Zerodha: The Brothers Who Broke the Brokerage Barrier

In our piece on Groww, we traced the origins of investing from 15th century Belgium to 19th century Bombay to the present day where digital brokers are revolutionising the industry. As we learned, Groww recently became India’s largest stockbroker with a nearly 25% market share. While its growth story has been remarkable, Groww wasn’t the first mover in the category. That honour goes to Zerodha, which pioneered the concept of digital broking in India, launching its services as early as 2010, 6 years before Groww. In this article, we will take a closer look at Zerodha, how it came to be, how it successfully established a new market in India, and how it is planning for the future with increasing competition.

Zero Barriers; Many Opportunities

Zerodha was founded in 2010 by Nithin Kamath and Nikhil Kamath, two brothers who had the goal of breaking all barriers that traders and investors face in India in terms of cost, support, and technology. The company name is a combination of Zero and ‘Rodha’ – the Sanskrit word for barrier, paying homage to that barrier-free trading vision.

Zerodha pioneered the concept of discount broking in India, charging reduced commissions on transactions to drive more investors to use the platform. Typically, brokerage fee used to go up proportionally with the increase in order size. Zerodha realised that whether a trader bought a single lot of options in one order or 10 lots in one order, the costs incurred by the company remained constant. Therefore, they decided on a fixed fee per executed order irrespective of size or contract.

 

Big Bro to Biggest Broker

Nithin Kamath, the older of the two brothers, was a long-time trader before getting into the brokerage business. An alumnus of the Bangalore Institute of Technology, Nithin worked as a call center telesales executive while building his trading portfolio on the side. His trading exploits impressed a foreign HNI who gave him a Rs 25 lakh cheque to manage his demat account. Nithin’s success attracted more clients which enabled him to leave his job and manage trading accounts full-time. However, this was 2005. A different world altogether. A time when apps and digital marketplaces did not yet exist for anything and everything imaginable under the sun.

Nithin faced challenges in handling multiple accounts as there was no unified platform for trading. To address this, he joined Reliance Money as a sub-broker. There he was able to buy and sell stocks from a single platform. This is also when he learned why stock trading was a relatively niche interest in India. Exposed to the side of broking for the first time, he witnessed the chasm that existed between amounts due to clients and the actual amounts that they received. Hefty commission fees charged by brokers filled this chasm. That coupled with the seemingly complex processes of trading discouraged the middle class and the youth from taking up trading.

Now equipped with insights both as a trader and as a broker, Nithin set about revolutionising the broking industry. His partner in this endeavour was his younger brother, Nikhil Kamath who was always destined for a life in trading. As early as 10th grade, he had begun trading second-hand cellphones. He soon dropped out of school at the age of 16, joined a call center like his brother, and started doing equity trading on the side as well. Like his brother, he discovered that he was quite good at it. He would then manage portfolios for his friends and colleagues, earning him a reputation as a shrewd trader. Combining these skills with his brother’s exposure to the industry, he co-founded Zerodha on August 15, 2010. The date poetically marking the brothers’ independence from part-time jobs and signalling the independence of traders from high brokerage fees.

Zero Fees; Zero Marketing

Zerodha was founded with the idea to stay completely online, provide  excellent support, offer a fast and reliable trading platform, and pass back the benefit of reduced costs to the client. The belief in a superior service being enough to attract clients led Zerodha to adopt a rather unique business model. It decided to not spend on ads. The Kamath brothers believed that without ads, a business is forced to constantly think and do things to get customer love and organic growth. Completely eliminating one of the highest cost centres in a startup enabled them to bootstrap the company.

The founders focused on community outreach through the early years. As Nithin was already a part of some online trading communities, Zerodha was able to get the crucial initial few sign ups. This along with a door-to-door marketing strategy helped it onboard the first 1,000 clients. That number went up to 3,000 by the end of the first year of operations. Platform and tech improvements helped it reach 30,000 clients at the end of five years. However, the biggest wave of growth came for Zerodha when it decided to live up to its name. In 2015, Zerodha did the unthinkable – making the delivery of equity investments free of charge. From a fee of Rs 20 per order, Zerodha now aptly charged Zero fee.

As a result, Zerodha’s client base grew from 30,000 in 2015 to 14 lakh in 2020. Zerodha toppled ICICI Securities along the way to become India’s largest stockbroker. The lockdown brought another wave of growth for Zerodha as trading surged in popularity among at-home Indians. At its peak, Zerodha’s client base surpassed one crore. During this period of unprecedented growth, Zerodha also became a rare profitable unicorn startup. Zerodha’s revenue grew from Rs 2,729 crore in FY21 to Rs 4,964 crore in FY22, nearly reaching Rs 7,000 crore in FY23. In FY23,  Zerodha posted an impressive profit after tax of Rs 2,900 crore. Zerodha, today, values itself  at Rs 30,000 crore. Nithin Kamath has said that the company values itself at 10–15 times its earnings and believes that the Rs 30,000 crore estimate is a conservative one.

Beyond Broking

Zerodha’s low-cost model, coupled with its user-friendly platform and educational resources, has attracted hordes of customers. But even though it was a trailblazer in the industry, it is now trailing behind its competitors. In October 2023, Zerodha was surpassed by Groww, losing its title of India’s largest stockbroker.

While Groww has used much of the same playbook as Zerodha, the former’s larger suite of investment options has made it a much more convenient platform than Zerodha. Groww lets customers can trade in stocks, mutual funds, and a host of other assets as well with a single app. Zerodha offers mutual fund investment services through a separate platform called Coin by Zerodha. To stop its rival’s growth in its tracks, Zerodha is looking to enhance its long-term wealth management offerings by integrating its existing stock trading platform, Kite with Coin.

This echoes a larger trend in the industry with fintech startups encouraging customers to save and invest in long-term securities instead of eroding their wealth with high-frequency trading. SEBI tightening the rules around the risky business of futures and options (F&O) trading has further accelerated this trend.

There is also increasing focus on investor education with a higher volume of content expected on its Varsity YouTube channel. Zerodha plans to expand the scope of the channel to discuss current affairs and relevant industry updates as well that can potentially affect traders and investors.

Zerodha’s capital, which is ~30% of customer funds, in addition to the zero debt that the company has, still makes it one of the safest brokerage firms to deal with in India. In an industry that is volatile by nature, that may be a boon for Zerodha going ahead.

A Hero for the Community

After 14 years of operations, Zerodha continues to be a hero in Indians’ lives, helping them do better with money while saving, investing, or trading across financial products. Building on the spirit of giving back to the community, Zerodha has also launched Rainmatter. Serving as a fund for green entrepreneurs, it supports organisations for climate action and a healthier environment. To enable and accelerate such an sustainable ecosystem, Zerodha has already committed $200 million in funding and grants to individuals and organisations working in these areas through the Rainmatter Foundation.

With its latest introduction of the Social Stock Exchange, Zerodha aims to revolutionise investing once again by letting people invest in projects in the social sector.

Such a commitment to the community while maintaining profitability as a bootstrapped business is truly unique in today’s corporate world. Zerodha’s journey from a small startup to the biggest stockbroker in the second most populous country in the world is a testament to the power of disruptive innovation and belief in the core product/service. The company’s commitment to affordability, technology, education, and customer satisfaction has allowed it to redefine the Indian stock market with room to Groww further still.

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Written By: NIMESH BANSAL