Zerodha, INDmoney Flag UPI MDR Impact On Brokers, Kamath Seeks ₹5-10 Cap

Investment platforms Zerodha and INDmoney have flagged the cost impact of the new merchant discount rate (MDR) on UPI transactions, warning that they could incur charges on fund transfers without necessarily generating corresponding trading revenue. 

While Zerodha cofounder and CEO Nithin Kamath called for the charge on broking transactions to be capped at ₹5 or ₹10, INDmoney founder Ashish Kashyap used a hypothetical example to illustrate the potential cost for investment platforms under the new framework.

The concerns came after the Centre introduced a new MDR framework that will end nearly six years of fully free UPI payments for certain merchant transactions. 

Under the new UPI MDR framework, which will come into effect on October 15, capital market transactions will attract an MDR of 0.02%, capped at ₹300. The category covers payments to stockbrokers, securities dealers, mutual funds, and investment platforms.

Standard person-to-merchant transactions above ₹2,000 will attract a higher MDR of 0.4%, capped at ₹300. Person-to-person transfers and eligible transactions involving small merchants will remain exempt.

The finance ministry has said MDR is a charge within the merchant-payment ecosystem and cannot be passed on to customers.

In a post on X, Kamath said Zerodha currently does not charge brokerage on equity delivery trades because its economics allow it to offer the service for free. However, a charge on every UPI transfer could create an additional cost for the broker, irrespective of whether the customer ultimately executes a trade.

“If every UPI transfer starts carrying an additional cost, irrespective of whether the customer actually trades, I don’t see how we can absorb this indefinitely,” he said.

Broking’s UPI MDR Problem

Kamath said the new structure does not account for the fact that transferring money to a stockbroker does not necessarily result in a transaction.

Unlike a typical merchant payment, customers can deposit funds into their broking accounts without subsequently using the money to purchase securities. In such cases, the broker would bear the UPI cost without earning any revenue from the transfer.

Illustrating the potential impact, Kamath said 10,000 customers could each make 50 UPI transfers of ₹2 Lakh in a month without executing a single trade, potentially costing the broker around ₹2 Cr without generating any business.

Kamath also flagged the impact of SEBI’s periodic settlement requirement, under which brokers must return unused funds to clients every month or quarter.

Customers who want to deploy the returned funds must transfer them back into their broking accounts. Kamath said more than half of these transfers take place through UPI, potentially leaving brokers to bear MDR on funds redeposited following the mandatory settlement, without generating incremental revenue.

Kamath said MDR on UPI was “probably inevitable”, given the payments platform’s widespread adoption. However, he said the proposed structure does not work for use cases such as investing and broking. He proposed retaining the 0.02% MDR for broking transactions while reducing the cap from ₹300 to ₹5 or ₹10 per transaction.

INDmoney Flags Potential Cost Impact

INDmoney founder Ashish Kashyap also flagged the potential impact of the MDR on investment platforms.

Using a hypothetical example, Kashyap said an investment app receiving ₹200 Cr through UPI each day for investments in stocks, derivatives, and mutual funds would incur ₹4 Lakh in MDR at the 0.02% rate.

Assuming 24 trading days a month, this would translate into an annual cost of ₹11.52 Cr. Kashyap added that INDmoney would not pass the additional cost on to investors.

PhonePe, which operates the stockbroking and investment platform Share.Market through its subsidiary PhonePe Wealth Broking, could also face MDR costs when customers transfer funds into their broking accounts through UPI.

However, the group stands to benefit from the new framework through its much larger payments business, as UPI app providers will receive a share of the MDR generated from eligible transactions processed through their platforms.

PhonePe founder and CEO Sameer Nigam highlighted that around 96% of merchant transactions would remain outside the scope of the new MDR, as they are either below the ₹2,000 threshold or covered by exemptions for small merchants.

Nigam said the revenue would help the payments industry recover some of the operational costs it has absorbed while UPI remained MDR-free and support further investment in the ecosystem.

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