Nithin Kamath. (Photographer: Karen Dias/Bloomberg)

Burned-Out Broker Got Rich Giving Free Trades to Millennials

(Bloomberg) -- After a decade working as a trader and a broker in India, Nithin Kamath was burned out and frustrated with a securities industry that seemed stuck in the past.

So in 2009, Kamath did something radical. With markets still reeling from the global financial crisis, he struck out on his own to start an online brokerage from a 700 square-foot office in Bengaluru. At the time, people called him crazy. Not anymore.

Burned-Out Broker Got Rich Giving Free Trades to Millennials

Thanks to a slick, mobile-friendly platform and rock-bottom commissions (some equity trades are free), his brokerage, Zerodha, has become a hit in a country with the world’s largest millennial and Gen Z populations. The firm’s rapid rise has not only made Kamath rich, it’s spurring the industry’s old guard to rethink its approach and turning Zerodha into a case study for how financial companies can lure young customers in fast-growing emerging markets.

Kamath, 39, attributes Zerodha’s success to the Google-like simplicity of its platform and the firm’s ability to undercut competitors on price because of low operating costs. Zerodha has no marketing budget, relying instead on word of mouth to attract new users, he said in an interview.

Burned-Out Broker Got Rich Giving Free Trades to Millennials

The model is hardly unique -- Robinhood has a similar strategy in the U.S. -- but Zerodha was among the first to deploy it in India, where rising wealth and smartphone use have fostered a fast-growing market for fintech startups. Zerodha now has an industry-leading 909,000 active traders, about two-thirds of which are 37 or younger. More than 70 percent of the firm’s transactions come from mobile devices.

“Zerodha has a superior platform,” said Madhukar Ladha, an analyst at HDFC Securities Ltd. in Mumbai. “It’s very agile, fast and smart. That makes a big difference.”

Zerodha -- a portmanteau of zero and rodha, which means obstacles in Sanskrit -- is the brokerage Kamath wishes he had as a young investor. In his teens and early 20s, he would trade by day and work for about $1 an hour in a call center at night. After a series of roles in the securities industry, including a five-year stint as a sub-broker at Reliance Commercial Finance Ltd., Kamath quit to start Zerodha with his younger brother, Nikhil.

The siblings saw an industry ripe for change. At the time, India’s biggest brokerages were operating with technology from the early 2000s or older, and users were paying high commissions for trading platforms that were clunky and cluttered, according to Kamath. “We wanted to be more Google-like than Yahoo-like,’’ he said.

Burned-Out Broker Got Rich Giving Free Trades to Millennials

It took time for Zerodha’s offering to catch on, but the firm’s growth over the past few years has been striking. Its active-user count has jumped more than 14-fold since 2016, leapfrogging at least 10 of the nation’s largest brokerages, including blue-chip names like ICICI Securities Ltd. and HDFC Securities Ltd., according to data compiled by the National Stock Exchange of India.

Zerodha said it handled about 10 percent of the country’s stock trades in the 12 months ended March, a period when the benchmark index jumped 17 percent and many Indians shifted into equities from cash after the government ban on high-value currency bills altered saving habits.

“Their portal is very user-friendly,’’ said Manoj Khandelwal, 27, a marketing professional in the northern commercial hub of Gurgaon who has been using Zerodha’s mobile app to invest his personal savings. “I have tried various other options, but there were always hassles.’’

Stock trades are free for Zerodha users who hold their shares for longer than a day. The firm makes money from fees on futures, options and intraday equity transactions, which cost a maximum 20 rupees. At ICICI Securities, similar longer-than-a-day stock investments can attract minimum fees of 35 rupees, while the regular commission is 25 rupees or higher for intraday orders.

Burned-Out Broker Got Rich Giving Free Trades to Millennials

Zerodha’s discount strategy is proving lucrative. Revenue climbed to 4.5 billion rupees in 2018 from 2 billion rupees a year earlier, while profits more than doubled to 2 billion rupees during the same period.

Kamath says he now sits atop a family fortune of at least 5 billion rupees, excluding his stake in Zerodha. The closely held company has no venture backing, but Kamath is considering an eventual initial public offering. If Zerodha were to command valuation multiples in line with its listed peers, it would be worth about 35 billion rupees, according to data compiled by Bloomberg. Kamath and his family own almost all of the company.

Zerodha’s continued success is far from guaranteed. Full-service Indian brokerages have already cut fees to stay competitive and are likely to keep doing so to defend their market share, HDFC Securities analysts wrote in a March report.

And then there’s the deep-pocketed newcomer. Paytm, an Indian payments giant backed by Alibaba Group Holding Ltd., has announced that it won regulatory approvals to open an online brokerage. The tech-savvy startup, which has changed how millions of Indians transfer money, is perhaps the biggest challenge to Zerodha’s rise. It plans to launch its new brokerage services before the end of March next year.

Burned-Out Broker Got Rich Giving Free Trades to Millennials

The fight for dominance will hinge in large part on which firm can attract customers with no previous capital markets experience. While India has more than 1.3 billion people, the estimated portion that invests directly in stocks via NSE is a relatively tiny 15 million.

Kamath is confident he can win over the stragglers.

“What traditional broking firms have not done well is to introduce markets to the masses,” he said. “We are the only firm that is adding new people to the ecosystem.”

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