How the FinTech (R)evolution will Change the Brokerage Industry
Being a stockbroker was comfortable, lucrative and genteel before 1975. The brokers charged a fair fixed fee for their services, competed on client service than price and both the broker & the client made money. But post 1975, after the introduction of negotiated commissions, the brokerage world changed. Full service brokerage firms became valuable overnight.
Back then investors had limited options for investment advice. Brokerage firms knew that in order to cash in, they would need middlemen. They aggressively started hiring employees screening them for only one quality – their sales ability. The middlemen and the brokerages had common agendas – to sell their products and earn commissions. As a rising tide lifts all ships, investors didn’t mind being sold premium brokerage plans by the middleman, as long as their account values kept going up.
Everything seemed to be working. But as the competition grew over time and few stock brokers and middlemen started putting their financial interests before the client’s, violating their trust and indulging in unethical ways to earn commissions. This marked the beginning of constantly increasing challenges for clients. Despite various checks and regulations introduced in recent years, complaints about few brokers overcharging for services accounted for a sizeable chunk of allegations that clients have slapped on their brokers.
Over the past few years, the technology revolution opened doors for online discount brokerage firms. A concept, fetched from US that caught up in India as well. These brokerages attracted a lot of praise for charging flat fee for trades and have amassed a lot of clientele. But soon more brokers barrelled into the discount trading ring, allowing investors to make unlimited trades for a flat annual fee, thus sharpening the price war.
But the technological disruption happening in the Indian financial sector will go far beyond offering a flat fee commission. It is set to radically transform the Indian brokerage industry. The consolidation happening in the industry with brokerages shutting shops and lowering prices, indicates that it is not just the brokers but the entire financial industry has to rethink how new technologies as well as shifts in user behaviour will impact them. It will be difficult for players to survive, unless there are clearly differentiated offerings like technologically driven products and commission free trading.
Finvasia, an emerging Fintech company and the only broker offering commission free trading in all segments, too believes brokerage sector is seeing consolidation. The company observes that consolidation is happening at a time when there is immense scope for technological innovation.
Over last six years, they have tried to evolve and adapt to the peculiarities of Indian markets while slowly treading towards their goal of creating a technologically driven frictionless financial services company that caters to all financial needs of Indian investors and savers alike. They cite that the idea behind zero brokerage was simple but not new. They realized that sending a trade over to the exchange is similar to sending a Whatsapp message or sending an email. All these prompts are nothing more than data packets (in plain English: internet connection bandwidth) that travel across a network from source to destination using internet bandwidth. If it does not cost to use Whatsapp, it effectively should not cost a dime to place trades in the market — and thus the idea to make trading “commission-free” was born.
Finvasia wants to be at Zero conflict of interest with its clients at any level hence they made brokerage Zero. They are using technology not middlemen, to allow buyers and sellers to come together to buy and sell directly from each other and as a result create value for each other. Companies like Amazon and Flipkart are an example how disinter-mediating the middle man can make things much cheaper to an average buyer. Fintech to the core, the company incentivise its Relationship managers on client satisfaction than client volumes.
They are working on creating an Artificial Intelligence based Trading software that can teach itself to adapt to changing market conditions, without guidance or instructions from humans. Robo Advisory, an automated algorithm-based portfolio management advice for retail investors, is another goody in their technology basket. Finvasia will also be launching an open source web trader that traders will be able to completely customize to fit their trading needs.
Whether we accept it or not, India’s brokerage space is on the cusp of a Fintech (r)evolution and the difference between “traditional” “discount” and “technologically driven” brokers will become more pronounced in days to come. Industry will find it hard to survive, unless their offerings are as disruptive as Finvasia’s. Those who have the willing to invest time and money in such offerings will survive and other will perish in oblivion.