Moneycontrol Pro Panorama | Disrupting the disruptors - Free brokers upend discount brokers

The free brokers have punched a hole in the market share of discount brokers.

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The broking industry has gone through structural changes since the turn of the century and continues to do so now. Ever since digitisation was introduced in the broking sector, the industry has grown by leaps and bounds. Investors and traders have benefited the most with improvements in technology coming in at a lower cost.

A large part of the structural change and growth of equity culture has to do with the stupendous growth of discount brokers. They came in as disruptors and dismantled the old hierarchy of traditional brokers. Today almost all the top broking slots are taken by discount brokers.

The transition continues with the disruptors being disrupted. Within the discount brokers, there is a category called free brokers, who do not charge any brokerage but earn from the float of the money left by clients in their accounts. This category of brokers has punched a hole in the market share of discount brokers.

The market regulator, on its part, has tried to curtail unchecked growth by controlling wrong practices and ensuring the safety of investors. In one such measure, it is considering asking brokers to send idle cash lying with them back to the client’s bank account on a daily basis.

Interests on idle funds account for a substantial part of brokers' revenue. In order to replenish this loss, brokers, especially the new generation discount brokers have started looking for other avenues of income.

Media reports say broking startups are expanding from their core business to complimentary opportunities like lending and payments.

Groww and Upstox are looking at their credit business to improve their product offerings. The brokers are partnering with banks and NBFCs, to begin with, and eventually will get a non-banking finance company (NBFC) licence. Lending products like personal, consumer, and two-wheeler loans are under consideration.

This is not the first time brokers are venturing into the credit business. Motilal Oswal, among the biggest full-service traditional brokers, started a housing finance arm – Aspire, and has done well over the years.

A credit business offers a steady revenue stream in a business where revenue moves in line with the market. There is nothing wrong with venturing into these businesses as the brokers are able to service their own clients and ensure a steady revenue stream. The only drawback is broking will be reduced to a mode of client acquisition, rather than a revenue stream.

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