Is the discount broking space in India getting overcrowded?
Discount broking has grown rapidly in the last few years and has been helped along the way by better technology, improved bandwidth and the rise of mobile app usage. Most investors are now seeing the advantage of keeping advice and execution separate and pay the broker only for execution. As alpha is increasingly becoming difficult, most investors are realizing the importance of saving on trading costs more than anything else. It is in this market that Bajaj Finserv has made a big entry into discount broking.
Rise of discount broking
It was something that would have been hard to imagine even five years back. A little more than a year back, Zerodha overtook ICICI Direct as the broker with the largest number of registered broking accounts. Even in terms of volumes of business, Zerodha is way ahead of the rest of the pack. If you look at the discount broking space, it is dominated by the likes of Zerodha, 5Paisa, RKSV, SAMCO and few others. It is in this crowded market that one of the largest and most profitable financial services companies, Bajaj Finserv, has also entered the discount broking space. Of course, Bajaj Finserv brings to the table a strong customer franchise with a known purchase pattern. It would be very easy for Finserv to convert these customers into broking customers. The question, however, is whether the space is overcrowded for another player?
There is still room
The good thing for Bajaj Finserv, is that it does not have to create a market for discount broking. They have a massive captive retail customer base with known and verified track record. Taking them to the broking platform becomes a lot simpler for them. At the end of the day, the discount broking players are largely the aggressive traders and the millennial entrants. Aggressive traders do come with tremendous cost consciousness and discount broking perfectly fits in. For most millennials, discount broking is more about cost and convenience. But it is also about the control that discount broking offers to the clients. With a rising millennial population, there is a huge market still available for discount brokers. We may have just scratched the surface and there is a huge market still untapped.
Beware the risks
The discount broking market may have potential but there are risks we cannot ignore. For example, discount broking heavily depends on the success of risk management systems (RMS). But black swan events can make a mess of the best of RMS. Discount brokers also earn on the float due to their large army of active traders. Any regulatory changes could take this advantage. Lastly, even in the US, this business faced resistance when too many players entered. That could be the biggest risk!
