Zerodha Business Model and How it Makes Money

Zerodha is a bootstrapped discount brokerage startup launched on 15th august 2010 by brothers Nithin Kamath and Nikhil Kamath.

And yes we realize that “Bootstrapped discount brokerage” is a lot to take in. So we decided to break it down for you so that you don’t lose the context of this article right away and understand Zerodha Business Model.

“Bootstrapped Discount Brokerage” is made up of two components namely, Bootstrapped and a Discount broker. 

Bootstrapping refers to the process of starting and nurturing a startup from the ground up without raising any funds through investments and using personal capital or revenues to grow the company.

And a discount broker is simply a broker that provides a platform for traders and investors to buy and sell commodities, stocks, and derivatives. It does not provide any consultancy or tips regarding the investments nor does it provide any calls to its clients.

On the other hand,  full-service brokers like ICICI Securities and HDFC Securities manage every aspect of the investment, from detailed analysis of companies to providing buy calls on trades.

So now we hope that the term “bootstrapped discount brokerage” is clear and that you are ready to explore the article until you hit that last full stop.

So here we go….

At this point, it’s pretty obvious that Zerodha as a startup was a huge success all thanks to its unique business model of Zerodha and this article is an attempt to answer the question “What makes Zerodha so special?”

What made Zerodha so special?

Well to put it shamelessly across the table, Zerodha was one of the best startup ideas to ever exist and there is tangible evidence to back this statement. But the statement itself does not draw any contention. 

When Zerodha stepped into the world of brokerage as a discount broker, there were very few people in India that were familiar with the Zerodha business model. Zerodha added the word “ Discount broker” to their vocabulary. 

Zerodha was the first discount broker in India and people realized that they needed Zerodha because they were subconsciously looking for an alternative method to invest their money. After all, full-service brokers charged a lot of money.

And as soon as they looked at the price Zerodha was offering its services, it was not difficult for them to make their choice. And this disruptive idea was the main reason behind the unnatural success of Zerodha business model.

Zerodha became the biggest stockbroker in terms of active users in India taking the crown from ICICI securities in less than 10 years. As of today, Zerodha has more than 6 million active users and controls more than 15% of all the transactions by volume.

Origin and History

Both the brothers Nikhil and Nithin chose two very different paths to arrive at the same destination. Nikhil hated school because schools never taught why something needs to be done and instead asked students to perform the task anyway.

This made Nikhil start his first business of flipping used phones for profit. But this business idea did not succeed as it was discovered by his mother and it was shut off.

During his 10th board exams, the school refused to allow him to appear in the exams, and his parents were called to the school. That’s when Nikhil decided to quit school although he did not have a plan. 

Nikhil got his first job at a call center when he was 17 and took the night shift because he traded in the stock market during the day. He started taking trading seriously when he was 18, his father gave him his savings and asked him to manage them.

Nikhil accumulated more clients from the call center including his boss and proved his mettle in trading by managing their money efficiently. 

While Nithin did not drop out of school and pursued engineering at Banglore Institute of Technology. Just like his brother, Nithin too was fascinated by the stock market and used most of his time in college to trade stocks and commodities.

After he graduated from college, he met an HNI and things changed for Nithin. He was handed a check by the HNI and was told to manage the money for him. 

After amassing a huge amount of knowledge and experience by managing money for a lot of clients, Nithin and Nikhil started their own company called Kamath associates which was a franchise of Reliance Money where they worked as Propriety traders.

Working for a full-service brokerage like Reliance Money, the brothers realized the problems and barriers that traders and investors face in the stock market and decided it was time to solve the problems and make it easier for young investors to get into the stock market and start their investment journey. 

Nithin and Nikhil Kamath started Zerodha on 15th August 2010 and bootstrapped it to unicorn status in 2020 during the first lockdown. The name “Zerodha” is a fusion of two words, “Zero” and “Rodha”.

Zero refers to the digit ‘0’, while ‘Rodha’ is a Sanskrit word meaning obstruction or hurdle. So the name means zero obstacles, which reflects the central idea in the business model of Zerodha and that is to provide a seamless experience to traders and investors in India.

Zerodha revolutionized the world of stockbroking by introducing the term discount brokerage in India and this disruptive idea paved the way for so many other discount brokers in India. 

Zerodha as a startup was generating revenues from the beginning, which helped the Kamath brothers use the revenue to fund the expansion and grow the startup into what we see today, without raising any external funds. 

The startup received many awards on its way to the top, including the “Startup of the year” Award by The Economic Times in 2018 owing to the unique business model of Zerodha. The company is currently valued at $2.2 billion. 

Let us analyze the fantastic Zerodha Business Model that changed the entire landscape of the Indian stock broking industry and introduced the disruptive idea of discount brokerage in the country that paved the way for companies like Grow and 5paisa.

Zerodha Business Model: Details

The Zerodha Business Model is a multi-branch tree of the different products and services offered by the Zerodha group along with the strategies to bring in revenue and keep the expenses on the lower side. 

Although we are aware of the fact that a business model is a lot more than just the total of all the products and services offered by the company. 

But in the context of this article, the additional details only substantiate the complexity of the topic, thereby making it very difficult for the reader to extract any value out of it. So for the sake of simplicity and to avoid ambiguity, we refer to the business model as the products and services offered by the company.

There are 6 branches in the tree of the Business Model of Zerodha-

• The Kite app

The Kite app is the interface that Zerodha offers to traders and investors. It is an integral part of the Zerodha business model. It is an easy-to-use application with an aesthetic UI that allows users to buy or sell stocks, derivatives, and commodities from the NSE, BSE, and MCX.

You can easily access the app once you have registered through the website and verified the documents. You can easily make an account with Zerodha online just by registering on the website and uploading a photo of your PAN card, AADHAR card, your photograph, a canceled cheque, and income proof.

Once these documents are uploaded, they are verified within a week and that’s it, you can now enjoy trading on the Kite app. The process is smooth and even students who do not have an income source can open an account on Kite. Income Proof is not required for students.

The app offers many interesting features like creating multiple watchlists and setting up alerts so that you do not miss out on trades. You can also apply for IPOs through the app. 

The app charges a flat fee of Rs. 20 per order on Futures & Options, and Intraday trades irrespective of the order size.

• Coin app

The Coin app is a platform offered by Zerodha similar to Kite where users can buy and sell Direct Mutual Funds directly from the Asset management companies without paying any commission or fee to the vendor. Initially, a DP charge was levied on all sell transactions on Coin but it was made completely free for its users on August 24, 2018. There are over 2000 Direct Mutual Funds currently listed on Coin.

The coin app is an important pillar in the Zerodha business model. It was launched in April 2017 and accumulated more than 100,000 customers within 16 months. The total amount of Mutual Funds purchased on the platform surpassed Rs 2000 crore.

Anyone registered with Zerodha can access the coin app using the same Login Id and password they use to log into the Kite app and access all the features of the app.

You can plan SIPs on the Coin app and it also allows you to pause or modify your term plan according to your needs.

• Varsity

Zerodha has a vision for the Indian stock market. A vision that trading in the Indian stock market should be effortless for anyone who wishes to invest their money or become a trader. And to realize this vision, Zerodha launched a free and open online learning platform called varsity. Although varsity does not add up to the revenues of Zerodha. It is an integral part of the Zerodha Business Model.

Varsity offers free tutorials and videos on the stock market and finance for young investors who are new to this space and want to learn more about the stock market before they invest their hard-earned money. 

Varsity has 13 modules covering topics ranging from stocks, F&Os, commodities, and G-Sec to personal finance, taxation, technical analysis, and much more. It is a complete package of all the information you will need to invest money in the stock market.

It is also a phenomenal marketing strategy by Zerodha to attract new customers. Anyone visiting Varsity to learn about a stock market is potentially a customer of a brokerage firm and by offering free educational content on their platform Zerodha makes it easier for them to choose their broker.

• Rainmatter Startup Incubator

Rainmatter is another initiative by Zerodha started in 2015, that invests in innovative startup ideas. It is also a startup incubator that has nourished some great startup ideas like Small case, Digio, and Streak. 

The Rainmatter foundation provides highly equipped workspaces, mentorship programs, and funding of up to $1 million to innovative startup ideas in exchange for minority stakes in the company.

It exposes these startups to the huge customer base of Zerodha and gives them access to a lot of resources including their API development platform that can be used to develop applications and test them to validate their products.

Some of the investments of the Rainmatter foundation include CRED, Armstrong, Jupiter, JODO, Procol, and a few others.

• True Beacon

True Beacon is an asset management initiative launched by Zerodha in 2019 for the HNI and UHNI who want to be a part of the economic growth of India. With True Beacon Zerodha plans to redefine how the HNI and UHNI create wealth. It is a relatively new addition to the Zerodha Business Model.

True Beacon One was launched in September 2019 under True Beacon. It is a SEBI-regulated fund with Nikhil Kamath as its investment manager. True Beacon does not charge a standing fee from its clients. It charges a percentage of the yield on its fund as a fee. 

True Beacon has generated exceptional returns for its clients beating industry expectations. With Nikhil Kamath at the helm, True Beacon delivered 29.2% absolute returns in its first year and an extraordinary 47.2% in the second year of its operations.

With True Beacon, Zerodha has made a mark on the asset management industry and is ready to reign the sector. Zerodha’s application for a new asset management company for investors has been approved by SEBI in September 2021. 

With this, Zerodha is all set to disrupt the asset management sector as well.

• Kite Connect API

Kite Connect API is a platform offered by Zerodha to retail investors, developers, and startups to develop a fully functional trading platform. It is a collection of different APIs that can be used to implement algo trading setups, backtest a project, or develop new trading apps. 

It is a part of the Rainmatter startup incubator initiative that gives startups free access to the API resources for the development of software and a 5 million strong user base to validate their projects.

For retail users that seek to implement algo trading strategies, a standard fee of Rs. 2000/month is charged along with some optional add-ons. For developers or startups who are creating projects for the masses, Kite Connect is free of cost. It is one of the central pillars in the Zerodha Business Model.

One of the most promising startups in India is Small case, which lets you invest in an idea rather than a company or a stock. It is one of the startups incubated by Zerodha through Rainmatter.

The Small case app is developed using Kite connect API.

So these are all the products and services offered by Zerodha to its users. Now let us take a look at how these products contribute to the revenues of the company.

Revenue Model of Zerodha

There are 4 major sources of revenue for Zerodha that account for a majority of the revenues of the company. 

• The fees charged on F&O and intraday trades on the Kite app are one of the major sources of revenue for Zerodha. There is a DP charge levied on every sell transaction on the app of Rs.13.5 per sell transaction of which Rs.5.5 goes to Zerodha.
• Zerodha also enjoys incentives, dividends, and interest on their investments made through the Rainmatter startup incubator initiative. This adds to the revenues of the company as well as its valuations.
• True Beacon, the asset management initiative for HNI and UHNI also contributes to the revenue of Zerodha along with the Zerodha Business Model. 10% of the returns generated on the capital through True Beacon One is charged as a fee.
• Kite Connect API also contributes to the revenues of the company by charging a flat fee of Rs.2000/month from the retail users. The optional add-ons offered on the app cost an additional Rs.2000/month. 

Zerodha keeps a majority of the Revenues with itself as profits, all thanks to its minimal expenses. Zerodha does not spend money on advertising and marketing and this helps the company maintain high profitability. The fundamentals of the Zerodha business model and its revenue model are stronger than most of its competition and it is one of the reasons why it has succeeded in the first place.

This is exactly what makes Zerodha an exciting business proposition for us, the fact that it has a fantastic idea behind it and it does not need a lot of effort to communicate this idea to people. People recognize the worth of the idea voluntarily and this is one of the reasons behind the massive success of Zerodha as a startup.

Future of Zerodha

To help you understand the prospects of Zerodha as a company, we will introduce you to some really interesting statistics.

• 40,00,000 new Demat accounts were added in India in FY19
• 49,00,000 new Demat accounts were added in India in FY20
• 1,40,20,000 new Demat accounts were added in India in FY2021

 And the next 2,00,00,000 Demat accounts are expected within the next 18 months. This will further strengthen the Zerodha Business Model and its revenue streams in the foreseeable future.

Do you see some possibilities yet?

The possibilities are vast for Zerodha as only 3.7% of India’s population invests in the stock market. And this percentage will grow exponentially with the economic growth of the country and will eventually strengthen the business model of Zerodha. Zerodha being the market leader will capture a majority of this percentage. 

An increase in the volume of transactions in the stock market will translate into greater revenues for Zerodha and in turn, will strengthen the balance sheet of the company.

With Zerodha pushing to enter the AMC business in the future, having proved its mettle through True Beacon, and the constant inflow of innovative ideas to make investing in the stock market easier, the future of Zerodha looks very promising.

Conclusion

That is all about the Zerodha Business Model and its Revenue Model. A unicorn startup with a disruptive business idea that promises to make investing easier for Indians.

This article is a detailed expression of the idea behind Zerodha

We hope that you enjoyed this article on Zerodha Business Model and how it makes money.

What do you think about the future of Zerodha?

We would love to know your views in the comments below!

Suggested Article for you: Business Model of Cred