Zerodha: Crushing Brokers like a Pro since 2011

The year is 1996; at the fresh age of 17, a young investor starts trading and experiences success only to have his portfolio meet sudden doom in the hands of the 2001 stock market crash.

Not one to give up, the young investor starts working night shifts in a call center to generate investing capital. Working the night shift allowed him to pursue his true passion, trading, during the day. The young investor began creating a healthy portfolio again through trials and tribulations.

Enter the year 2008, and the largest erosion of investor wealth wipes out the young investor’s portfolio again. Just when the light at the end of the tunnel seemed within reach, disaster struck again. 😞

“Fool me once, shame on you; fool me twice, shame on me; fool me thrice; well, that won’t happen because I’m gonna turn the whole game sideways” was the attitude that led Nithin Kamath to create Zerodha. The subject of today's blog is this very discount broking company and its meteoric success since its conception.

The superhero origin story

Created in 2010, Zerodha got its moniker from the amalgamation of the English word “Zero” and the Sanskrit word, “Rodha,” which means “barrier”. Being one of the first players in the discount broking market, Zerodha definitely experienced “Zero” to minimal “Rodha” in the entry.

The significant disruption that the startup introduced was flat fee broking, a model that many of its peers follow and find success in. Zerodha has considered itself more of a tech company than a financial products company ever since its transition from vendor-based products to an online platform in 2015.

Zerodha  Peers

 Account opening and AMC Charges

Zerodha seems confident in its services as it seems to charge its customers more in terms of upfront and Annual Maintenance Charges. The confidence isn’t misplaced though, the choices it has made have turned Zerodha from a player in the discount broking market to a leader setting the standards instead of trying to meet them.

Zerodha has a closely contested product variety. Zerodha and its competitors are running a close race, with each peer having minute differences from the rest. “But what are these differences?” you ask? I could tell you, but our home-grown Select would do a much better job with its concise and comprehensive analysis of multiple brokers.

As competitors nip at its heels with cut-throat prices and much more aggressive advertising campaigns, one would assume that Zerodha has met its match and is on its way to locking horns with its peers. Au contraire, my dear readers, because what appear to be competitive strategies are more like attempts at catching up to the comfortable lead that Zerodha maintains as the “King of the hill” in the discount broking business.

Competitors haven’t been the real threat for Zerodha, though. Creating a business in uncharted territories has been the real challenge the Fintech giant faced and has constantly been combating. As one of the first entrants in the digital broking market, Zerodha took the first-mover advantage and turned its operations into industry standards.

Zerodha wasn’t behind or ahead of the learning curve; Zerodha was the curve.

The Right Choices

Life is about choices, and they have consequences. The magnitude of these consequences increases manifold when there is no precedent set by those who made such calls before. The choices that Zerodha has been making seem to work well, so competitors are following Zerodha’s suit and finding success by adding little nuances of their own.

Here are some of the not-so-secret yet not-so-obvious ingredients to Zerodha’s success:

• Change things up: The stage was set, the time had come; Nithin wanted to be just a trader no more. He wanted to lead a foray into the broking world. Instead of being the next greatest, he wanted to create a “first of its kind.” An edge was needed, and a choice was made.
  
  That choice was discount broking with a flat fee structure. Since traditional brokers charged on a per cent basis, investors ended up incurring massive amounts of additional charges on top of the invested amount. Zerodha chose to introduce a maximum flat fee system of ₹20 per Commodity, Future or Options transaction, irrespective of the value of the transaction.
   

• “Free” Equity Trading: While the previous step had the F&O and Commodity traders on board, a large part of the Indian investing demographic was still untapped by Zerodha, the equity investors. Yet again, a choice was made. While waiting in an airport, Nithin had an epiphany which he called a “brain wave,” and equity trading was made free as long as investors held said equity for more than a day.
  
  While the drop from ₹ 20 wasn’t exactly revolutionary, when seen on a multiple transaction scale, it was beneficial for traders who wanted to invest in shares for the long haul. This choice ended up being a masterstroke for Zerodha as, within a year of free equity trading’s introduction, the user count leapt from a meagre 70,000 to a whopping 700,000!

• “Mutually” beneficial: Zerodha’s next target demographic was India’s mutual fund investors. Traditionally when buying mutual funds from full-service brokers, the investor would have to pay upfront and trailing commissions. For example, Let’s take a traditional broker that charges 1% upfront and 1% trailing for 10 years on a mutual fund worth ₹ 10,000. At these rates, the investor would pay:

  Cost	Rate	Amount
  Upfront Brokerage	@1% of ₹10,000	₹100
  Trailing Brokerage	@1% of ₹10,000x10 years	₹1000
  Total Brokerage	-	₹1,100

  
  The investor would incur additional costs of around ₹1,100 for the entire period of holding the mutual fund. Zerodha chose to eliminate the broker’s commission from the equation. To implement this choice, Coin was created. Coin is Zerodha’s direct mutual fund product. Direct mutual funds mean they can be purchased for free without having to pay any distributor commission. The only cost to the investor would be the flat payment to use the platform.

• It’s simple, stupid, keep it stupid simple: Highly detailed and informative interfaces were the norm for online broking platforms. The level of detail ended up counter-productive as the excess information proved confusing and even intimidating to the new investors. Zerodha’s choice in terms of the user interface was to keep the layout as bare-bones and clean as possible. This included the “.exe” based computer application and the web client Kite.
  
  Using over a decade’s worth of his personal experience as a trader and having seen the industry as a consumer himself, he chose to keep only the most relevant information visible to keep confusion to a minimum.

• One deal to end all deals: Every investor would get a broking agent under the traditional system. Since these agents charged brokerage on a “percentage of transaction value basis,” people with higher prospects for profit would get brokers who would be better salesmen. A better salesman for a broker meant more trades which translated to greater commissions earned by the broker and his company.
  
  While I intend to throw no shame at said broking companies, and the “less exciting” investors by no means got worse agents, there was a definite divide between how various clients were dealt with based on perceived prospects. Zerodha chose a “one deal for all” policy which meant investor and their funds would receive the same tempering. Their chance at profit or affluence and influence didn’t matter.

The Bottom Line

With everything said and done, even with the similarities and oh-so-minor differences, Zerodha seems to lead the discount broking market by an enormous margin. In my opinion, what seems to be its best feature is that nearly all the payments that need to be made to Zerodha are very upfront. While the competitors do not hide their costs, the charges make a gradual appearance that might feel somewhat annoying, if not downright wicked.

What tops these upfront costs is them being lower than competitors in most investment categories offered. Zerodha has a 75 lakh strong user base, and Upstox has accumulated ~50 lakh total users. On an arithmetic scale, their numbers aren’t too far apart, yet in terms of active users, Zerodha has upwards of 50 lakh users who have traded at least once in the year, while Upstox has just a bit over 40 lakh active clients.

Compared to the total two crore+ investors in NSE, Zerodha’s active users comprise 18.48%, while Upstox makes for 14.37% of the total client share. The last thing I’d like to add, as cliche as it may be, is that Zerodha thrives due to certain factors that go beyond numbers.

Nithin Kamath created a financial products company with his experience from being both an investor and a broker. Instead of fundamentally changing it, he added another facet to it with technology. The creation of Zerodha means to the discount broking industry what the invention of the digit zero means to the numerical system; growth tenfold and more.