Atul Kumar, after his nine-year stint with Tata Electric Companies, started Practical Financial Services in 1992 and obtained Corporate Membership in 1994. He is the Co-founder and Chief Executive Officer of Quantum Information Service Limited. He is also the Chairman of the Committee on Trade Related issues of the National Stock Exchange.
In an interview with equitymaster.com, Mr. Atul Kumar shared his views on the online broking industry and how does he visualize the industry to evolve in coming years.
EQTM: How do you see the future of Indian online trading in terms of customer base and regulatory issues?
Mr. Atul: Basically, online trading has shown a very good trend in countries that have high PC penetration and Internet access. I think in America almost 36% of trades are through Internet and in the Asian markets like Taiwan and Korea, it is as high as 50%. But at the same time, in places like Japan, it is not so high. In India, we have a minuscule portion of the trading volume currently on the Internet i.e 0.5%.
Having said that, I think more and more people are getting used to Internet and technology, they are getting used to going to the ATM instead of going to a bank, used to getting a pin number and passwords. So the barriers to technology are breaking down. In India, that is going to take longer because people draw comfort from doing things physically and handling paperwork. This is why there was a big issue when dematerliasation of shares was launched three years ago when people where forced to shift from paper to one consolidated electronic statement of holdings. So it is similar with e-broking. As customers shift to online banking, they are also open to online trading, which is as secure as online banking.
EQTM: What are the factors that you think are acting as hindrances for online broking in India?
Mr. Atul: On the regulatory front, it is by and large, a self-regulatory framework that has been setup. Curiously enough, almost 99% of Internet trading volumes is only on the National Stock Exchange (NSE), which again I think is because of the leverage on technology.
On the structural aspect of, almost the whole country is backward. As of today, there is no inter-connectivity within the banking system and we lack a central clearing system, which allows a person to transfer funds seamlessly on the same day from one bank to another bank anywhere in the country. Banks have created virtual private networks to be able to connect to their branches and allow their customers to move money across to other customers within the same bank/branch. But the moment I go and try and cross from one bank to another, unless it is high value, I am not able to do it. The whole country is held at ransom by the banking system. Most important, there is no development on a true payment gateway, which means to get on to a payment gateway and therefore you can electronically interface with multiple banks who all adhere to the same interface standards and are part of the same system.
EQTM: The recent scams in the capital market have shaken investor confidence and consequently have resulted in lower volumes. What has been the impact on the online broking business?
Mr. Atul: I think the firms who focused on the low end of the market (in terms of lower brokerage) and in traders rather than investors are suffering. They basically came to you because of the commission rate that they offered. The ones with no value-add products are suffering the hardest in recent times. But those who have a value proposition to offer to their customers, in terms of the quality of the content, easier transactions, very high service levels are the ones who are really going to survive this downtrend.
EQTM: When do you see the recovery in the capital markets from the current downtrend? Do you favour the banning of badla? Are those investors who have been affected due to recent scams going to come back?
Mr. Atul: At present, the prospects are not all that promising for the simple reason that there has been a loss of faith of the investors in the entire financial system be it’s financial institutions or banks or mutual funds. So investors have really got no options left to invest. I think what is going to happen is that if the government continues to bail out all these institutions, it is going to get reflected in the fiscal deficit. At the end of the year the government has to plug out all the numbers in its own balance sheet and they are going to find that they have got into an internal debt trap. America ‘at war’ is also going to have serious consequences but hopefully only for the short term.
EQTM: We know that almost 72 brokerage houses applied for online brokerage initially but now there are very few players who can bear the burnt. Do you support this view or do you see M&A happening in the industry? Which factors are restricting consolidation activity?
Mr. Atul: The market is huge and so is the potential. The point is that it has to be correlated with the growth of the Internet, growth of PC penetration within the country and a vibrant capital market. The other big barrier is the price of the PC itself. It is not coming down below the Rs 20,000-Rs 30,000 levels and that is still a large amount for many people.
But I think ultimately, there will not be more than seven players, out of which there will be four or five who will continuously survive. There will be one or two new entrants every year to try and make a lot of money and eventually will find out reality the hard way.
EQTM: What is the one thing that you think is essential for an online trading service to win the race? What do you think is the USP of your services compared to your peers?
Mr. Atul: It is very easy to understand and to convince yourselves that because of you have funds and it is a viable business proposition you can go and recruit talent and you can build a business. What we have seen is that there have been a whole lot of players and only two or three have shown the resilience and the ability to remain focused on their core business, and to be clear about what that core business is.
We differentiate ourselves by offering an open platform to our customers. It means we are not saying that you have to only bank with Bank A and have a depository account with Bank A. That means if you an account with either HDFC Bank, or Citibank or UTI Bank, and a depository account with any of the three or Stockholding Corporation of India, then you can trade with us. So you are reducing the inconvenience to the customer as far as possible. Because today these are the three banks that are Internet enabled, apart of course from ICICI. There is tremendous inertia for customers to change their bank account solely to be able to trade. So that’s one differentiating feature of ours.
The other is of course, the reliability of the system, the high uptime, the ease of use, the value add in terms of the reports that you get and top class customer service because I don’t think that anybody in this market really understands what customer service is truly all about.
EQTM: Do you think that an offline model should supplement an online brokerage model? Don’t you think customer reach is also necessary for an online broking firm for increasing volumes?
Mr. Atul: That defeats the whole purpose of being an Internet broker. Not to say that in other businesses having what they call as conventional click and brick model is necessary. But in online broking business, a large part of products and the need for having all these branch offices depends on the way your product is designed. And that also extends to the Customer Relationship Management (CRM) solution that you have. People should not be in the need to have to physically visit the office to (a) get a sense of comfort and (b) to resolve problems. If your system is well designed and if your processes are well set up, then you don’t need a customer to go to physical location to interact nor do you need an elaborate CRM system. So, the more the thought process into designing the product, reduces your requirement to have an offline presence and reduces the investment requirement in CRM.
At the end of the day, customer acquisition is one part of the game but customer retention is also equally important. So while the branches will help you acquire those customers, if your product is well designed, there is very little that a branch could offer to the customer thereafter.
EQTM: Are there any books or personalities that influenced you the most?
Mr. Atul: The books are: Catcher in the Rye, by J. D. Salinger, The collected thoughts of Bertrand Russel and Catch – 22 by Joseph Heller.
J. C. Daniel, a naturalist and conservationist, Nayna Kathpalia, a city saver and C. B. Bhave of National Securities Depository Limited.