stock broking is a massive opportunity. Inspite of having such a well-established stock market, the country with more than 50 crore smartphone users currently has only 1.2 crore active traders. If traditional brokers through brick and mortar business could not expand the market, these startups are hoping to leverage technology to achieve that.

A player like Paytm (with its massive reach) can definitely expand the horizon for the market and bring in new traders, said Nithin Kamath, chief executive officer, Zerodha.

For Paytm with a massive user base, it makes an obvious choice to offer stock trading in an easy and intuitive manner thereby hoping to get smartphone savvy users to place trades. It not only helps them create more use cases on the app, also open up new revenue opportunities, increases customer stickiness.

The lure of the millennial generation is massive. This generation which even opens a bank account remotely, for them online platforms will be the obvious choice when they start trading. This is where these platforms with superb user interface and user experience hope to attract the new traders.

“We have invested heavily on designing the app, a great user experience has helped us get users rapidly,” said Lalit Keshre, cofounder, Groww.

Why are Indians interested in trading?

Industry insiders have pointed out that information availability is one major factor which is causing new traders to try out stocks. Keshre said that this interest is not only in Indian stocks, but also in American companies, given there is so much information around tech giants like Netflix, Amazon, Tesla and others. Even on social media platforms there is so much content doing the rounds on trading many first time traders are feeling confident to put some money and test the markets.

Wealth creation is getting celebrated in the country, which was never the case before, hence many young professionals with disposable income are eager to test the waters, said a founder of a wealth management startup.

Again there is a set of new traders who have disposable income and given the pandemic they are spending less. This set of consumers are keen on investing their surplus wealth and trading actively.

So does this mean traditional brokers are in trouble?

Not really, traditional brokers have their own set of loyal users. Most of them are professional traders, trade daily and are actively involved in the markets. This category of traders might not be keen to move their assets into a startup platform. Also the bank led brokers have their captive customers. These are the bank customers who open demat accounts with the same brokerages as well.

But talking about new millennial traders, the traditional players are definitely losing out. No wonder Zerodha which was started in Bengaluru a decade back is the largest trading platform in the country today. As per latest numbers shared by NSE, Zerodha has 19 lakh active traders. Upstox another fintech platform has 7.7 lakh and the other tech broker 5Paisa has 5.6 lakh active traders. Compare this with HDFC Securities with 7.5 lakh active traders. So definitely the new age players are taking a chunk out of the overall business.

What about making money in this business?

Quiz time. Name one payments startup that is making tons of money. Can’t think of one easily? There is Zerodha; it is not only the largest stock broker in the country, it is perhaps also one of the very few fintech startups to be making hundreds of crores of profit on almost Rs 1,000 crore of revenue. That means there is money to be made in broking. The success of Zerodha has inspired a whole generation of entrepreneurs to the sector. While long term investors do not pay brokerage, intra-day trades are chargeable. There is an account opening fee that needs to be paid upfront by traders joining the platform. There is money made in futures and options trades as well.

So unlike digital payments and direct mutual funds selling, broking is a cash generating business. This is obviously a major attraction for startups, which generally burn millions of dollars to acquire customers.

So what is the catch here?

The only catch here is, most cases platforms entice users to join the broking world with the promise of some extra bucks. That is risky. A wealth management startup founder pointed out that how many of these new traders actually understand the risk in trading? Most of these traders are attracted to the proposition of making some quick bucks, but stock markets can erode massive amounts of wealth too.

In a country like India where median wages are low and consumption capacity is concentrated only among a few million citizens, the new generation traders should be extremely careful while foraying into markets and only dabble in disposable wealth and not compromise on savings.