*****From payments bank to Neobank, Zerodha’s options are open: Nithin Kamath, co-founder, CEO – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/markets/from-payments-bank-to-neobank-zerodhas-options-are-open-nithin-kamath-co-founder-ceo/article65372786.ece

The Kamath brothers who own and run India’s largest privately held discount brokerage house, are the unlisted billionaires of Bengaluru, a tag they say is ‘notional’ and ‘detest.’ In FY22 its revenues were ₹4,300 crore and profits at ₹1,800 crore. They also have invested in a portfolio of more than 20 companies through their Rainmatter Fintech platform. Zerodha has more than 6.2 million active clients according to NSE data and clocks about 8-10 million orders on a daily bais. Nithin, 42, the elder Kamath brother is the CEO and in a detailed interview he talked about, growth, investments and future plans. Edited Excerpts:

FY22 has been spectacular with more than 60 % jump in revenue and profits of Zerodha

The last two years have been large outliers. So many new users coming to the market. For brokers, the money really come from volatility in the market. When markets are volatile it leads to more trading, which means more brokerage. So last two years have been like, years of excesses — a combination of everything, lot of IPOs, several first timers trying to give trading activity a shot, and the volatility leading to a lot of trading turnover as well.

What progress have you made on (launching) the Asset Management Company (AMC) ?

AMC is still waiting for final approval. We’ve set up the team and infra, so whenever the final approval comes through, within two-three months, we should go live. We’re hoping to do this by the end of this year.

Will retail investors grow at the same pace as they have in the last two years?

Near every top of bull market, the same question gets asked. Retail inflow is like a mirror image of the underlying performance of the market. So will this time somehow it be different? Well, if I have to take a bet on it, I’d say no. I think the activity participation, new interest, all of that may drop off the cliff quite fast. But this time around, the audience has expanded, and maybe in the right category, because these are mostly 20 to 30 year olds.

Before, say 2008, or even the late 90s in those bull markets, the average participant was much older. So, when mistakes were made, the drawdowns were larger, the impact was larger, so people didn’t come back to the market. Today 70% to 80% of our new customers are less than 30 years old, and maybe this time it could be different. Maybe these customers will not go away and they’ll stick around.

I’ve never seen participation like this before and I’ve been part of like three bull markets. Now there’s not as much information asymmetry as the last time and corporate governance issues in India have improved significantly. Participation really is enabled by greed, and greed typically arises when markets are doing well. So, can markets indefinitely do well? It is not possible. Cyclically markets go up and down.

On the competitive landscape, do you see the broking business getting more consolidated?

Business is sure getting more concentrated. I think traditional old school brokers are getting most affected in all of this competition. Today, everyone has got a similar product, which is getting commoditised. Some of our competition is under pressure to raise money. They may have done well in acquiring users but not in terms of acquiring business. Some claim to have as many users as us, but in terms of AUM (assets under management) or revenue, it’s still far behind.

I think there is space for five to ten brokers. I think all of us have to do more, to help people do better with money. While we have given all the tools, utilities and education etc, does this all lead to people doing better with the money?

You can have 10 million customers, but if they aren’t going to make money and lose money, they’re going to become inactive. So 10 million inactive customers is equal to zero customers. If you want the customer to remain active, you need to help him do better. Future is really for folks who can find ways to help customers make fewer mistakes with finances.

Today, our competitors get measured on user growth. If you spend ₹3,000–₹5000 acquiring a customer, it’s very tough to generate that much revenue. So the lifetime value of a customer at a very deep discounted pricing model isn’t ₹3,000 , which most of our competition is spending. If we had spent that money to acquire customers, that would have been equal to all the profits we have made till date in the last 12 years.

So how will this play out?

When I say consolidation today, it is essentially that the long tail is slowly and steadily reducing. Our average revenue per user is reducing because we are adding a lot of users or just investors.  We don’t charge a brokerage fee for equity investing, so as we add more users, if you look at overall average revenue per user, it will seem like it is declining. But it is okay for us because this user isn’t really coming to us at a cost. If we had a million customers to do only equity investing, they will not really generate any revenue for us when they invest in the markets. But we are okay, because we haven’t spent ₹3,000 to acquire the user.

On portfolio of investments through Rainmatter Fintech?

There are two things- Rainmatter Fintech (RF) and Rainmatter Climate (RC). RF we started in 2016 and tries to do moonshots, where we partner with startups, collaborate with them. What startups needed was an easy way to get started. So we gave away this thing called the Kite connect APIs, which allowed startups to build on top of us and we also provided funding, because 2016-17 wasn’t really hot for people building savings or investing in trading platforms.

Under RF – I think there are 20 investments, but the ones that are building for capital markets, I think there are around 14 of them, and there are five to six which are ancillary to the capital markets. On an average we used to invest anywhere between ₹1 crore to ₹10 crore.

In Rainmatter Climate, we have allocated $100 million .  We are trying to support both for-profits and nonprofits who are working around climate change and creation of livelihoods. And here too we’ve done around 10 plus. Here any profit goes back to our foundation.

Areas of business adjacencies which you can get into?

Biggest adjacency for all FinTech companies in India is around lending. I’m constantly asking everyone to not borrow to buy stuff they don’t need. It goes against the philosophy so we’ll probably never get into luring people to borrow. But that said, we do have a loan against securities business but we don’t actively promote it. Insurance is something which is adjacent. We partnered with a startup for this – a great newsletter platform called finshots,  which also has an insurance business called Ditto in which we have a majority stake of 50 percent or so.

Will you get into housing finance, payment bank, web 3 ventures like Crypto, NFT’s etc? Where do you invest?

Today if you are our customer and have money in your trading account, you can use it to buy stocks, but if you want to use it to pay for something, you have to withdraw, wait for it to hit your bank account and then use it. We would love to offer a solution where you can just withdraw instantly and use it for whatever you want. So does it require us to become a payment bank or can we become like a neobank on top of other existing banks? That is something we’ve been thinking about but it is still not on top of our priority list. Maybe six to 12 months we’ll have more clarity, we are still debating the merits, pros and cons of all of these two different approaches.

Housing finance we don’t understand . This whole business of underwriting the credit risk of a person is something that is outside our core competency and we don’t enjoy it. Also that space is already too crowded. There’s no real moat in that business. I think in the longer run and whoever has lower cost will win. We don’t see any point in looking at that space.

On cryptocurrency and NFTs, I don’t understand what all these things are solving. But as a platform, as a broker, if tomorrow regulations allow us to do it, and there’s demand for it, we will offer it.

Our personal money is actually managed by my younger brother. We have a large public market portfolio. We also hold a bit of gold because Nikhil believes that there is a lot of volatility in the future and that gold probably can hedge. We hold a lot of government bonds as well.

Published on May 01, 2022

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