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Nithana Kamath of Zerodha identifies problem in UPI MDR system that could create crisis for brokerage houses
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Aaj Tak
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Nithana Kamath of Zerodha identifies problem in UPI MDR system that could create crisis for brokerage houses

Nithana Kamath from Zerodha has pointed out a potential issue related to the new Merchant Discount Rate (MDR) mechanism for UPI, which will come into effect on October 15. He noted that this system could lead to financial difficulties for brokerage firms.

Kamath indicated that the MDR structure designed for regular merchants is unsuitable for businesses such as investment and brokerage services. Under the new framework introduced by the government for the UPI ecosystem, a commission of 0.4% will be charged on certain UPI payments exceeding ₹2000. Meanwhile, UPI remains free for end-users, and the MDR fee applies to the payment receiver within the ecosystem.

Kamath stated on social media platform X that while widespread use of UPI may necessitate the introduction of MDR, the existing model is impractical for the fields of investment and brokerage services. He emphasized the significant difference between a regular merchant and a broker.

He illustrated this with an example: when a customer buys an item worth ₹20,000 and pays via UPI, the seller receives income directly from the transaction. However, in the case of a broker, a client might deposit ₹200,000 into a trading account but not execute any trades that day. In this scenario, the broker does not earn trading income but could face MDR expenses related to the UPI payment. This is the point Kamath raised.

To illustrate potential costs, the Zerodha founder provided an example. He hypothesized that if 10,000 clients make 50-50 transfers of ₹200,000 over a month without executing any trades, MDR costs could reach approximately ₹20 million at a rate of 0.02%. Kamath used this example to show that a broker could incur significant losses from MDR charges simply due to frequent fund transfers without making trades.

Furthermore, Kamath mentioned the quarterly SEBI settlement system, under which brokers must return unused funds to clients for a specific period. The client can then re-send these funds to their brokerage account. Kamath noted that more than half of these transfers occur via UPI, creating a money movement cycle: from bank to broker, then to client, and back to the broker. If an MDR fee is charged for each such transfer, the broker's expenses could increase even without trades.

Kamath reported that Zerodha currently does not charge a commission for delivery stock trades. He stated that the current business model allows for cost coverage. Nevertheless, if a separate fee is levied for every UPI transfer, regardless of whether the client executes a trade, maintaining these costs in the long term could become challenging. It is important to note that Kamath only expressed concern about potential costs, not announced any changes to his commission.

Kamath is not against the MDR system in general. He insists on the need for a separate fee structure for brokerage activities. He proposed setting the MDR around 0.02% with a maximum limit of ₹5 or ₹10 per transaction. In comparison, the new framework provides for an MDR of 0.4%, and the maximum fee for payments of ₹75,000 or more is set at ₹300.

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Introduction of UPI Commission: Rules and Conditions That Will Not Affect Ordinary Users
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Introduction of UPI Commission: Rules and Conditions That Will Not Affect Ordinary Users

UPI has become an integral part of the daily lives of many people, assisting in purchases ranging from milk and vegetables to online shopping. Consequently, questions have arisen regarding the impact of the upcoming introduction of commissions on UPI. The government has decided to implement a Merchant Discount Rate (MDR) on UPI, which will come into effect on October 15, 2026.

The Department of Financial Services (DFS) of the Government of India and the National Payments Corporation of India (NPCI) have released a new MDR structure for payments made via UPI. The primary concern among the public is the potential increase in costs when conducting digital payments.

For ordinary users who use UPI to purchase daily necessities such as groceries, milk, vegetables, rations, taxis, or make online purchases, UPI will remain completely free, as before. Peer-to-Peer (P2P) transfers between friends or relatives remain absolutely free, regardless of the amount, whether it is 100 rupees or 100 thousand rupees.

When paying in a store or on an online platform using a QR code scan or UPI ID, the customer will not be charged any additional fees. The government has given a clear directive that payment applications, such as Google Pay, PhonePe, Paytm, or BHIM, must not levy any hidden or paid charges on users for the platform.

MDR (Merchant Discount Rate) refers to a commission or fee that the merchant pays to banks and payment service providers (such as PhonePe, Paytm, Google Pay) for accepting digital payments. Previously, since January 2020, the MDR for UPI was completely zeroed out to stimulate digital payments. Now, however, the new rules stipulate its reintroduction.

For transactions up to 2000 rupees at any store or with a vendor, the MDR will be zero, meaning no charges for either the customer or the merchant. If the payment in a large store or mall exceeds 2000 rupees, the merchant will be charged an MDR of 0.4%. For example, for a transaction of 3000 rupees, the seller will pay approximately 12 rupees, and for a transaction of 5000 rupees, it will be 20 rupees.

A maximum MDR limit has been set for large enterprises: for payments of 75,000 rupees and above, the maximum charge is capped at 300 rupees, irrespective of whether the transaction is 100 thousand or 500 thousand rupees.

Small entrepreneurs, such as vegetable vendors, tea stall owners, small grocery stores, and taxi drivers, actively use QR codes. They have been provided with significant support. Small traders and sellers whose total volume of digital payments via QR code per month does not exceed 100,000 rupees have been assigned the P2PM category. For these sellers, the MDR will be completely zero (0%) for all transactions, even if they exceed 2000 rupees.

According to data, 96% or more of all merchant transactions via UPI in India are transactions of 2000 rupees or less. The government believes that over 95% of small and medium enterprises will remain outside the scope of this MDR charge.

For essential services such as train tickets, fuel stations, insurance, and telecommunications, a fixed MDR of 5 rupees has been established instead of a percentage charge. This means that if a user makes a payment via UPI exceeding 2000 rupees (for example, fueling a car for 2500 rupees or paying an insurance policy of 50,000 rupees), the merchant will only bear a fixed charge of 5 rupees. This specific rate stabilizes costs without passing on indirect burdens to consumers.

The government argues that the system processing billions of UPI transactions monthly requires enormous infrastructure. Round-the-clock server maintenance, protection against cyberattacks, and fraud prevention are costly processes. Banks and fintech companies have long demanded compensation for these expenses. These minor charges will strengthen the banking and fintech industry.

Five percent of the total collected MDR volume will be directed to a special development fund. This fund will be used to strengthen the network and infrastructure of digital payments in small towns and rural areas across the country. Although the government will not directly receive income from the introduction of the UPI commission, all revenue will be distributed among the digital payment ecosystem (banks, payment applications, and NPCI). Estimates from global brokerage firms Jefferies and Bernstein suggest that the introduction of MDR for large transactions will generate an annual revenue of approximately 500 billion rupees for the payments industry.

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