Revenue sources of discount brokers in India need to be diversified to make the business model more stable and resilient against market and regulatory risks, a top institutional brokerage said.

The current revenue pool for discount brokers has significant dependence on F&O trades. With regulatory actions to curb retail trading in F&O, brokers are likely to face revenue headwinds over the near term.

In diversifying mode

“Discount brokers are on the journey to diversify the revenue mix and in the process, make the business less volatile and reduce dependence on growth in trading volumes alone,” Kotak Institutional Equities said in a note.

A key strength of the discount broking business is the ability to acquire a large number of customers, given the lower cost of acquisition along with the natural pull towards trading among younger populations, it said. These brokers could look at various ways to monetise the customer pool such as trading commissions and ancillary fees, interest income from margin funding, distribution commission and asset management (cross-sell in-house products).

“Margin funding has been one of the first ways to monetise a small set of customers, leading to improvement in profitability without increasing the risk profile by a big margin. Typically, less than 5 per cent of the customer pool will likely qualify for margin funding. It is relatively easier to migrate customers from broking to margin funding as it allows more leverage, but it is a lot more difficult to move to the recurring revenue model,” the note said.

Asset management 

Building a retail advisory platform is an attractive, though challenging opportunity for discount brokers to build, it said. Larger platforms such as Angel, Groww and Zerodha have built a client base, which has grown not only in numbers, but also in terms of aggregate wealth, which is lying in the form of custody assets or distribution AUM.

“As this customer base matures and grows its income, and explores more steady ways of building wealth, it becomes imperative for these platforms to also enrich their service propositions to remain relevant. While these platforms are seeing excellent adoption of commission-free mutual funds, there is a place to provide more customised offerings to customers willing to pay a fee. This would likely compete with the traditional engagement channels such as a bank or MFD, where customers potentially pay higher fees, with risks of misaligned initiatives,” the note said.

Discount brokers have been major beneficiaries of the 5x jump in the active client base, with their market share increasing to about 70 per cent in September 2024, compared with 30 per fent in March 2020. The market share is measured based on active clients trading with the NSE.

Published on April 4, 2025