Zerodha Business Model

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Introduction

There was a time when investing in the stock market felt out of reach for most people, but Zerodha changed all that.

Often called the "Robin Hood of India," Zerodha made stock market investing simple, affordable, and accessible to everyday Indians. Founded by the Kamath brothers in 2010, Zerodha has grown to become one of India’s largest stockbrokers.

The name “Zerodha” is a clever combination of "Zero" and "Rodha" (Sanskrit for barriers), reflecting the company’s vision to remove obstacles for retail investors.

📈 Zerodha’s Reach

Today, Zerodha has over 1 crore clients, handling 15% of all trading volumes in Indian markets.

In this blog, we will discuss Zerodha’s Business Model and the Stock Broking landscape in-depth — digging deep into whats working and what not. Keep reading for more!

But what does Zerodha do?

Nithin and Nikhil Kamath, the founders, started their journey young—trading stocks while balancing other jobs. They eventually launched Zerodha to simplify investing for everyone.

At its core, Zerodha offers discount brokerage services for Indian stock exchanges like the NSE, BSE, and Multi Commodity Exchange. Their trading app, Kite, is used by 50 lakh traders daily, placing over 2 crore orders.

They also help people invest in mutual funds through their Coin app, offering a zero-commission model where Indians have invested more than ₹70,000 crores.

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Zerodha’s Moat

1/ First mover advantage

When Zerodha started out, the discount broking market was crowded with financial institutions and full-service brokers handling requests for their account holders — which involved tedious paperwork, lack of awareness and a high entry barrier for retail investors.

Zerodha noticed this customer pain point and digitalised the entire process of opening a demat account and trading online — essentially creating a self-serve model to lower barrier for people to invest without feeling overwhelmed by the process.

2/ Zero brokerage model

Zerodha entered the market with a zero commission model for equity delivery and flat fee of ₹20 for every other trade regardless of the volume. Many questioned its sustainability, but this pricing model helped them amass a massive customer base.

3/ Educating its audience

Zerodha doesn’t just want people to invest; they want them to invest smartly. They’ve invested in educating their users through their app Varsity and YouTube channels, with over 1.4 million subscribers, offering easy-to-understand content about the market and safe investing practices — across various languages.

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4/ Accountability

As a tech-first company that handles over 1 crores clients every day, Zerodha is tasked to maintain its infrastructure to withstand huge user traffic during the ups and downs of the markets. Operating in a highly - regulated industry, Zerodha makes sure that they come forward and take accountability of any glitches and breakdowns that happen on the platform by posting a full RCA on the issue and addressing it openly — something that is often did ambigously by other firms.

5/ Very user-focused product, no spam or ads

Zerodha’s app stands out because it’s simple, clutter-free, and ad-free. Unlike other platforms that bombard users with pop-ups or try to upsell services, Zerodha focuses on what matters: a smooth, focused trading experience. They only send three push notifications a month to avoid information overload.

6/ Zerodha Ecosystem

Zerodha has built an ecosystem where users can manage all their investments—stocks, mutual funds, and more—in one place. With freemium tools, it’s easy to track and grow investments, making Zerodha a trusted partner for long-term investors.

Market Overview

When SEBI was formed, Indian stock markets were a trust-based, physical market ecosystem, and it has really undertaken the heavy lifting of transforming the securities market into an ecosystem that is completely electronic, technology-enabled, and provides equal access to all.

You see, Indians have traditionally put most of their savings into asset classes like gold and real estate.

But growing confidence in the Indian economy has propelled people to start investing in stocks and index funds.

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To give you a glimpse, in just 5 years, from FY20 to FY24, the number of demat accounts in India has skyrocketed from around 4 crore to an astonishing 16 crore and counting —representing 20 per cent of Indian households.

The number of demat accounts in India surged from 4 crore in FY20 to 16 crore in FY24, covering 20% of Indian households.

Mutual fund investors grew from 1 crore in 2014 to 4.5 crore today.

Retail investors poured over ₹1 lakh crore into stocks this year, while mutual funds invested over ₹2 lakh crore.

Despite fluctuations in foreign investments, retail and domestic institutional investors have maintained strong inflows into the market.

Insurance companies have invested ₹18,886 crore in Indian equity stocks, while banks have sold about ₹9,627 crore worth of shares.

Interestingly, while foreign portfolio investors (FPIs) have been inconsistent in the Indian stock market, they’ve still bought ₹30,604 crore worth of stocks in 2024.

At the same time, retail investors and domestic institutional investors (DIIs) have been steadily increasing their investments.

Discount brokerage industry in India

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Discount brokers have made a remarkable leap, now holding 60% of the market share—up from just 11% in just 6 years.

Their presence is especially strong on the National Stock Exchange (NSE), where their share of active clients has surged from 25% to 60%, highlighting their growing dominance in India's stock market.

The retail brokerage industry has also seen tremendous growth, with revenues nearly doubling from ₹14,000 crore to ₹27,000 crore in 4 years, growing at a 17% annual rate. It is projected that revenues could further soar to ₹55,000-60,000 crore in the next five years, showcasing the industry's bright future.

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Competitive Landscape

In the competitive landscape of stock brokers and mutual fund (MF) distributors, Zerodha continues to lead, but several other players have also strengthened their presence in 2024. The most significant competitors for Zerodha include:

Groww:

Initially a mutual fund platform, Groww has expanded into stockbroking and has shown significant growth, especially in acquiring a large user base. It is the top stock broking app in India. It demonstrated the most impressive growth with a 77.5% YoY increase in active clients, reaching 9.5 million in FY24 from 5.4 million in FY23.

Upstox

Often regarded as Zerodha's closest rival, Upstox offers a similar flat brokerage model with strong trading features. While Zerodha's web platform (Kite) is smooth, Upstox's mobile app is favored for its speed. It experienced a decline of 12.6% in active clients, down to 2.5 million from 2.9 million the previous year.

Dhan

Launched in 2021, Dhan has quickly grown, making its way into the top 10 stockbroking platforms. As of August 2024, it reported 7.4 lakh active users, a major leap from previous years. This platform has focused on providing a technology-driven trading experience and has introduced a range of innovative features.

AngelOne

Previously known as Angel Broking, AngelOne has expanded aggressively. As of August 2024, it had an impressive 71 lakh active users, making it one of the top brokers in India. AngelOne offers a full-service brokerage model with comprehensive research reports and investment advice, which makes it popular among investors who seek more than just basic trading features.

Traditional brokers

ICICI Direct, HDFC Securities, and Kotak Securities, continue to challenge Zerodha’s dominance in both the stockbroking and MF spaces by offering unique tools, features, and aggressive pricing. Isec saw a sharp decline in active clients (-20.9%), while Kotak Securities showed some resilience with a 30.9% growth in active clients, reaching 1.2 million.

The top five discount brokers (which include Zerodha, Groww, Upstox, etc.) saw their combined market share increase from 60.0% in FY23 to 63.8% in FY24. Zerodha’s market share among discount brokers is around ~18%, trailing behind Groww that has a market share of 23%.

Revenue Model of Zerodha

Zerodha had an outstanding FY23/24, with revenues of ₹8,320 crore and profits of ₹4,700 crore. Interestingly, the reported profits don’t include an additional ₹1,000 crore in unrealized gains.

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Zerodha’s net worth is about 40% of the total customer funds it manages, making it one of the safest brokers in the market.

Zerodha’s Revenue Model

Zerodha’s revenue model is built around low-cost trading, which has attracted millions of users. Here’s a breakdown of how they make money:

Intraday and F&O Trades

Zerodha charges a flat fee of ₹20 or 0.03% (whichever is lower) per order executed on intraday trades across equity, currency, and commodities. For options trades, it’s a flat ₹20 per order. This pricing is one of the reasons Zerodha has grown so quickly in the discount broking space.

Rebates from Exchanges

About 10% of Zerodha’s revenue comes from exchange rebates (given to brokers by exchanges for high trading volumes) — primarily from options trading, which has seen tremendous growth. While other brokers might rely on these rebates for 10% to 50% of their income, Zerodha’s share has grown from 3% to 10% over the last four years. However, new regulatory changes mean brokers will no longer earn these rebates going forward.

Assets Under Custody

Zerodha currently manages ₹5.66 lakh crore worth of assets in its demat accounts. These assets have grown due to a bullish stock market, increased retail participation, and a thriving IPO market. What’s notable is that customers collectively hold over ₹1 lakh crore in unrealized profits, reflecting strong trust in Zerodha’s platform.

Since 2015, Zerodha has offered zero brokerage on equity delivery, subsidizing it with revenue from F&O trades. However, with recent changes in the industry, they may have to introduce a fee for equity delivery or adjust their F&O brokerage rates to maintain profitability.

Understanding Zerodha’s Business Landscape

Zerodha, India’s largest discount brokerage firm, has revolutionized the way people trade by making investing more accessible and cost-effective. Let’s break down their business strategy, expenses, opportunities, and risks in simpler terms while diving deeper into insights that highlight their position in the market.

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Key Business Expenses at Zerodha

Zerodha's costs are primarily focused on technology, regulation, and operations, which sets them apart from traditional brokers. Here’s how they manage their expenses:

Tech and Infrastructure:

Platforms like Kite and Coin: Running these advanced trading and mutual fund platforms requires constant updates, server maintenance, and cybersecurity measures.

Cloud Services: With millions of users trading live, Zerodha relies heavily on cloud infrastructure to ensure a seamless experience.

Regulatory Compliance:

Mandatory Fees: Payments to SEBI and the exchanges for each transaction add up, covering turnover charges and transaction taxes.

Legal and Audit Costs: To stay on the right side of strict financial laws, they regularly invest in legal support and audits.

Employee and Support Expenses:

Lean Team: Despite heavy automation, Zerodha employs over 1200 people for IT, customer service, and compliance to keep things running smoothly.

Efficient Customer Support: Investing in training and tools helps resolve client issues faster, though they keep the team compact to reduce costs.

Marketing & User Growth:

Word-of-Mouth Focus: Zerodha’s growth is largely driven by satisfied customers sharing their experience, minimizing the need for expensive ads.

Educational Content: Their focus on providing learning resources like Varsity has cemented Zerodha’s role as a trusted brand in finance education.

Transaction Fees:

Payment gateways and banks charge Zerodha for every money transfer into or out of trading accounts, which adds to their transaction expenses.

Office and Admin Costs:

Though largely digital, they maintain physical offices for their tech, support, and compliance teams to ensure smooth operations.

Zerodha’s focus on tech and efficient processes lets them operate with much lower costs compared to traditional brokers, allowing them to pass these savings on to their customers.

Critical Metrics That Matter to Zerodha

Zerodha’s performance can be gauged by a few key metrics that highlight their market dominance and customer satisfaction:

1/ Market Share of Active Clients:

Despite a slight dip, Zerodha still commands a strong position on both the NSE and BSE, with about 16% market share on BSE alone.

This slight decline could be due to introducing account opening fees, which they later removed to stay competitive.

2/ Assets Under Custody (AUC):

Zerodha’s AUC stands at a whopping ₹5.66 lakh crores (~₹566,000 crores), showing massive trust and investment from retail investors.

High AUC indicates that more investors are entrusting their wealth to Zerodha, reinforcing its status as a reliable platform.

3/ Customer Service Ratings:

With call ratings at 4.17 out of 5, Zerodha’s support system is strong, though there’s room to improve ticket resolutions.

Maintaining high customer satisfaction will be key as they scale and face more competition.

4/ Platform Reliability:

Zerodha’s transparency in reporting technical issues builds customer trust, even if occasional glitches occur.

Continuous tech improvements will be essential to keep users engaged and loyal in a market that values reliability.

New Opportunities on Zerodha’s Horizon

Zerodha isn’t just sticking to its core trading business; it’s expanding into new areas that could significantly boost its growth:

1/ Startups and Climate Innovation with Rainmatter:

Investing ₹680 crores in over 120 startups and another ₹1000 crores in Rainmatter Foundation shows Zerodha’s focus on innovation and sustainability. This move positions Zerodha as not just a financial entity but a change-maker in fields like fintech and climate action.

2/ Expansion of Passive Investments:

The Zerodha Fund House has already reached ₹3000 crores in AUM(Asset under Management), and they’re planning to roll out more low-cost investment products. Focusing on passive funds appeals to a new generation of investors who prefer simpler, hassle-free investing.

3/ New Trading Products:

Margin Trade Funding (MTF) and Loan-Against-Securities (LAS) are in the pipeline, aimed at providing traders with more leverage and liquidity. These products will attract both retail and institutional clients, expanding Zerodha’s market reach.

4/ Scaling Ditto Insurance:

By offering transparent insurance options, Ditto is growing as a trusted name, differentiating itself from spammy insurance providers. This aligns with Zerodha’s brand philosophy of putting customer needs first, potentially unlocking a large new revenue stream.

Risks and Challenges Ahead

Despite its innovative approach, Zerodha faces several challenges that could impact its growth:

New SEBI Regulations:

The true-to-label guidelines could cause a 10% drop in revenue as they might limit flexibility in investment products.

Zerodha will need to adapt quickly, finding ways to keep its offerings attractive despite stricter regulations.

Potential Changes in Index Derivatives:

Expected regulations on index derivatives could lead to a 30%-50% hit in revenue, a significant concern for Zerodha.

Diversifying beyond derivatives is crucial for Zerodha to mitigate this risk and sustain its revenue streams.

Impact of Rising STT:

Higher Securities Transaction Tax could reduce futures trading, which has been a strong income source.

Zerodha may need to develop new products or incentives to keep traders engaged despite the cost hike.

Referral Program Restrictions:

New exchange rules limiting referral payouts to registered individuals will slow down customer growth.

This means Zerodha will have to rethink its acquisition strategy to maintain momentum in a competitive landscape.

Cybersecurity and Tech Reliability:

As a digital-first company, any data breach or tech failure could severely damage Zerodha’s reputation.

Investing in top-notch cybersecurity is non-negotiable to protect their massive customer base and sensitive financial data.

Increasing Competition:

The rise of new discount brokers means Zerodha must continuously innovate to stay ahead.

Remaining a market leader will depend on offering superior tech, customer service, and new, unique financial products.

Zerodha’s strength lies in its tech-first approach and focus on providing value-driven services at minimal costs. While the evolving regulatory landscape and competition pose challenges, Zerodha’s investment in new growth avenues like Rainmatter, passive funds, and insurance could help it stay resilient. To navigate the future successfully, Zerodha will need to stay agile, prioritize innovation, and continue building trust with its vast customer base.

Zerodha Business Model - GrowthX