Zerodha co-founder Nithin Kamath says UPI MDR is inevitable but wants a lower cap for broking transactions, warning that brokers could face costs even when customers do not trade
Zerodha co-founder Nithin Kamath backed the introduction of Merchant Discount Rate (MDR) on selected UPI transactions, saying the move was probably inevitable as the digital payments system has become widely used.
The National Payments Corporation of India (NPCI) has announced a revised UPI MDR framework from October 15. Under the framework, a 0.4 per cent MDR will apply to specified person-to-merchant transactions above Rs 2,000, with a maximum charge of Rs 300 per transaction.
Customers will continue to use UPI without paying the MDR directly. The charge is paid within the payments ecosystem and is shared among the banks, payment apps and other service providers involved in processing the transaction.
Capital market transactions, including certain mutual fund and securities payments, will have a lower MDR of 0.02 per cent, also capped at Rs 300.
However, Kamath has raised concerns about how the new MDR structure could affect the broking industry. He said the proposed cap of Rs 300 per transaction could create a significant cost for brokers, even when customers transfer money without eventually carrying out a trade.
Kamath flags a problem for brokers
In a post on X on Wednesday, Kamath said the introduction of MDR could also encourage more competition in UPI, where three apps currently account for more than 95 per cent of the market.
More from BusinessBut he said the proposed structure does not work as well for some use cases, particularly investing and broking.
The key issue, according to Kamath, is that a transfer of money to a broker does not necessarily lead to a transaction.
“As brokers, we can’t force a customer to trade after transferring money,” he said.
Kamath argued that if brokers cannot pass the UPI charge on to customers, there could be no effective limit to the cost incurred by a customer who repeatedly transfers money without executing trades.
He gave an example of 10,000 customers each making 50 UPI transfers of Rs 2 lakh in a month without executing a single trade.
Even at a 0.02 per cent MDR, Kamath said such activity could potentially cost a broker around Rs 2 crore without generating any business.
Quarterly settlement adds another cost
Kamath also pointed to the impact of Sebi’s quarterly settlement rules. Under the framework, brokers are required to return unused client funds at regular intervals. Kamath said many customers then transfer the money back into their broking accounts, with more than half of these transfers taking place through UPI.
He said this could create a situation where regulations effectively require money to move out of a broker and then back into the account, while the broker bears the UPI cost without earning additional revenue.
This is particularly relevant for brokers that do not charge brokerage on equity delivery trades.
Kamath said Zerodha currently offers equity delivery trades without brokerage because its business model allows it to do so. But he questioned whether brokers could continue absorbing a new cost on every UPI transfer when there is no guarantee that the customer will eventually trade.
“I think having an MDR is okay,” Kamath said.
However, he proposed a lower charge for broking transactions, suggesting an MDR of 0.02 per cent with a cap of Rs 5 or Rs 10 per transaction instead of the current proposed cap of Rs 300.
What the new UPI MDR means
The revised framework marks a shift after more than six years of zero-MDR UPI merchant payments.
NPCI has said the revised structure is aimed at supporting the long-term sustainability of the UPI ecosystem. The payments network now handles billions of transactions every month, increasing the need for investment in infrastructure, cybersecurity, fraud prevention, system reliability and customer support.
UPI processed around 24 billion transactions worth about $311 billion in August, according to Reuters.
The new framework does not apply the same charge to every type of transaction. Fuel, railways, telecom and insurance payments above Rs 2,000 will attract a flat Rs 5 fee under the specified structure.
Economist says framework could support UPI’s sustainability
Ranadurjay Talukdar, Partner and Payments Sector Leader at EY India, said the revised framework represents a shift from subsidising adoption towards building a more sustainable digital payments infrastructure.
“The revised UPI MDR framework represents a shift from subsidising adoption to building sustainable digital infrastructure,” Talukdar said.
He said the structure protects consumers, small merchants and more than 95 per cent of low-value merchant transactions, while requiring larger commercial payments to contribute towards the cost of the ecosystem.
According to Talukdar, the MDR revenue could provide banks and payment providers with resources for resilience, cybersecurity, innovation and customer service.
He also noted that large merchants would face an additional cost, although UPI remains cheaper than many card-based payment acceptance systems.
Talukdar said the Rs 300 cap could be reviewed in the future. He also highlighted the need for transparency in how MDR revenue is shared, prevention of consumer surcharges and effective use of the proposed funds to expand digital payment acceptance among smaller merchants and underserved markets.
