For brokers, small is no longer beautiful

Broking business in consolidation mode.

The sharebroking business is in the consolidation and expansion mode. The big are getting bigger and the small are beginning to align with the big to adapt to the demands of the retail market.

Three broad trends are visible. One, big brokerages are growing and acquiring scale by geographical expansion. Two, they are positioning themselves as retail financial services brands instead of merely banking on old client relationships to deliver business.

And three, smaller players, whether former sub-brokers or distributors of other financial products, are opting to operate under the umbrella of big brands, through franchising and commission-sharing deals.

Ask Ambareesh Baliga, vice-president, Karvy Stock Broking, and he explains why. "Although big business still comes from A segment cities like Mumbai, there is a huge amount of interest in equities from small cities and towns."

To tap the huge market, Karvy has opened almost 260 branches in more than 150 locations and plans to add a couple of score more in due course.

Adds Motilal Oswal, chairman and managing director, Motilal Oswal Securities: "Investor awareness has increased multifold. They know what they want and big brokerages are able to offer a bouquet of services under one roof."

The main drivers of the change are two-fold: the rising cost of technology investment in broking, which makes the business unviable without scale; and the entry of banks offering all financial products under one roof, from deposit products to insurance to mutual funds and, in the future, even post-office schemes.

While ICICI Bank and HDFC Bank operate big broking arms that integrate bank, demat accounts and broking services in one seamless offering, other banks are learning to use their huge retail reach to sell third-party financial products.

The threat from banks is forcing broking houses and financial products distributors to match the geographical reach of banks by coalescing or collaborating for business.

Thus, big brokerages like Kotak Securities, Sharekhan (SSKI), Karvy, Indiabulls and Motilal Oswal are spreading out in the country, opening their own branches and adding franchisees to tap B and C segment cities and towns.

Many former sub-brokers, who cannot bill their clients directly, are signing up with them to benefit from their branding efforts. Says Motilal

Oswal, "Small brokers and sub-brokers are taking up franchises to offer their clients better service." Motilal Oswal is planning to expand its network from the current 250 branches in 150 cities and towns to about 1,000 branches in 250 locations over the next two years. "The idea is to more than double the current client base of about 45,000," Oswal explains.

Brokerage houses that build brands rather than just relationships with clients have the advantage of being received better by small investors.

Most big brokers are looking to tap smaller cities and towns, where sub-brokers can help the business grow by bringing in their own clients.

The deal typically involves revenue sharing, where the sub-broker sets up an office and invests in basic infrastructure like computers, furniture and manpower. The back-end and front-end software, risk management and billing are taken care of by the big brokerage house.

Mohan Natarajan, senior vice-president at Kotak Securities, says smaller players prefer to go with bigger branded players because it is becoming increasingly difficult for them to keep pace with compliance and regulatory issues.

"Broking is now a highly capital-intensive business, with funds required for technology upgradation, margins and investments in other add-ons like research," he adds.

"For a big broker like Kotak, four out of five franchisees tend to be former sub-brokers or distributors of financial products."

Like housewives moving up from kirana stores to malls, the broking house customer is also looking for a more sophisticated experience when investing in financial products.

Says Gagan Banga, sales and marketing head at Indiabulls, which runs both online and offline broking businesses: "The business is not only about issuing contract notes for deals that one executes for clients. It has to be a complete experience and investors prefer to go to known brokerage houses as they feel they will get the best service backed by the latest in terms of technology and information."

An Indiabulls executive said almost 60 per cent of the brokerage's 140-odd franchisees were sub-brokers. "Some 35 people responded favourably to a mailer I sent to about 200 sub-brokers offering them an opportunity to join up with us," he added.

Indiabulls has plans to add another 200 franchisees by this year end, while setting up 74 of its own branches across 50 plus locations.

The overall customer experience and service are important factors in growing the business. Says Jaideep Arora, director, Sharekhan, a retail brand owned by broking house SSKI: "We are building our network by focusing on good and reliable service to the client. We invest in training our franchisees and their staff to extend this kind of service."

Sharekhan has about 190 franchisees across 96 locations and most of them are former sub-brokers.

Others prefer to go the branch network route. Baliga says he prefers to open new branches instead of expanding too much through franchisees since service control is better. But he is not averse to adding franchisees if "the right people come along".

It is not only sub-brokers who are getting 'acquired'. The big boys are buying out rival brokerages, too. Says P K Advani, director, Advani Share Brokers, "To sustain any business model, growth is very important and M&As are obviously one way of achieving this."

There are already signs of this happening. Centrum Finance, the Mumbai-based financial services company, has just signed a deal to take over a fairly well-known domestic broker.

Says Rajendra Naik, managing director of Centrumdirect, a group company, "We service more than 1 million investors through our financial products distribution company and the brokerage business will be a step up for us to become a one-stop financial shop for them."

Another distribution company, Blue Chip Investments, has decided to align with Kotak Securities to offer equity broking services to almost 100,000 'investment families'.

Says Blue Chip's managing director, J Rajagopalan, "We have decided to become channel partners with Kotak Securities as they have a strong brand name with expertise in the business."

Not everybody is gung-ho about this big-and-small mating game. Rajesh Kamdar, a small broker, has a point. "Investors prefer to deal with known faces and the industry is very relationship-based," he argues.

"With large firms, employees come and go, but with small brokerages like ours, investors are in direct touch with us. Over a period of time we build almost family-like relationships with them."

Right now, though, the small-is-beautiful tribe is growing smaller.