Broking industry must prepare for next downturn: Samco CEO Jimeet Modi

“Private equity and venture capital (PE/VC) firm-backed players pursue aggressive tactics to acquire clients without paying much heed to the bottom line, but we believe in profitable growth,” says JIMEET MODI, founder and chief executive officer of SAMCO Group. In an interview with Sundar Sethuraman, Modi says that the account aggregator framework will be the next game changer for the industry, and players with less than 50,000 clients will find it challenging to adapt to technological changes. Edited excerpts:

There is a change in the pecking order in the broking industry. What are your thoughts?
 

There are multiple metrics to define who holds the top position in the broking industry. The only publicly available information is that of active clients, but this is just one metric. Some brokerages have only a third of the clients of the new top player, yet in terms of revenues, they are five times larger.

We also have to consider the average revenue per user. At SAMCO, we don’t believe in chasing customers or growth for the sake of it; it must be profitable growth.

PE/VC-backed players pursue aggressive client acquisitions, but that number makes no difference for players who are more profit-oriented.

What is SAMCO’s unique selling proposition, given how competitive the broking industry is?
 

We are not a plain-vanilla execution platform. We provide trading services as well as a recommendation and analytics platform. We target investors who are already in the market and looking to improve their performance.

Many new investors come from small towns with the aspiration of getting rich quickly through derivatives trading, but we don’t chase that category. Instead, we help customers become more self-aware by showing them their trading patterns and blind spots. The idea is to assist customers in making the best use of the funds they can deploy.

What are the new emerging trends in the industry?
 

Between 2000 and 2010, online trading was introduced, but people were paying ad valorem fees. Research was bundled as part of brokerage services and offered to customers.

From 2012–14 onwards, discount broking started to gain prominence, focusing solely on the platform.

I believe the next eight to 10 years will be characterised by platform-plus services. Merely offering a platform may no longer meet customer needs; value-added offerings in terms of analytics, advanced recommendations, and automated trading are necessary.

Digital onboarding was a game changer for the broking industry. What could be the next development to further boost the industry?
 

The account aggregator framework will give a significant boost to the industry. Account aggregators offer a range of assets across multiple brokers, allowing customers to have a holistic view of their assets and manage their finances more effectively. Brokers will leverage data from aggregator platforms to enhance the customer experience.

The past few years have been financially favourable for the broking industry. What is your outlook for the future?
 

The broking industry is supercyclical in nature. In recent years, especially since the pandemic, markets have seen a generally upward trajectory with occasional corrections. Brokerages are likely to perform well in such a scenario.

However, at some point, the markets may experience a turbulent phase similar to the 2008 global financial crisis, the 2012 taper tantrum, or the 2018 midcap crash. This could lead to a substantial decline in activity and revenues for the broking industry. When this will happen is uncertain, but as brokers, we must be prepared for such a downturn.

Will a few large players dominate the industry in the future?
 

By and large, only a few hundred brokers will remain. Survival will likely be limited to brokers with more than 50,000 customers, as they can afford the deep investment in technology for customer experience and regulatory compliance. Smaller brokers face the challenge of being too small to meet compliance costs.

What new regulatory changes could impact the industry?
 

All recent regulations have contributed to a healthier market. Regulations on upstreaming and downstreaming implemented by the Securities and Exchange Board of India since September have prevented events similar to the Karvy case.

Similarly, regulations on margins have reduced leverage in the system, preventing many brokers from going bust.

The reduction of the settlement cycle is the next significant regulatory change that will impact the industry. We are content with the T+1 cycle but have concerns about how an instant or hourly settlement would work.

Questions arise regarding how short sellers will be accommodated and how day traders will be affected. They bring a lot of liquidity by buying or selling before the market closes.

We hope that the new regulations will not negatively impact liquidity and will address these concerns. We look forward to the consultation paper on this.