The Zerodha Business Model | How does Zerodha make money?

To most people, especially people who’ve grown up watching movies like The Wolf Of Wall Street, the stock market is one of the loudest, dangerous, yet weirdly amusing places ever.

Stock brokers might seem like devils disguised in suits going after money like wild boars with expensive Ferraris, and people with money to spare being their primal targets.

This would’ve been half truth if we were still living in the ‘80s. The world has come a long way since then, and stock brokers haven’t stayed behind. You don’t need to make telephone calls to your broker to make stock purchases or sell your holdings.

Your brokers are also not wearing suits and cold calling millions of people every day harassing them to make a purchase. Instead, you just pick up your phone, login to your demat account, choose the stock you want to buy, choose the price at which you want to buy, and swipe to buy. It’s as simple as that. In fact, only one company decided to make it this simple for 6 million users across the country.

What is Zerodha? 

Zerodha is a fintech startup based out of Bangalore. Started in 2010 by two brothers – Nikhil and Nithin Kamath – Zerodha has since generated more than INR 1093.64 crores in revenue, and is undoubtedly India’s largest stock broker. It is very simple to use, easy to get started, and so unimaginably profitable, you’d kick yourself thinking ”Why didn’t I think of that!?”

But more on that later. Let’s understand why Zerodha is what it is today.

Why is Zerodha successful ?

Much of Zerodha’s success is because of the Zerodha business model, which has helped the company gain an almost religious following, and also make a lot of money in the process. If we had to pick one other reason for Zerodha’s success in this grueling market, it would be the simplicity of the app itself.

Zerodha profit 1000 crores in FY21 - News snippet from ET News

Everything in Zerodha is based on transparency – you get what you see, no bull, no hidden costs, nothing. When you sign up to Zerodha, you know exactly what the cost of transactions are going to be, a quick tutorial on how to trade online, steps to set up your demat account and even how and why certain stocks are performing on the market.

All these factors take Zerodha decades ahead of its biggest competitors, because Zerodha works to keep its clients focussed on just one thing – trade. All the other hassles are taken care of by the company. How does it do this? Let’s find out

How does Zerodha Work?

Zerodha is a financial services company. It offers brokerage to stock market traders, generating just around INR 1100 crores in revenue in 2020 alone. You can trade stocks, mutual funds, and even bonds and government securities – their website literally says “Invest in Everything”.

That is just how Zerodha works. It uses a host of apps at its disposal to trade, and even educate users, on different markets.

Zerodha’s products include:

Zerodha Products displayed in FLowchart

Kite

Kite is Zerodha’s official trading platform. It can be used to trade stocks and commodities on a regular basis. You can add funds, purchase and sell stocks, and withdraw funds to any bank account as needed. The Zerodha revenue model revolves majorly around Kite, but we’ll get to that in a bit.

Coin

Coin is Zerodha’s mutual fund purchasing platform. You don’t get any additional fees for purchasing funds through Coin, and can also transfer funds between Kite and Coin seamlessly.

Varsity

This is a financial guidebook for beginner investors, and has some great lessons on what stock market trading really is. Varsity is Zerodha’s one-stop stock market reference, complete with tutorials and advice on how to get the most out of the market.

We at GrowthInsights love Varsity. We’ll be soon covering an article on how Varsity nails it in SEO & how they use this to generate leads for their platform.

Here’s a snapshot indicating the number of visits that Varsity pulls in on a monthly basis to their website.

Zerodha Varsity Traffic Metrics - Taken from Ahrefs

Sentinel

Sentinel integrates with Kite to give you real time alerts on all your holdings, and some more, through cloud based analysis and real time information sourcing. This is a much less known product by Zerodha, and is often overlooked by beginners.

Quicko

Now, if your holdings own a sizable chunk of your income, then they are going to be taxed as per government norms (Give this article by Financial Express a read). Zerodha makes this job easier for accountants by introducing Quicko into the picture. The app is a free income tax filing tool for several businesses and individuals alike. 

Zerodha has partnered with Quicko, an online tax filing platform via their Rainmatter initiative.

Kite Connect API

Kite Connect is a product for developers to build entire trading platforms usings Kite’s extensive systems. Even SmallCase, one of the fastest rising investment platforms, uses Kite Connect. Basically, Kite Connect helps users create trading platforms to get customers to invest in the market, thereby making margins off of the companies that bring them in.

Individually, these apps are powerful and can hold their ground on their own. However, their seamless integration with each other and with most other apps is what makes them reliable and effortlessly simple.

If you’ve used Apple products, you know about the ecosystem and how beautiful that walled garden is. Zerodha has built this ecosystem for your financial needs, and in one word, it’s awesome.❤

That’s how Zerodha works – it puts together all your financial essentials, and helps you transition seamlessly from one tool to another, saving you time, making you money, and also making money for itself in the process. But where does this money come from? Let’s find out

How does Zerodha make money ?

It’s probably a given by now, but Zerodha makes money for transactions made on Future and Options as well as on intraday transactions. Any stock purchase that is held on for more than a day is not charged, so essentially, if you’re investing for the long term, you  won’t be facing any charges until the time you withdraw your funds.

Intraday and F&O transactions are charged INR 20 or 0.1% of the transaction, whichever is lower. This helps the company make change through  transactions. But that is not all.

Zerodha charges INR 100 per transaction for Smallcases, a flat INR 50 per month for mutual fund investments through Coin, and INR 2000 for Kite API users. It also charges users on account registration, and the fee ranges anywhere between INR 200 to INR 800 based on your account type.

There is also a small maintenance fee deducted from your trading account. You can find out more about all these charges on the Zerodha website.

List of Charges from Zerodha

On the surface, these charges seem so small,  Zerodha’s valuation of $2 billion USD seems to be overrated. But when you picture a stock broker doing over 5 million trades a day at those margins, you don’t need to be a math wiz to figure out the Zerodha business model makes a lot of money.

So much so that it can afford to pay its three founders an  income of INR 100 crores per year.

IMO, the whole 100 crore salary part was justified & was unnecessarily blown out of proportion in the news. Here’s a brilliant explanation given by Nithin on the Wake Up With Sorabh Show on why they decided to take home the amount as salary. 

Zerodha’s turnover was just shy of INR 1100 crores in FY2020 with close to INR 500 crores in profit. That’s a pretty good margin considering the competition in the fintech industry.  And when you’re a private company with no outside capital whatsoever, all of your profit is really just yours to keep. Who gets to keep all this profit though? Let’s talk about the brains behind this brilliant venture for a bit.

Who are the owners of Zerodha?

Zerodha – a fusion of the words “Zero” and “Rodha” (Sanskrit for Barrier) – was founded in 2009 in a small 700 sq.ft. apartment in Bangalore, by two brothers stressed with the horrendous charges levied on their stock accounts. Zerodha emerged as a cheaper, much friendlier option to the traditional brokerages. 11 years later, the company now employs over 1100 employees across the country, with some really clever people steering the ship.

Here’s a snapshot of the website in its early days. ❤

Zerodha website in 2011 - snapshot
Zerodha’s Website | 2011

 Nithin Kamath

Nithin Kamath is the older of the two brothers, a brilliant CEO, and one of the most influential people in the fintech industry today. Above all these things, he is a trader at heart, a passionate leader, and a great father, and husband.

Nithin worked at a call centre for four years before becoming a franchisee of Reliance Money in 2009. The journey continued with him moving from Reliance and starting his own discount brokerage with brother and Co-founder Nikhil Kamath. Today Zerodha is the largest brokerage firm in India by a large margin, and it has no intentions of stopping there.

Nithin also loves playing basketball, and cherishes guitar sessions with his son Kiaan. You can read all about him on the Zerodha founder’s personal homepage.

Left to Right Nithin Kamath & Nikhil Kamath. October 2020. Photograph by Nishant Ratnakar. Image link

  Nikhil Kamath

Nikhil has been dubbed ‘India’s Youngest Billionaire’ although he doesn’t think much of the title. A chess champion since his teens, Nikhil Kamath – Co-founder and CIO of Zerodha – dropped out of school when he was just 14 to pursue something “that didn’t require a college degree”. He found chess to be the solution, and started working his way into national and international level tournaments.

After treading on for about two years, Nikhil fell in love with Dalal Street at 17, and has been a trader ever since. In an interview with Arabian Business, Nikhil said:

“Anybody can study the financial markets, you can read up online, you can buy books about different systems and methodologies of trading and investing and become a good trader on your own”

And that is exactly what he’s done. Today, Nikhil is also the founder of TrueBeacon, a successful hedge fund management company that deals with Ultra High Net Worth Individuals.

Is Zerodha a listed company?

Part of what makes Zerodha’s success story so inspiring is that it is a completely bootstrapped company, run without any outside interference whatsoever. In the words of Nithin Kamath himself “You shouldn’t be taking money just because someone is giving it away”.

Zerodha Alternatives

Zerodha is undoubtedly the largest stock brokerage firm in India right now. But there are a lot of sharks fighting for that seat at the top, and it’s only getting harder to stay at the top. Let’s first take a look at Zerodha’s competitors and understand why they’re eligible candidates to overtake the fintech giant.

Groww

Groww is a focused market trading app that only deals with mutual fund investments at the moment. But with close to 10 million active users at the moment, it may plan to open up to trading on other markets as well. Yes, you do not get the automated trading feature, and investment offerings are only so-so currently, but it is still a great platform given its tremendous growth since its inception in 2016.

Read more here: Zerodha Vs Groww

Upstox

If you watch the IPL, you definitely remember this company. Upstox is every bit similar to Zerodha except for (really negligible) charges. It is spending a lot to acquire customers, so it definitely has a lot to go before becoming profitable, but the company definitely has potential because of increasing exposure.

Read more here: Zerodha Vs Upstox

ShareKhan

ShareKhan is undoubtedly one of the fiercest competitors in the game. With over 2200 branches all over India and overseas (UAE and Oman), the stock broker is one of the “elder guns” in the stock market. It was started way back in 2000, and does a little over 400,000 trades per day. The only disadvantage is the high costs compared to Zerodha.

Read more here: Zerodha Vs ShareKhan

Why Zerodha has the edge? 

Compared to all these brokers, we have to argue that, while it has some problems of its own, Zerodha is the best stock broker in India by a large margin. It offers low chargers per trade, has a seamless UI/UX, and a host of other tools to support your finance management.

Conclusion

With over 5 million active users making a little north of 6 million trades per day, Zerodha has changed the way India trades stocks and securities. It’s learning app Varsity has crossed over a million downloads and has helped thousands of people make sound financial decisions.

In a  way, Zerodha has helped improve financial literacy among its users, and that is a true measure of Zerodha’s success, and not just the unicorn label that they’ve earned. To conclude, we’ll just leave you with these words by Nithin Kamath:

  “If nothing else, I want to tell people that it is possible to be successful at business by questioning the true cost of revenue, valuations, and growth, instead of continuously chasing them…”

Shivaharsh Murugan
Shivaharsh Murugan

A company secretary and lawyer-turned SEO geek and also someone who thinks he is deeply passionate about startups.