Nithin Kamath, founder of India's leading online trading platform Zerodha, has expressed reservations regarding the newly introduced Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions over ₹2,000. While acknowledging the inevitability of such charges given UPI's widespread adoption, Kamath highlighted specific issues for the investing and broking sectors.
New UPI MDR Rules Impacting Merchants
The government's new policy, effective from October 15, imposes a 0.4% fee on UPI payments exceeding ₹2,000 made to merchants. This move aims to support the UPI ecosystem, which has seen explosive growth but operates largely without direct transaction fees for consumers.
For specific categories like mutual funds and stockbrokers, the MDR is set at 0.02%, with a cap of ₹300 per transaction. Person-to-person (P2P) transactions remain exempt from these charges, and for high-value payments of ₹75,000 and above, the MDR is also capped at ₹300.
Kamath's Concerns for Brokerage Firms
Kamath argued that the current MDR structure presents unique challenges for the broking industry. He pointed out that money transferred to a broker does not guarantee a subsequent transaction or trade. If brokers cannot pass on these UPI charges to customers, they face potentially significant costs without generating revenue.
“As brokers, we can’t force a customer to trade after transferring money. And if we can’t pass the UPI charge on to the customer, there is essentially no limit to the cost a customer can impose on a broker without generating any revenue.”
He illustrated this with an example: 10,000 customers each making 50 UPI transfers of ₹2 lakh in a month without executing a single trade could cost a broker approximately ₹2 crore under the proposed MDR. Furthermore, SEBI-mandated quarterly settlement transfers, which often occur via UPI, could also incur charges for brokers when funds are returned to customers, again without an incremental benefit or revenue.
Proposed Adjustments and RBI Stance
Kamath suggested that while MDR is acceptable, a lower cap for broking transactions would be more reasonable. He proposed a cap of ₹5 or ₹10 per transaction, instead of the current ₹300, to better align with the operational realities of the investment sector.
Meanwhile, the Reserve Bank of India (RBI) clarified that MDR is a charge within the merchant payment ecosystem, not directly levied on customers making UPI payments. The RBI stated that a fair distribution of MDR across ecosystem participants is crucial for sustaining investment in technology, infrastructure, and acceptance networks, thereby fostering wider UPI adoption and transaction growth.