'Inevitable, more competition': Nithin Kamath backs UPI MDR but flags cost burden for brokers

Zerodha co-founder Nithin Kamath said the Merchant Discount rate (MDR) on UPI was "probably inevitable" given the widespread adoption of the payment system.

In a post on X on Wednesday, Kamath said introducing MDR could also increase competition in the UPI market, where three apps currently account for more than 95% of the market.

However, he said the proposed MDR structure did not make sense for some use cases, including investing and broking.

Kamath said the main problem for brokers was that there was no guarantee that money transferred to them would ultimately result in a transaction.

"As brokers, we can't force a customer to trade after transferring money," he said, adding that if brokers cannot pass the UPI charge on to customers, there could be "essentially no limit" to the cost a customer can impose without generating any revenue.

He gave an example in which 10,000 customers each make 50 UPI transfers of ₹ 2 lakh per month without executing a single trade. At the 0.02% MDR he proposed for broking transactions, Kamath said, this could potentially cost a broker around ₹ 2 crore without generating any business.

Kamath also pointed to the quarterly settlement (QS) rule, a Sebi regulation that requires brokers to return unused funds to clients every quarter.

"Most customers then transfer these funds back to their broking accounts, with more than half of these transfers happening through UPI," he said.

According to Kamath, this means regulation effectively forces the movement of money every month or quarter, while brokers could end up "bearing the cost when the funds return without receiving any incremental benefit or revenue".

Kamath said Zerodha currently does not charge brokerage on equity delivery trades because the economics allow it to offer them free of charge.

However, he said the company may not be able to absorb an additional cost on every UPI transfer indefinitely, regardless of whether the customer eventually trades.

"I think having an MDR is okay," Kamath said, while arguing that it does not resolve the issue of customers transferring money without transacting.

"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 added.

Kamath's observation came after the National Payments Council of India (NPCI) announced on Tuesday that MDR would apply to select UPI transactions conducted from person to merchant.