The mishaps at large financial institutions of crediting funds to the wrong persons serve as a reminder about one of the most significant risks of running a financial services firm.

Whether you are a broker, a bank, or any entity that directly settles with end customers, once securities or funds are sent to the wrong person, it’s hard to get them back. This risk is like a hanging sword for these businesses.

In a way, all financial services firms are like insurance businesses. They collect small fees on services while trying to avoid catastrophic events that can wipe out the entire networth bankrupting them.

The more time I spend running Zerodha, the more I appreciate why regulators ask for increased networth as the size of the business increases. This is also why it is essential to be profitable when running a financial services firm, so that the networth increases proportionally as the business grows. Otherwise, even minor goofs can lead to a company going bankrupt.

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