Discount broking in Indian equities has taken off in the last couple of years. 5paisa, part of the IIFL (India Infoline) group, is among the handful of players in the domestic market. The company believes the business will have a bright future. To support the future needs, the online financial provider is also planning to raise capital via IPO (initial public offering) in June. CEO of 5paisa, Prakarsh Gagdani discusses the future outlook and company plans with Pankaj Joshi.
Can you highlight your current position?
Our operations are a year old. Our daily turnover is around Rs 1,200 crore of which 99 per cent is equities and only 1 per cent comes from currency. Right now, our client base is seeing a quarter-on-quarter 100 per cent growth. On a monthly basis, 80 per cent of our clients are active.
Our main competitive advantage is cost. Our charges, even in the discount broking space are around 50 per cent cheaper than our competitors, and compared to full-service brokerages we are lesser by 98 per cent.
The other value proposition we offer is the ease of transaction. The 5paisa app today handles account opening, trading, back-office processes and query resolution. Our app has been downloaded around 1 lakh times. It is integrated with Aadhaar and the registration process on the app is such that a new account can be opened in 15 minutes with all KYC uploads done digitally. Today, 70 per cent of our transactions including large trades are through the app. Integration of e-wallet transaction in trading is not possible due to regulatory issue which permits trading only via bank account.
Today, we have 60 per cent of our clients from tier-III and tier-IV cities (defined as being outside the top 30 cities of India). We have no ground presence except a Mumbai office and we do not hold seminars or any such activities. Our two value propositions enable client acquisition, and those are possible on the back of the Rs 10 crore investment done in the digital platform. We have a call centre set up to assist clients through the account opening and documentation process because our experience shows that it continues to be a complex process for an average person. Beyond that, there is hardly any human interaction.
What kind of future growth can be expected in discount broking?
Today, our overall daily trades on the exchanges amount to Rs 4 lakh crore. In retail, we would be somewhere around 45 per cent-50 per cent that is around Rs 2 lakh crore. We estimate the discount broking segment to be around Rs 15,000 crore, which is just 7-8 per cent of total retail business. It is small but growing rapidly – two years back is was only around 2 per cent. Our vision is that retail participation is only going to grow. The growing market of discount broking will achieve a market share of 25-30 per cent in the next 2-3 years. As a business you can see that discount broking has entry barriers in the sense that it needs deep pockets and there is an immense requirement to scale up rapidly.
Today, the standard broking fees for us are around Rs 10 per trade and the key now is how soon the business will get profitable, because investors no longer have 7-10 year horizons. In that context, aggressive pricing of fees (in spirit of competition) is possible but at the same time theoretically going for zero fee transaction is not possible.
Intra-day trading today is 85-90 percent of volumes for the industry as a whole and for us as well. It accounts for close to 50 per cent of revenues. Over a two-year scenario, we can see daily trading turnover rising to Rs 5 lakh crore and retail having a share of say Rs 2.5 lakh crore. We are optimistic that discount broking would have a share of Rs 75,000 crore. Overall, the turnover (in terms of fee) can be around Rs 175-200 crore for the discount broking industry without considering any aggressive fall in the fee.
Typically, any online business (in any industry) has a structure which can support only 3-4 players. The leader (not necessarily first mover) would have a 65-70 per cent share and the second would have a 20-25 per cent share with a negligible share left for marginal players who would come and go. We think the same pattern will play out here as well.
What about business beyond equities?
For mutual fund investments, we believe the vital element is to make the process simple in case there is an array of options in each category and benchmarking is not standard. To deal with these issues, we developed an automated advisory process, known as Robo Advisor, which asks queries and then gives portfolio options in crisp fashion.
For an aggregator, mutual funds do not represent a profitable product. So, they prefer focussing on execution and let the individual asset management companies or AMFI (Association of Mutual Funds) attend to the marketing part. I believe ease and comfort are our basic offering aspirations which will drive people.
What would be your focus areas beyond the current business model?
New product lines would be personal loans, vehicle loans, and anything and everything in financial segment where transaction fulfilment is possible online. We estimate further investment of around Rs 3-4 crore, mainly in enhancing Robo Advisor and also in analytics and business intelligence.
For any business in the discount broking space, a key evaluation parameter is how reach can enable customer acquisition – how fast and how easy is the on boarding process. The other parameter is how soon the venture can turn profitable, preferably in 3-4 years, because investors’ patience is not what it used to be.
Your company is getting listed next month. Can we have some details?
5paisa.com is getting demerged from its listed parent company IIFL, and getting listed as 5paisa Capital on the BSE and the NSE. The whole process will take a month and the shareholding pattern will mirror that of the listed parent, where IIFL would invested Rs 100 crore in 5paisa and existing shareholders will get one share of 5paisa for every 25 shares of IIFL held. Post-listing, we will be complying with quarterly financial disclosure requirements from the quarter ending June 30.