The Hindu Business Line : Why should I charge customers every time they trade?

As with all its new business launches, the Reliance (ADAG) group has made quite a splash with its foray into financial services and broking through its new venture — Reliance Money. To start with, Reliance Money’s move to offer broking services for a flat fee (starting from Rs 500) may spell a threat to brokerage structures in the domestic market. The firm also has plans to vend a wide range of financial products and services, from gold and commodities trading to money transfer and money changing services. Mr Sudip Bandyopadhyay, Director and CEO, Reliance Money, talks to Business Line on the untapped potential in the financial services industry and Reliance Money’s plans:

Excerpts from the interview:

What are your key business verticals?

We have three verticals. One is financial markets, consisting of equity/commodity broking derivatives, IPOs and offshore investments. Two, a distribution vertical under which we distribute mutual funds, life insurance, general insurance, credit cards, loans….anything provided by a third party.

The third vertical is over the counter (OTC), which includes money changing, money transfer and gold coin retailing. In the OTC segment, we acquired a wholly-owned subsidiary of Kuoni Group, which is into money changing and money transfer; we have renamed it Reliance Money Express.

We are the largest private sector player partnering Western Union Money transfer in India (the No. 1 being the Indian Postal Services).

We have also done a test launch with gold coin retailing and will now go all-India before Diwali season. We will be selling 0.5, 1 and 2-gm coins in addition to 5 gm and 8 gm.

The idea is to enable people to use gold coin as a gifting item. A half-gram coin costs just about Rs 500.

Can you give details on the number of clients Reliance Money currently has?

We launched Reliance Money in April 2007. We add about 2,000-2,500 customers everyday in our online broking platform. We currently have 1,65,000 customers. To put this number in perspective, a few weeks ago, Motilal Oswal, during its public issue, advertised that it had 2,00,000 customers. They started a couple of decades ago. So that gives a perspective of where we are and where we want to go.

To give an idea on the numbers, India has 330 million bank accounts. The mutual fund industry has 30 million unique folios.

Unfortunately, in the broking industry, the number of people with demat accounts has continued to stagnate at 5.85 million for the last 10-12 years, which is absurd. Every industry in India has grown over the last 10 years except this one.

How do you explain this stagnation?

People haven’t worked on expanding the market. They have been continuously doing business with the same clientele. We saw what happened in the telecom (mobile) industry. The total subscribers in the mobile industry in India were about 20,000-25,000.

Every company in the industry was losing money and the Government had to change the pricing norms twice, to ensure that the industry survived. But today, Reliance is adding 1.5 million customers every month; Bharti adds similar numbers. The total additions by the industry last month were 6.5-7 million customers. How did this happen?

Incoming calls are free and outgoing calls are probably free if within the same operator in a State or they are charged at 30-40 paise. The lesson is that you need to make the service accessible, cost-effective and secure.

What is Reliance Money doing to change this?

In the broking industry, 10-12 years ago, we used to go to trading rings in every stock exchange and the level of effort involved was different. Today, the customer calls up and places an order. I’m just punching numbers. Is there a rationale to charge a higher brokerage for punching a 1,000 than for punching a 100?

No service can be structured wherein there is no link between the cost of rendering the service and the charge you levy on the service. Similarly, why should I charge somebody every time he logs on to buy or sell shares?

We realised that this model needed to be changed and therefore introduced fixed pricing, where you pay Rs 500 and trade. It’s like a club. You pay a fee and use the facilities anytime. We also thought of providing more security. Everyday, hacking happens. We thought we needed to do something and introduced a security token with a six-digit number flashing, and which changes every 32 seconds.

We also wondered why the trading community had to depend on a laptop or a broadband or a broker? Why not change it?

We, therefore, introduced trading kiosks, 2,500 of which have already been installed in Barista outlets, CMCs, DTDCs, and so on. Our customer can walk in and transact. We are doing all this to ensure that this is the best possible deal for a customer.

For this we are looking at the total opportunity and looking to expand the market. We are not looking at just getting some clients from the other broking houses.

What is the model on which you operate? Franchisees or ownership?

We have a mixed model. You cannot effect rapid growth unless you involve partners. We also need to work with locals in smaller locations. I can recruit 100 executives in a city and start 100 offices, but if I want to establish presence in smaller places, then we need local partners to get optimal benefits.

So, using this franchise model, do you plan to dovetail the operations of Reliance Money with Reliance Communications and have a single retail outlet?

No. The operations are different. They (Rcom) have their own Reliance World outlets. We (Reliance Money) will have a presence in Reliance World through what is called a “shop-in-shop” model. Like Gili (jewellery) shops are present in Shopper’s Stop outlets. But the idea is nothing beyond that. We want to be present as much as possible so that we become more visible and can serve our clients more effectively.

Do you plan to use the client base of your sister concerns also?

No. Doing that will only restrict my vision. For me, every individual is a potential customer. I don’t believe that in India there is anybody who cannot save a minimum of Rs 10 per day. We now have mutual fund products that provide SIPs that require a minimum of Rs 50 per month as investment. Thus when we go to smaller locations, we are targeting everybody.

In the absence of large players, these people put money in chit funds, which can be risky investments. They should instead move to structured investments, such as MF SIP.

We are also talking to these people about general insurance, cattle and crop insurance. We talk to them about products relevant to them. I cannot offer them some esoteric investment products that will just go over their head.

But have not existing companies already tried doing this is smaller towns?

Existing companies can make a lot of money sitting in Mumbai, Chennai or Bangalore. There is no compulsion to move to smaller places. Despite all my effort, 80 per cent of my business is going to come from big places. For me also that sounds easy. Brokerages would rather concentrate more on places such Mumbai and Chennai and get all the business.

But I do not think I have a long-term business that way. If you want to be a long-term player, and want the market to really expand, you need to do something more. Otherwise, my investor population would remain 5.85 million. Yes, we could maybe grab 50 per cent of that population, and bring them to our platform. But that is not our goal.

In India, what is the current distribution between online and offline trading (on stock markets)? Two years ago, it was 5 per cent (online) and 95 per cent (offline). But now it has improved to 15 and 85 per cent, respectively. The reason for poor online trading is that if you have to trade online, you need a broadband connection, which is now limited. Customers who trade through dial-up connection always complain. This apart, while buying and selling shares, people believe in asking questions such as “Shall I buy now? Shall I buy the whole quantity now?” They like talking to people as opposed to doing a trade themselves. At Reliance Money, we want to popularise the online concept.

How has your turnover grown from the time you started?

When we started it was Rs 400-500 crore, now we do about Rs 1,200 crore. All this is 100 per cent retail online. I think we would be No. 1 in terms of number of trades through online mode.

Do you have an investment advisory team for providing customised investment advice?

Of course, we have an investment advisory team, which we are ramping up. Again there are different levels of investment advice. Broadly there are two categories of people. Some people come with a pre-determined mindset. They want to buy X scheme in a mutual fund, we provide them with that. But some people ask for advice. We also have a centralised team which disseminates information to all our partners. If you walk into any of our outlet, you will be given the same advice, irrespective of which branch you walk into.

What about equity advisory?

Equity advice is one area, where the public image of the broking industry is bad. The general perception is that brokers all over the world first buy and then give a buy call or sell first and then come out with a sell report. In the US you have big scams happening around this. So we thought that we not only have to be clean, we have to be seen as clean. Of course, Reliance is a big name; I cannot deny advice to my clients. So we give advice; we have a huge research team and every morning and also throughout the day we give advice.

This apart, we have international partners — Dow Jones and Reuters — which we are making available on our platform for free. We also have independent experts like Deepak Mohani and Sachin Chauhan who come on our platform and give their views as outsiders. We pay them for that. We try to give our customers a balanced view. So if clients trust Reliance’s view they can go ahead and act on our view, if they want an international perspective then they have the news agencies’ views, else they can also use the expert advice. That is available on the screen; emails, SMSs are sent to our customers on a regular basis.

What is the size of your in-house research team? Do you also have a third-party research team?

We have about 35 people right now, but we are ramping it up. No we don’t believe in outsourcing. If we give an advice, it has to be approved by us; it will be Reliance’s view. Experts such as Deepak Mohani will give advice in his name.

What is making so many people come to you in such a short period?

It is simple. We don’t charge any brokerage. Today, say you are using some other broker’s platform; they charge you 0.85 per cent. Say you buy shares worth Rs 1 lakh. You pay about Rs 850 as brokerage. And when you sell the same shares, hopefully you don’t sell it at a loss, you again pay Rs 850 as brokerage. So for a Rs 2 lakh transaction, you are paying about Rs 1,700 as brokerage. Now on our platform you just pay a fixed fee of Rs 500 and trade. I am talking about investors. Now let us look at a trader. Say other brokers charge him Re 1. He buys at Rs 100 and wants to sell it. Now he has to wait for the price to cross Rs 101. In our platform he has not paid any brokerage. So his capacity to trade also increases. He can even sell it at 10 paise higher than his cost price. Whether it’s a trader or an investor, there is a unique advantage in terms of brokerage; because there is no brokerage in our platform.

Two, whether one recognises it or not, people are concerned about their money and shares when they trade online. Now we have been able to give full comfort to our customers through the security token.

Now that you have brought down brokerage or rather eliminated brokerage, do you think other players will also follow suit?

Yes of course, we want that to happen. Players are so far in their comfort zone as markets are booming. So nobody is feeling the pinch. For instance, take the telecom industry. If tomorrow Reliance drops the rates by 20 paise, the day after everyone will drop their rates.

But the telecom market is also booming and competition is cutthroat, unlike broking. Why is that so?

That is because in telecom companies have grown and have to match the same incrementally. But broking is one industry in India which has not grown. At 5.85 million, for the last 10 years the numbers are almost the same. Scope for growth is huge.

As far as your overseas clients are concerned, what are the investment avenues they are looking at?

Some go for insurance policies. They usually prefer endowment or ULIP policies. Others are into MF investment. Some are into equities. The sectors that are usually preferred are infrastructure, banking and finance, capital goods, education.

What about offshore investing?

There is a very clear trend. There is a segment of people who trade locally and create a hedge. Anyone who is a gold, crude or silver trader takes hedging positions. Since the correlation between international market prices and domestic markets are high, hedging is done. There are also commodity users who trade. In Tirupur, there is demand for cotton contract. There are also people who are index traders, pure speculators who track global markets. They buy NASDAQ, LSE, and so on. These are people from remote areas, not from Mumbai or Chennai. The percentage of trading in gold, silver and crude will be 60-70 per cent, index will be 20-30 per cent.

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