Startup of the year: What Zerodha attempted to do when it started in 2010

Zerodha has used its technological prowess and a deep discounting model to disrupt the Indian brokerage industry in ways few had imagined

Zerodha is derived from the words “zero” and “rodha”, which means barrier in Sanskrit. Removing all barriers for traders is what Zerodha attempted to do when it started in 2010.

“Back then, the aim was to focus was on very active day traders, reduce the trading cost and bring in a lot of transparency to the business, because financial services firms are generally very opaque in the way they do business,” says founder and chief executive officer, Nithin Kamath, who used to manage a community of traders on social media platforms such as Orkut and Yahoo messenger and was a sub-broker with Reliance Money before starting Zerodha.

“I had this keeda of talking to people. And we wanted to make Zerodha a community for active traders. The business model evolved over time.”

Over the years, the firm has used its technological prowess and a deep discounting model to disrupt the Indian brokerage industry in a way that few had imagined a few years before.

The disruption it has brought into the brokerage industry, the innovations, new products, and its stellar financial performance has helped it win the Business Standard Startup of the Year award 2021.

At the beginning of its journey, Zerodha introduced flat fees for intraday and F&O (futures and options) trades, doing away with the entrenched practice of charging percentage-based brokerage by incumbents. The firm’s pricing was 90-95 per cent lower than the market and the first few thousand customers were sourced from platforms such as Orkut and traderji.com.

“As soon as you say low-cost, people assume that the quality will be low as well. Building trust takes time and the challenge was to make people believe that we were a credible business,” says Kamath, who led the sales initiative for the firm for the first two years.

In 2013, Kailash Nadh established the firm’s tech team, which helped it transition from being a brokerage to a fintech. The brokerage saw a meaningful uptick in its client base after 2015, the year that saw the launch of its flagship trading platform Kite, and the introduction of zero brokerage on all equity delivery trades. “Zero brokerage created a lot of PR and social media noise for us,” says Kamath.

The ability to open accounts online using Aadhaar-linked digital signatures in 2016 also helped the broker gain acceptability among a wider user-base. Until then, opening an account involved printing and signing several dozen sheets of an account opening booklet. “Customers who had to wait two weeks to open an account could now do it in 15-20 minutes,” says Kamath.

Zerodha now charges Rs 20 or 0.03 per cent, whichever is lower, for executed orders on intraday trades across equity, derivatives and commodity markets. All direct mutual fund investments are free as well. Varsity is another zero-cost initiative that offers capital market education, and has been appreciated by a wide section of the investment community.

“When we started, pricing was the sole differentiator, but that isn’t the case today. Pricing alone can’t help build any business; there has to be a product along with it. From 2015, the edge has been the platform and the product,” says Kamath.

Zerodha’s trading platform Kite offers features such as the cloud-based alert system Sentinel and the mutual fund platform Coin, the largest direct mutual fund platform in India. “We launched the Kite Connect API system in 2016 that allowed startups to build on top of us. This allows our customers to get access to a lot of products built by startups that we have partnered with,” says Kamath.

Zerodha has been valued at $3 billion by the Hurun Global Unicorn List of 2020, and since then its valuation could have only risen. The startup, which has been bootstrapped all along, posted a net profit of Rs 1,122 crore in FY21, a jump of over 164 per cent from Rs 424 crore in FY20, while revenues for the year rose 3x to Rs 2,729 crore. For FY22, profits were up over 60 per cent year-on-year to about Rs 1,800 crore.

“The industry spends anywhere from Rs 3,000-5,000 per customer. We realised early on that we can’t spend that kind of money on acquiring customers. If we had spent the same amount of money as our competition, we wouldn’t be profitable,” says Kamath.

Zerodha has emerged as the market leader in a short span of 10 years. It took eight years to reach one million customers and only 1.5 years to add the next million. The Covid-19 pandemic proved to be a big tipping point. While it took almost 10 years for the broker to get to 2 million customers, which was around the time Covid hit, it added the next 6 million customers in just 18 months. The company now has over six million active clients who contribute over 15 per cent of all daily retail order volumes in India. On average, its users belong to the 25-35 year age group.

“The stock market took the imagination of people not just in India but around the world during Covid. We had 2 million customers before Covid and now are at 9 million-plus,” says Kamath. “We are one of the largest brokers in the world in terms of number of orders placed by customers on a daily basis. Apart from user experience, the fact that our platform is able to cater to so many customers is itself a big moat.”

At the end of the day, how many users open accounts with Zerodha doesn’t really matter, according to Kamath. What matters is whether customers trust it with their securities: “The reason we exist is we want to help customers with their money. Has all the innovation in the past led customers to doing better with their money? That’s a question we keep asking ourselves.”

Zerodha has introduced features such as equity SIPs, GTT (good till triggered) orders, basket orders, and stock gifting in the past two years and revamped its mobile app Kite at least twice. Last year it launched Nudge — a stream of alerts that help clients better the odds of winning when trading. In 2018, it got the Reserve Bank of India’s approval to operate as a non-banking financial company. Last year it got approval from the market regulator to set up an asset management company. The broker plans to offer the NPS (National Pension Scheme) on its platform and foray into the advisory space soon.

Investors can do well with their money if they can follow five or six fundamental rules of investing, according to Kamath. “Our customers give us their undivided attention when they are placing a buy order. Those few seconds can potentially be utilised to educate customers much more than all of the content we have today. That’s the next big thing for us: to figure out how to help customers to do better with their money.”