TAPMI
Journal of Economics and Finance A Student Run, Peer Reviewed Journal
Volume III, Issue No. 1
August 2018
Papers
Page no.
RAZORPAY: TRANSFORMING THE PAYMENT LANDSCAPE IN INDIA
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Brendon Presentation Mascarenhas & Arun A.R, T. A. PAI MANAGEMENT INSTITUTE, MANIPAL
THE GROWTH OF PEER-TO-PEER LENDING Ayush Bagmar & Yogi Nayak, T. A. PAI MANAGEMENT INSTITUTE, MANIPAL
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DISCOUNT BROKERS IN INDIA: A CASE STUDY ON ZERODHA Ashish Agrawal
& Pradnya Walunj, T. A. PAI MANAGEMENT INSTITUTE, MANIPAL
T. A. PAI MANAGEMENT INSTITUTE 0
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Sponsored by
Managing Editor Prasun Banerjee
Editors Animesh Gupta Junitha Johnson Kriti Sinha Laxmi Mishra Prasun Banerjee Vasudeva Kamath
Advisory Editors
Tamal Bandyopadhyay Mint, Bandhan Bank Ltd
Prabhakar Reddy Patil Securities and Exchange Board of India
Yangyang Chen Hong Kong Polytechnic University
Peter Kien Pham University of New South Wales, Sydney
Michael E. Drew Drew, Walk & Co.
Kok Fai Phoon Singapore Management University
Ravi Gautham Northern Trust
Edward Podolski La Trobe University, Melbourne
Anil Ghelani DSP BlackRock
Arati Porwal CFA Institute
Anjan Ghosh ICRA Limited
Sridhar Seshadri Development Credit Bank
Viswanathan Iyer National Australia Bank
Cameron Truong Monash University, Melbourne
Madhu Veeraraghavan T. A. Pai Management Institute
C. Vasudevan Bombay Stock Exchange Limited
Madhav Nair Mashreq Bank
Jayaraman. K. Vishwanath DCB Bank Limited
Suman Neupane Griffith University, Brisbane
Production Team Laxmi Mishra
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COVER STORY India is one amongst the few economies with a vibrant start-up ecosystem, with start-ups in the finance sector driving the growth. The major driver of growth and innovation in this sector is the government impetus towards financial inclusion and digitization of the economy. With the Digital India and Start-up India programmes acting as the backbone for the fledgling start-ups to thrive, we see a bright future for the start-ups in terms of funding and valuation trends that helps them truly capture the growing demand of Indian consumers. The transaction value in the FinTech market is nearly $44 billion and is expected to increase at a CAGR of 20.2% during the period 2017-2021 to $92 billion in 2021. India has over 600 fintech start-ups with this sector attracting capital from well-known PE and VC investors to tune of $2.74 billion. Fintech provides multiple products and services including e-wallets, Peer to Peer lending, insurance, robo-advisory, security and biometrics. Technology enables faster processing of loans without the hassles of the documentation which benefits the largely unbanked MSME sector. Fintech also enables operational efficiency for companies that ultimately help them provide services to a wide range of customers at much lower cost than traditional models of financial services. Traditional banks are collaborating with fintech start-ups to provide innovative solutions in various segments like mobile banking, chat-bots, blockchain etc. while also reducing their own costs. One of the major hindrances in the growth of fintech space is a lack of funding in early stages – Pre-Series A and Series A funding which is extremely necessary for young start-ups to grow. The other aspect being the high cash burn rate of fintech start-ups in the early stages due to investments in technological innovation and lack of traction. We believe that a conducive regulatory environment, sustained investment, product innovation and user adoption will drive the fintech space in India and be counted amongst the best in the world. With this background, we present three papers in this issue of TJEF. We hope that the readers of the journal benefit from the views and insights of the papers published.
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EDITORIAL In the recent months, the world has witnessed few major economic trends and turmoil. The Economic Analysis & Policy Division of the UN reported in its June 2018 briefing, a stronger outlook for developed economies. There have been favorable investment conditions in the developed and the emerging economies. But the build-up of trade tensions among major economies and the rising levels of debt in both developing and developed countries have the potential to derail the improvement. Amid such macroeconomic events, an entirely new dimension of business is growing steadily and disrupting the financial service sector. These businesses, commonly known as start-ups, are further simplifying the way we do business. Most of them are leveraging technology to reduce the market-friction in the transaction of wealth. But consumer inertia in financial services is high. Consumers have generally been slow to change financial-services providers. So, there is an inherent challenge that the sector poses to these startups. The first Issue of the third Volume of the TAPMI Journal of Economics and Finance (TJEF) has aimed to study few of these major disruptors in the economy. This research quarterly would focus mostly on the startup landscape in the financial space. Recently, with the RBI clearing few major roadblocks, payment banks in India have grown in leaps and bound, providing mobile and web-based payments, clearing and settlement services. Recently, the level of venture-capital investment in the financial technology startups has also accelerated. Internet penetration and affordable smart devices have further mobilized the growth of these companies. This edition of the journal, have covered a wide range of companies from discount brokers to merchant payment banks. The editorial board would like to thank all the authors who have contributed to this journal. We hope that the readers benefit from the insights of the papers published. Managing Editor Prasun Banerjee
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Aims and Scope 1.
TAPMI Journal of Economics and Finance is a peer-reviewed journal. We seek research papers in the areas of Banking, Economics and Finance.
2.
The main purpose of the journal is to encourage quality submissions from business students.
3.
We encourage submissions from students enrolled in leading business schools in India and abroad.
4.
We also encourage submissions from practitioners.
5.
Our aim is to provide constructive feedback on all submissions.
Disclaimer 1.
Intellectual Property Rights – unless otherwise stated, the Editorial Board and the authors own the intellectual property rights of the journal.
2.
The decisions of the editorial board are final and binding.
3.
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RAZORPAY: TRANSFORMING THE PAYMENT LANDSCAPE IN INDIA Brendon Presentation Mascarenhas Arun A.R T. A. PAI MANAGEMENT INSTITUTE Introduction FinTech refers to technological innovation changing the nature of financial services. It covers services ranging from mobile payment solutions to e-portfolio management and international money transfers. The areas of financial market activities that can be used to group FinTech innovations are:
Figure 1: Categorization of Fintech’s
Scope In India, 40% of the population does not use banks and non-digital cash payments occur 87% of the time. Mobile usage is expected to increase from 53% to 64% by 2018. With internet penetration climbing, the Indian FinTech industry has bright prospects. Further, 90% of SMEs are not linked to the banking industry. These gaps in access to financial institutions and services offer several opportunities to the FinTech industry in India. We acknowledge the helpful comments and suggestions of the editors. Editor’s note: Accepted by Kriti Kanchan Sinha & Laxmi Mishra
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Submitted on: 03/08/2018 Accepted on: 04/08/2018 Published on: 20/08/2018
The FinTech industry in India was valued at $450 million in 2015. According to NASSCOM, the industry grew 282 % between 2013 and 2014 and is expected to grow by 170% by 2020 to reach $2.4 billion. The value of transactions in 2016 alone was estimated to be $33 billion in 2016 and is expected to touch to $73 billion by 2020. A Google-BCG report indicates that FinTech will contribute to 15% of India's GDP and the industry is expected to grow 10-fold to touch $500 billion by 2020. Also, in the digital payments industry, India is set to become the third largest market after the US and China. The country is expected to reach 25 billion transactions in 2018, according to the government. The graph indicates the trend of investments in FinTech shifting to developing economies like India.
Figure 2: Investments in FinTech from 2010-15
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The fin-tech products or services offered in Indian financial markets are as follows:
Indian Fin-Tech Industry
Figure 3: FinTech Product Offerings in India
Objective There are 400 fin-tech companies currently operating in India. This paper analyses the payment sector of the Indian FinTech industry using the example of Razorpay. This paper examines Razorpay’s business model and revenue model in the context of its success in the payment sector as a payment company that offers a fast, affordable and secure mode of e-payments for merchants and e-commerce companies. Razorpay can be used as a model for understanding the payment segment in India as this company operates across various platforms such as mobile wallets, payment gateways and mPOS. Also, Razorpay’s growth story is similar to other successful FinTech startups in India such as Instamojo and EBS. This paper builds a case for why the Razorpay model can be adopted by other FinTech start-ups in India. Business Model Razorpay primarily caters to the B2B market for merchants, e-commerce and SMEs. The company’s revenue streams are from the following product offerings: •
Razorpay Smart Collect is built to automate all collections made through bank transfers and integrate it in one place. Businesses can now automate their NEFT or RTGS reconciliations in real time in an API-driven environment, thus increasing transparency of incoming payments.
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•
Razorpay Subscriptions was developed to benefit businesses that have recurring billing models. This product helps manage scheduled payments, create different pricing plans, and track all payment activities from a single subscriptions platform. Enterprises can benefit from its flexible and fully managed billing platform.
•
Razorpay Invoices is designed as an interactive solution to efficiently invoice and collect payments from customers. This solution ensures GST compliance, supports multiple modes of payment and is effective for SMEs that do not have a website or an app.
•
Razorpay Route offers an efficient end-to-end solution for businesses to be able to manage split payments, marketplaces, and facilitate vendor pay-outs.
Thus, Razorpay manages the entire payment lifecycle of an organization from the moment it is initiated to the point it is fully reconciled and disbursed to the destination.
Current Traction and Major Clients Razorpay caters to various industries such as travel, e-commerce, food tech, education, Government, bill payment, insurance, mutual fund houses, etc. Since 2013, 25,000 merchants have been on-boarded. Significant clients include Nestaway, Videocon, ClearTax, Zerodha, Licious, Papa Jones, Zomato, Rentomojo, and Chai Point. Funding and Valuation S.No. I.
Funding
Date
Investors
Funds
Type
sanctioned
Seed
September Y Combinator, $2.5 million
Funding 2015
Matrix
Partners 33
and angel
investors
Reason Razorpay received this funding as it made it to the Y combinatory program due to its
aim
revolutionize
8
to
online payments by providing a simple, affordable secure
and
way
for
small businesses, start-ups and other traditional
SMEs.
II. Series Funding
A October 2015
Tiger
Global $9 million
This was to expand
Management
the
and
needed to solve
Matrix
Partners
technology
India-specific problems particularly in the card
and
net
banking transactions, which account for 30%40% of errors on the web and nearly 50% of errors on mobile devices. In addition to this, the market opportunity
was
huge as the domain Razorpay operated in
was
mostly
dominated by Tiger Global-funded
9
companies
who
could
help
Razorpay
grow
faster. III. No Stage
July 2016
MasterCard
Undisclosed Razorpay was a part
of
the
MasterCard
Start
Path programme to speed
up
the
adoption of online and
mobile
payments among small businesses in India.
Razorpay
looked to integrate the
MasterCard
Payment Gateway to
support
merchants card
and
issuers
to
validate each other prior
to
the
authorization of a transaction.
This
will help resolve infrastructural challenges in the Indian
payment
ecosystem. IV. Series Funding
B January 2018
Tiger
Global $20 million
To set up more
Management,
business verticals,
Matrix
drive adoption and expand the team. 10
Partners and Y
The funds will be
Combinator
used to scale up its four
products
Razorpay
Route,
Razorpay
Smart
Collect, Razorpay Subscriptions and Invoices
and
bolster
its
technological capabilities
and
offerings. Further expansion of the team
to
meet
market demands, diversify
the
product portfolio and
build
new
experiences through
cutting-
edge data science.
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Revenue Model The company has a paid-up capital of Rs. 49.41 lakh and authorized capital of Rs 220 lakh. The company posted a PAT of Rs 28.7 lakh for 2016-17 as compared with a loss of Rs 4.1 lakh the previous fiscal year.
Revenue in Crore
Revenue fromOperations
Revenue
0
5
10
16-17
15
20
25
30
15-16
Figure 4: YoY Revenue of Razorpay
Razorpay offers two pricing plans: 1. Start-ups: It charges 2.5% for every successful transaction. This plan has no annual fees or setup costs. It costs an added 1% per transaction while handling international
credit
cards.
Service
tax
is
an
extra
charge.
2. Established Businesses: It charges a 2% fee for every transaction that goes through the site. The plan costs Rs. 5,000 in setup fees, along with Rs. 5,000 in annual charges. An additional 1% is charged for transactions that include an international credit card. There are various payment methods available for Razorpay clients. Razorpay accepts all major debit and credit cards and over 50 networking banks and wallets are supported through the system. These include Visa, MasterCard, Maestro, RuPay, SBI, AXIS, KOTAK, ICICI, and HDFC. They also accept Net-banking and wallets such as MobiKwik, PayZapp, Airtel Money and PayUmoney. Thus, Razorpay provides a maximum number of payment options that any merchant can get compared to other payment gateways in the country. 12
Reasons for Success •
Improved reliability: The founders of Razorpay entered the payment space as they found a need for a reliable and faster payment system. Thus, Razorpay primarily focussed on success rates. Some estimate shows that their success rates are 20% above the industry average.
•
Swift Client Onboarding: In 2013, prior to Razorpay, setting up a payment system was burdensome. The process involved bureaucratic red tape, paperwork, and long wait-times in a process that needs to be done region-byregion. Razorpay simplified client onboarding, by enabling submission of documents online and instant sign up on the platform. The account is activated in less than a week after being reviewed by a team.
•
Demonetisation: Razorpay benefited from demonetization as the company grew from serving 10,000 merchants to 35,000. It has seen a 25x growth in payment volumes post-demonetization. A sudden shift to digital payments resulted in an increase in business as small merchants lacked the infrastructure to transact digitally. Razorpay’s solution to such a problem was ePOS – a nifty, easy to use the app to enable small merchants to accept digital transactions. Solving specific merchant problems, ePOS witnessed substantial adoption from merchants across India.
•
Unified Payments Interface: Integrating UPI as a payments option has led to more transactions for gateways. Because of UPI, there is no requirement of adding a beneficiary and waiting for approval. UPI has proven to be extremely beneficial for businesses the immediate nature of a UPI transaction has immense potential to solve a merchants’ payment collection woes. According to the National Payments Corporation of India (NPCI), UPI transactions in November reached an all-time high of 105 million transactions, with a total of Rs 9,640 crore being transacted across the network (in the same month). At Razorpay, the e-commerce sector has seen maximum UPI usage in terms of successful transactions. 13
•
Government Initiatives: There have been various government initiative that has been instrumental in Razorpay’s success such as: o National Broadband Mission and the extension of NOFN – the National Optical Fibre Network to all parts of the country. o The digitization of records: The digitalization of all citizens to government interaction processes in the country. o The ability to access and disseminate information needs the digital literacy mission to create capability and the availability of all data records and information in electronic form. o India Stack: The government contributed to the growth in the FinTech industry by providing a top-notch technological framework to innovators, entrepreneurs and corporations.
•
Aadhaar Adoption: The RBI recently approved Aadhaar-based biometric authentication, which will allow bank accounts to be opened through e-KYC at any Banking Correspondent (BC) location.
Competitor Analysis Razorpay competes with Instamojo, CCAvenue, EBS and PayU. While most of them offer free set-ups, their plans and products are on par with Razorpay. •
Instamojo: They presently power more than 3,00,000 businesses in India. They provide free set-up and annual maintenance. Their transaction fee is standard, and they cater to clients such as Online Prasad, UrbanClap, and YourStory.
•
CCAvenue: They also offer free set-up for start-ups. However, the privilege plan costs Rs. 30,000. The transaction fees vary according to the plan chosen. CCAvenue caters to 85% of India’s e-commerce services such as MakeMyTrip, ClearTrip, AirAsia, RedBus and Myntra.
•
EBS: Set up fees range from Rs. 4,799 to Rs. 23,999 depending on the plan while Annual Maintenance Fee is fixed at Rs. 2400. Popular Clients include BabyOye, Snapdeal, and FirstCry.
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•
PayU: The plans are competitive with EBS. Their clients include Jabong, BookMyShow, and Zomato.
Thus, compared to its competitors, Razorpay has the following unique offerings: •
RazorPay has mobile SDKs for iOS and Android.
•
It has a powerful mobile API. This can be leveraged with a mobile website.
•
It can support different payment modes and accepts international payments.
•
RazorPay is integrated with 3D-Secure and Verified by Visa (VBV). All redirection is managed within a popup. In addition to this, it accepts RuPay Debit Cards.
•
It can be embedded in a business’ website using easy-to-generate code.
Recommendations Consumer preference for convenience and wider product offering has put start-ups in the FinTech segments in direct competition with large banks. However, the road ahead for both entities is only through collaboration. Collaborating with FinTechs allow the banks to effectively outsource part of their R&D and develop improved services that can be brought to market swiftly. This allows institutions to gain access to motivated technology teams that are capable of building solutions in a shorter timeframe. FinTech start-ups also benefit from such partnerships, as they gain access to the large customer base of financial institutions, as well as their management and deployment capabilities. Also, FinTech start-ups have accelerated their go-to-market process by leveraging the credibility of the traditional large institutions. These large institutions can provide a vast amount of user data to develop new business & revenue models. Moreover, it makes better business sense to collaborate with start-ups instead of competing with established institutions while trying to upscale business. Partnerships with FinTech companies in India are expected to go up from 42% in 2016 to 95% in 2020. However, various obstacles may occur in such collaborations. There are differences in the working models, security and culture of FinTech companies as compared to financial institutions. These institutions suffer compatibility issues, legacy systems and slow adoption of innovation. FinTech companies must focus on bringing new levels of 15
efficiency and speed to specific parts of the value chain, while established institutions are required to cover the whole spectrum of transaction services. Despite these challenges, collaboration represents a highly promising avenue for both parties. With the increasing instances of banking issues and the scope in the Indian market, the opportunities for collaboration are only growing. In the years to come, FinTech companies, which include technology companies like Google, Apple etc. may serve at the front office. The banks may serve in the back office supporting the services of FinTech companies. References 1. Online payment gateway Razorpay raises Rs. 58 crores. (2017, October 25). Economic Times. Retrieved from: https://economictimes.indiatimes.com/smallbiz/startups/newsbuzz/razorpay-gets-20-million-to-fend-off-rivals-likepaypal-stripe/articleshow/62517213.cms 2. PricewaterhouseCoopers. (2017). FinTech Trends Report. Retrieved from: https://www.pwc.in/assets/pdfs/publications/2017/FinTech-India-report2017.pdf 3. Razorpay. (2018). Retrieved from: https://economictimes.indiatimes.com/small-biz/startups/online-paymentgateway-razorpay-raises-rs-58-crore/articleshow/49546271.cms 4. Razorpay: A hot new saving grace for the Indian payment gateway market. (2017, August 23). E-commerce-Platforms. Retrieved from: https://ecommerce-platforms.com/ecommerce-reviews/razorpay-a-hot-newsaving-grace-for-the-indian-payment-gateway-market 5. Reserve Bank of India (2017). Report of the working group on FinTech and digital banking. Retrieved from: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ WGFR68AA1890D7334D8F8F72CC2399A27F4A.PDF
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6. Top 10 payment gateway service providers in India – Updated. (2018). NextWhatBusiness. Retrieved from: https://nextwhatbusiness.com/paymentgateway-india-small-business/
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THE GROWTH OF PEER-TO-PEER LENDING
Ayush Bagmar Yogi Nayak T. A. PAI MANAGEMENT INSTITUTE
INTRODUCTION Peer to Peer lending (P2P) is a new method of debt financing which promotes borrowing and lending of money without the need of financial institutions acting as intermediaries. With the use of technology and focus on connecting borrowers and lenders in online platforms, P2P lenders are aiming for a steady growth by integrating the use of technology in finance, loan processing and credit approvals. With the rise in the loan book of various big players in this segment, the P2P platform has outsmarted the consumer lending altogether. With its momentum gaining by twofold in the global market P2P is building its roots in India. Business Model P2P business model is different from that of traditional banks, it works on an Aggregator Business Model where the companies like Faircent, I-lend aim to organize a marketplace for the borrowers and lenders to meet and transact. They function entirely online and require little personal interaction. It runs on a twofold customer strategy where borrowers are matched directly with the investors through a lending platform. Investors get to see and choose exactly which loans they want to fund. It offers rapid and less complicated procedures thus making the whole process simple and valuable for the customers. Further, this industry is divided into three sub-sectors Consumer lending, Business lending and Proprietary lending. We acknowledge the helpful comments and suggestions of the editors. Editor’s note: Accepted by Prasun Banerjee & Vasudeva Kamath H
⋅ ⋅ ⋅
18
Submitted on: 03/08/2018 Accepted on: 04/08/2018 Published on: 20/08/2018
P2P Consumer lending platforms like i2i funding (India) aim to bridge the gap between investors and individual borrowers (personal loans) while P2P Business lending deals only with small & large businesses and accredited investors. However, few platforms offer multiple types of loans where any type of investor can fund them, Lending Club (UK) follows this model. The lower cost design associated with online platforms enables these lenders to offer stakeholders attractive rates. P2P lending basically is a tech platform which does not assume any credit risk on behalf of its users.
Fig. 1 Illustrative P2P Lending Process
Revenue Model The P2P lenders earn revenue by levying fees to the borrowers and taking a percentage share of the interest earned on the loan. Typically, lenders charge origination fees1 which ranges between 1% to 6% of the loan amount, and late payment fees to borrowers. On the investing front, they take a percentage of the interest accrued on the loan. Example: Lending club (UK) takes 1% fee for each payment amount if a borrower makes a payment of Rs. 100,000, the Lending club will take Rs. 1000 before passing to the investor.
Regulations P2P still being an unorganized sector in India, lot of risks are associated with the same. There are many small problems, issues and inconveniences in the current banking and 19
financial system. Peer-to-Peer companies have an idea for disruptive innovation and even though these companies in India boast of average returns of 22%-24%, the default rate is between 5-7%. To resolve this problem, under the purview of The Reserve Bank of India, it has stated certain Directions for compliance by every Non-Banking Financial Company that carries on the business of a Peer to Peer Lending Platform. It issued a Notification No. DNBR.045/CGM (CDS)-2017 dated August 24, 2017, in terms of subclause (iii) of clause(f) of section 45I of the Reserve Bank of India Act, 1934 in relation to the same as follows 2: i.
Prudential Requirements: It is mandatory to have a minimum own fund of ₹ 20 million and maintain a minimum leverage ratio. This is done to prevent platforms to expand with indiscriminate leverage. The allowable limit cap is of ₹1 million for an individual borrower and the maturity period for loans is 36 months.
ii.
Fit and Proper Criteria: The Directors and CEOs must be selected based on ‘fit and proper’ criteria. The company should be incorporated in India and have the required competency in relation to technological resources to provide such services.
iii.
User Interface: The responsibility of data security and customer data confidentiality will be on the service provider. In the case of risk management and grievances, a proper mechanism needs to be in place. In case of closure of platform, approved Business Continuity Plan should be in place for servicing of loans of full tenure by a third party.
iv.
Auditing and Reporting Requirements: Certified Information Systems Auditor (CISA) certified external auditors should conduct an Information System Audit at least once in two years. The same report should be submitted in one month to the Regional Office of the Department of Non-Banking Supervision of the Bank, under whose jurisdiction the Registered Office of the NBFC-P2P is located. Under RBI guidelines, an NBFC P2P must be a member of all Credit Information Companies (CICs) and submit all data to them.
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Association India has formulated its first P2P lending association as the fintech start-ups join hands together to facilitate the expansion of the industry. This association will represent the P2P lending industry and will work in conjunction with the regulatory authorities and government on matters of regulatory compliance. Also, they aim to streamline the industry and work with various players in the alternate financial and lending services to ensure overall growth of this sector. Companies like Faircent, LendenClub, I-Lend are part of this association. SWOT Analysis of P2P industry in India A. Strengths: 1.
Customised loans available according to the borrower's needs
2.
Quick and less cumbersome process for both borrowers and lenders
3.
No need of collateral from the borrower
4.
Higher Returns for lenders ranging from 12% up to 36%
5.
Risk Portfolio diversification by investing in different loans
6.
The lender can withdraw the money as per his discretion
B. Weaknesses: 1. Lower credit score borrowers will still have to bear higher interest rates 2. In the Indian Context, RBI has set a limit cap of Rs. 1,000,000 for an individual borrower C. Opportunities: 1. The P2P lending industry is still in its nascent stage. The current trend shows the industry will grow to $4-$5 billion (160 times the current lending size) in 2023 in India 2. Growing SME sector due to Make in India Campaign 3. Digital India Campaign is an impetus for usage of online services D. Threats: 1. Higher chances of borrowers defaulting due to unsecured loans 2. The business model can be imitated by banking and financial organizations 21
Exploit Opportunities with Strengths: Investors are always on the lookout for better investment opportunities and a growing industry with a higher rate of return is a lucrative option for investors. The improving SME sector if integrated with P2P lending will give a boost to the borrowers funding on a large scale. Ward-off Threats with Strengths: Since the business model can be easily imitated, P2P lenders must provide customized loans to borrowers and better lending returns to investors. Overcome Weaknesses to grab Opportunities: Increasing opportunities in the SME sector and a growing industry will eventually drive RBI to remove the limit cap of Rs. 1 lakh and provide borrowers, access to more funds. Threats against Weaknesses: In the unorganized sector loans are also provided to people and businesses with a low credit score. Due to a greater possibility of borrower defaulting, stricter rules may be implemented by the Central Bank.
Fig. 2 Faircent loan purposes
Growth Opportunities in India and around the World Two important government campaigns which are giving a huge boost to P2P lending in India are: Digital India and Make in India. In witness of this growth, RBI has decided to come into the picture and regulate this sector. Due to regulation and protection of investors interests, this is one of the main reasons which is attracting more and more investors as well as borrowers to this system of lending. As per RBI, there is an increase in demand for personal loans from 15% in 2015 to 19.6% in March 2016 3. Even though 22
there is an increasing demand, there is lack of supply of funds. Small traders and middle-income people in India still have plenty of difficulties availing a loan from banks. Investors don’t get desired returns from traditional fixed deposits and mutual funds. Hence, in India, Peer to Peer (P2P) lending is creating a disruptive market and providing a solution for both these problems. In India, some of the firms that facilitate P2P lending are i2i funding, Faircent, Paisadukaan, OML P2P, India Money Mart, etc. The market size of P2P lending in India as on January 2018 is 25 million USD.
Fig. 3 Global share of major P2P Lenders
The estimated P2P lending to be generated in India is around 4 billion USD (160 times the current lending size) however, this figure is very low as compared to the world market leader China whose P2P lending platform currently is valued at around 100 billion USD 4. According to Transparency Market Research, the global P2P market will be worth USD 897.85 billion by the year 2024. According to Market Research, this sector in the period of 2016 to 2020 will grow at a CAGR of 53.06% and at a CAGR of 48.2% in the period of 2016 to 2024 5. 23
Conclusion The P2P lending is a business model in which individuals and institutional investors provide loans to people seeking funds. Today, P2P platforms are growing at a fast pace in the segment of alternate financing. The market is anticipated to grow at a CAGR of 48.2% between 2018 and 2024. Also given the competitive interest rates and ease in availability of loan this segment is gaining popularity and huge momentum. In a country like India where only 14.28% of borrowers acquire a loan from formal means, this platform aims to bridge the gap between the deprived borrowers and the fervor of p2p companies to grow. With the obvious risks involved for end consumers, RBI would take greater measures to strengthen its regulatory framework with P2P lending platforms and thereby help to increase the mass adoption of this emerging segment. With the given trends, India has huge potential to grow in this segment and if the P2P lending becomes well established as in developed markets (e.g. Lending Club in the UK) banks and other institutional investors would also want to be part of this growth cycle adding few blocks of P2P in their portfolio. Overall the trends look positive and global market is anticipated to rise to $1 trilliondollar market within 2024. With the increasing focus on automation and innovation in providing loan services to investors and borrowers, P2P firms must continuously evolve themselves in terms of technology and operational effectiveness of their key processes and controls to keep them relevant with dynamic market trends and ensure that data integrity of the platform is not under threat at any point in time.
References:
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1. Medium.com. (2017, September 29). Retrieved from: https://medium.com/getline-in/p2p-lending-market-in-numbers-the-getlinenetwork-4299da9ad867 2. Hardingloevner.com. (2018, March). Retrieved from: https://www.hardingloevner.com/fundamental-thinking/p2p-lendingplatforms-are-growing-rapidly-should-banks-be-worried/ 3. Online.norwich.edu. (2016). Retrieved from: https://online.norwich.edu/academic-programs/masters/businessadministration/resources/infographics/pros-and-cons-of-peer-to-peerlending-for-a-small-business 4. P2P Lending Process. PWC article. (2017). Retrieved from: https://www.pwc.in/assets/pdf 5. RBI, (2018, February 23). Retrieved from: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11137 6. LenDenClub. (2017, August 2). Retrieved from: https://www.lendenclub.com/growth-of-p2p-lending-in-india/ 7. NASDAQ, Rise of P2P lending. (September 2016). Retrieved from: https://www.nasdaq.com/article/the-rise-of-peertopeer-p2p-lendingcm685513
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DISCOUNT BROKERS IN INDIA: ZERODHA, A CASE STUDY Ashish Agrawal Pradnya Walunj T. A. PAI MANAGEMENT INSTITUTE Introduction India, with a population of nearly 1.25 billion people which is mostly unbanked or underbanked, is a growing market for Fintech. With the government pushing for digital penetration in the country, there exist huge opportunities for banks and financial institutions to take the lead on this front. Initiatives such as boosting Fintech ecosystem, and providing new opportunities to start-ups to launch competitive products are paying off, with almost a billion dollars flowing into this space in the last 3 years. (India, 2016) It can be safely said that API’s are powering most of the new fintech innovations. Most Fintech companies float their product on cloud services, which enables them to access APIs on-premise as per their requirement. One such Fintech company which has levered this technology to its maximum advantage is the discount brokerage firm, Zerodha (Zerodha Securities Pvt Ltd). Objective This paper intends to delve into the functioning of India’s biggest discount broker, Zerodha. Its management, business model, use of technology, products, challenges, and future will be a major part of this paper. Also, this paper will try and find out the
We acknowledge the helpful comments and suggestions of the editors. Editor’s note: Accepted by Junitha Johnson & Animesh Gupta
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Submitted on: 03/08/2018 Accepted on: 04/08/2018 Published on: 20/08/2018
sustainability of such a model and its need in a country where less than 1% of the population actually trades and invests in the Capital Markets. Zerodha: Management, Business Model, Success Story Zerodha started its operation in August 2010. The name is derived from two words, Zero + Rodha (Sanskrit for barriers), which literally means no barriers. Their aim is to make products for traders and investors in India which seamlessly penetrate the barriers in terms of technology, support, and cost. Today, they are the fastest growing brokerage firm with one of the top volume contributions on NSE, BSE, and MCX, with an average daily trading turnover of around INR 100 billion (Zerodha, 2018). It has also pioneered and popularized “discount broking” in India, the way developed markets trade globally (80% of the trading business in the US happens through discount brokers). Management The top management of the company comprises of 5 people, which includes its Founder and CEO, Nithin Kamath, Nikhil Kamath (Chief Operating Officer), Venu (Compliance Officer), Hanan (Relationship Manager) and most importantly, Kailash Nadh (Chief of Technology) (Zerodha, 2018). Except for Kailash, the rest of the team were a part of Reliance Money, where they worked together on the trading desk. Zerodha also has a strong employee team of more than 900 members, which boasts of almost 0 attrition rate. The success in employees satisfaction can be attributed to the fact that most of their hires are from local engineering colleges, who are then trained on the job, which makes them more loyal and productive towards the organization. A couple of their human assets are Kailash Nadh (CTO), who has a Ph.D. in AI and Computational Linguistics and is the brain behind all of Zerodha’s technological initiatives. On the other hand, Nikhil (COO) is an astute trader and has a track record of being profitable for 36 months in a row during his stint as a trader. The biggest challenge for the management was to project themselves as a good quality discount broker. People usually associate such cheap costs of operating with the poor quality of the product. Overcoming this challenge, they became one of India’s most advanced trading platform with their in-house tools for algorithms and strategy based automated testing. 27
Business Model The team started its operation just after the 2008 crisis when most of the brokers had burned their fingers in the crisis. In 2008, Indiabulls had only 5% of their total revenues from the brokerage (India, 2016). It no longer looked like a lucrative business. People were moving out of the market instead of entering into it. It was this time when Zerodha entered the market, with a modest capital of INR 1.75 crores, mostly for exchange refundable deposits, which was managed through personal savings and some support from friends and family. They never raised money through Angel investors or Venture capitalist as they believed having control over the company’s decisions was much more important than funding. Also, they believed in doing only those things which made them profitable from the very beginning, which is why their first trading platform was built on NSE Now, the free platform provided by NSE for brokers to work upon (Economic Times, 2016). They used technology to their advantage to reduce the cost of trading and transactions. This is evident from their user-friendly, highly integrated and advanced trading products such as Pi (desktop trading platform), Kite (browser and mobile trading platform), Streak (algorithm platform) and Quant (trade and reporting console and dashboard). They continue to invest heavily in technology with the aim to disrupt, innovate and grow the Indian markets. There are no brokerage targets to avoid misselling of products. They work as an execution-only platform and thus has no expenditure towards research for stock picking and stock advisory. The target audience for Zerodha are newer entrants to the capital markets, instead of existing investors. Thus, their major focus is on the 100 million strong middle-class population of India, who after the shock of demonetization, have realized that there is a need to find alternative investment avenues, other than gold and real estate. The founders believe that capital markets provide by far the best alternative to them for parking their money. (Nithin, 2017) While start-ups look for funding, Zerodha is well out of this game and is thus bootstrapping its way to the success. The founders believe in not giving out the control of the company to an alien entity, which might hamper the motto of the company for better profitability. It is thus one of the few start-ups in India which do not have any 28
outside financial backing and is still able to grow (Nithin, 2018). All the investments made by Zerodha are thus generated out of their operational profits. Performance Starting with a modest capital base of INR 1.75 crores and nearly 80 clients, the growth of Zerodha has been exponential over the years. They were able to generate an operating profit margin of nearly 50% consistently in the last couple of years.
REVENUE AND PROFITS ₹ 500.00
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Chart 1 Source: Economics Times
In terms of clients, they have improved their rankings from 11th at the start of the year 2017, to 2nd till July 2018. This tremendous growth in the client base has also brought in supernormal revenues for the firm, which stood at INR 450 crores in the FY 2017-18 (Economic Times, 2016). The Profit before Tax for the same FY stands at INR 250 crores, thus generating a healthy profit margin of over 50%. In terms of revenue and clients, it is second to ICICI Securities, which is the market leader with INR 1,800 crores of revenue and INR 800 crores in profits. A quick check on the growth of client base reveals that Zerodha has been adding 50,000 to 70,000 clients per month in the last one year, half of whom are first-time entrants into the capital markets (Nithin, 2018). 29
Another of Zerodha’s most popular product, Coin, claims to handle close to INR 1100 crores in Asset Under Management (AUM) as of March 2018 with just 75,000 accounts. In total, Zerodha handles close to $2 billion in client holding in its various platforms. Going by these numbers, it safe to state that they are a real big fish in a small pond. (Entracker, 2018)
CLIENTS 1000000
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Chart 2 Source: Economic Times
Industry experts have continuously appreciated the brilliance of the company and the team. This can be seen from the recognition it has received from the industry in the form of various awards, such as “BSE/D&B Emerging Brokerage Award in 2014 and 2015, ET Start-up Award of the Year (Bootstrap) in 2016, Outlook Money’s Retail Broker of the Year, 2017 and the most recently by EY, Entrepreneur of the Year, in 2017”. (Zerodha, 2018) Products and Investments Zerodha provides a wide array of products, ranging from trading, investment in mutual funds, Algo apps, learning platforms for clients, and related technology. All the products of Zerodha are known for their excellent user interface and functionality. It includes Kite 3, which is a web-based platform, Kite Mobile for smartphones, Kite Connect API for content developers, and Coin for mutual fund investors. They are also known for 30
their educational product, Varsity, which provides an in-depth collection of market lessons for traders and investors in layman terms. In 2016, founders of Zerodha started their own incubator, Rain Matter. It is a FinTech start-up incubator, which aims to help them remove entry barriers, and provide relatively easy access to capital and mentorship for new and upcoming talent. Rainmatter has a capital base of INR 35 crores, with single-party exposures of not more than INR 5 crores (Nithin, 2016). There are others interested in this space apart from Zerodha. This can be substantiated by the fact that there were already over 47 deals in 2016 amounting to $954 million in Fintech space, from big market players such as HDFC Bank, SBI, and Citibank, which have their own incubators. There are other global players eyeing Indian Fintech market, including Target, Microsoft, Citrix, and SAP (UniIndia, 2018). This attractiveness comes from the sheer size of financial services and fintech markets, which is now as big as ecommerce space. The sector almost runs like a parallel economy. Many of the Rainmatter investments are paying off, with Zerodha launching smart advising products such as Smallcase, which is India’s first thematic investment platform. It also includes Streak, which is an Algo trading platform that does not require any prior knowledge of coding for it to function. Road Ahead There is a quiet revolution brewing inside Zerodha. It was the introduction of the Aadhar system by the government which is bringing about this change. As most of the information of the client is mandated to be linked to Aadhar, including details about PAN cards, mobile phones, and bank accounts, it has become very easy for discount brokers to open and manage accounts in one go. It makes the whole system more efficient and paperless. Zerodha claims to open a DEMAT account using Aadhar in just 20 minutes (Nithin, 2018). Despite controversies around the use of Aadhar, Zerodha has on-boarded more clients in the last 2 months than they did in the previous 5 years. In the pipeline is another project for Zerodha. Just after claiming the position of second – largest broker in the country in terms of active users, they have also received a nonbanking financial company license from the Reserve Bank of India in March 2018 (Entracker, 2018). They intend to give small ticket size loans and short-term to consumers, collateralized against their securities at a click of a button. The minimum 31
ticket size of the loans will be INR 5,000 up to a maximum cap of INR 20 lakhs. The target for the first year of lending is kept as INR 200 crores. It will be marketed as a retail product, with the interest rate in the range of 12% to 15% and a spread of 3% - 4% on average per loan. (UniIndia, 2018) In the future, company targets to add 50% more clients from beyond the 10 cities which have their primary client base presently. They are also looking at options to provide collateral-free loans and through other lending categories. With the NBFC sector booming in the country, the kind of disruption through Zerodha’s arrival in this segment needs to be kept a check on. They also intend to go international with Sri Lanka as their first overseas venture. It’s thus proven that right attitude, great business plan, and smart people blended with technology can bring in wonders for any organization. (Nithin, 2018) References 1. Zerodha Securities Pvt Ltd. (2017). Retrieved from: https://zerodha.com 2. Overview of Fintech in India (2016). Retrieved from: https://www.swissnexindia.org/wpcontent/uploads/sites/5/2016/10/Fintech-Report-2016.pdf 3. Opportunities and challenges faced by Fintech in India (2016) Retrieved from: https://www.swissnexindia.org/wpcontent/uploads/sites/5/2016/10/Fintech-Report-2016.pdf 4. How Zerodha is reinventing the rules of lending with an age-old product (2018) Retrieved from: https://yourstory.com/2018/05/zerodha-reinventing-rules-lending-age-oldproduct 5. Expected profits of 120 crores, bootstrapped Zerodha is targeting for more (2017) Retrieved from: https://yourstory.com/2017/02/zerodha-3 6. Nithin Kamath’s advice of not chasing money, let money float towards you (2016) Retrieved from: https://yourstory.com/2016/10/nithin-kamath-how-to-make-money 7. Stop venture capital funding, bootstrap –Start-ups who did not borrow through venture money (2016) Retrieved from: https://yourstory.com/2016/09/bootstrapped-startups-no-to-vc-money 32
8. Rainmatter –Bootstrapped Zerodha to enter into the fintech incubation space (2016) Retrieved from: https://yourstory.com/2016/07/rainmatter 9. Bootstrapped and growing at 100% year on year, Zerodha to transform the growing Fintech Market (2015) Retrieved from: https://yourstory.com/2015/11/zerodha-2 10. The launch of Crowd.in by Zerodha to check market sentiment (2014) Retrieved from: https://yourstory.com/2014/08/zerodha-crowd 11. Online broking firm Zerodha looking for strategic investors (2013) Retrieved from: https://yourstory.com/2013/03/india-deal-digest-12032013-online-brokingfirm-zerodha-aiming-to-raise-1-million-funding 12. From Trading alone at the age of 17 to start-up Zerodha-Inspiring story of Nithin Kamath(2018) Retrieved from: https://yourstory.com/search?q=zerodha 13. Online discount broking space increasing at a faster rate (2015) Retrieved from: https://economictimes.indiatimes.com/small-biz/startups/online-discountbroking-space-are-growing-at-a-fast-clip/articleshow/47579447.cms 14. The lone ranger-How Zerodha held its own against India’s largest stock brokerages (2018) Retrieved from: https://economictimes.indiatimes.com/small-biz/startups/features/the-loneranger-how-zerodha-stood-its-own-against-indias-largest-stockbrokerages/articleshow/64215146.cms 15. Zerodha adds clients at a 349pc rate during FY 18-19(2018) Retrieved from: http://www.uniindia.com/zerodha-adds-clients-at-349-pc-rate-during-fy-1819/business-economy/news/1280306.html 16. Stock broking firm Zerodha gets RBI license to operate as NBFC (2018) Retrieved from: https://entrackr.com/2018/03/stock-broking-zerodha-rbi-licence-nbfc/
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T. A. Pai Management Institute Manipal - 576 104 Karnataka, India e-mail: tapmi@tapmi.edu.in Write to us at: tjef@tapmi.edu.in Like us at: facebook.com/TAPMI Journal of Economics and Finance Connect with us at: linkedin.com/in/FinanceForumTapmi Follow us at: twitter.com/FinForumTapmi Visit us at: https://financetapmi.wordpress.com
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