‘Inevitable but doesn’t make sense in some cases’: Zerodha’s Nithin Kamath on MDR on UPI transactions over ₹2000

MDR on UPI transactions: Nithin Kamath, founder of online trading and investing platform Zerodha, said the Merchant Discount Rate (MDR) on UPI transactions over ₹2,000 was “probably inevitable” but it still doesn’t make sense for some of the cases. He pointed out that a bulk of the quarterly settlements happen through UPI, which could also raise further issues.

Kamath’s remarks came after the government introduced a 0.4 per cent fee on UPI payments of more than ₹2,000 made to merchants from October 15. As per the rules, payments towards mutual funds, and stock brokers would attract MDR of 0.02%, capped at ₹300.

Meanwhile, there will be no charges on person-to-person (P2P) transactions, and MDR will be capped at ₹300 per transaction on payments of ₹75,000 and above.

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“I think MDR on UPI was probably inevitable at some point, especially given how widespread UPI adoption has become. It could also lead to more competition, instead of just three apps accounting for more than 95% of the market. That being said, there are some use cases, like investing and broking, where the proposed MDR structure doesn’t really make sense,” he said.

Kamath added that the problem with broking is that there is no guarantee that the money transferred to a broker will actually result in a transaction.

“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. Just as an example, 10,000 customers could each make 50 UPI transfers of ₹2 lakh in a month without executing a single trade. At the proposed MDR, this could potentially cost the broker around ₹2 crore, without generating any business,” he argued.

Kamath also said that the SEBI-mandated quarterly settlement transfers happen through UPI, which means the broker could end up bearing the cost when the money comes back without any incremental benefit or revenue.

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He says if every UPI transfer starts carrying an additional cost, irrespective of whether the customer actually trades, then brokers won’t be able to absorb this cost indefinitely.

“I think having an MDR is okay. It still doesn’t solve the problem of customers transferring money without transacting, but something like 0.02% with a cap of ₹5 or ₹10 per transaction seems much more reasonable for broking, instead of a cap as high as ₹300,” he said.

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Meanwhile, the RBI said in a statement that MDR is a charge within the merchant payment ecosystem, and not a charge on customers making UPI payments. RBI further said a fair and appropriate distribution of MDR across ecosystem participants will support continued investment in technology, infrastructure and acceptance networks. This, in turn, can enable wider UPI acceptance, deepen the customer base and support sustained growth in transaction volumes, it said.