We can’t force a customer to trade: Nithin Kamath flags UPI MDR burden on brokers

The proposed Merchant Discount Rate (MDR) on UPI transactions could impose significant costs on stockbrokers even when customers transfer money without executing any trades, Zerodha co-founder Nithin Kamath said on Wednesday. He called for a lower transaction charge and a smaller cap specifically for the broking industry.

“I think MDR on UPI was probably inevitable at some point, especially given how widespread UPI adoption has become,” Kamath said in a post on X. He added that introducing MDR could also increase competition in the UPI ecosystem, where three apps currently account for more than 95% of the market.

However, Kamath said the proposed MDR structure may not work for certain use cases, particularly investing and broking.

Brokers face costs even without trades

“The problem with broking is that there is no guarantee that money transferred to a broker will actually result in a transaction,” Kamath said.

Unlike merchants selling goods or services, brokers cannot ensure that customers will trade after transferring money into their accounts. If the broker has to bear the UPI charge, repeated fund transfers could therefore create costs without generating any revenue.

“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,” he said.

Kamath illustrated the potential impact with an example. If 10,000 customers each made 50 UPI transfers of ₹2 lakh in a month without executing a single trade, the proposed MDR could potentially cost a broker around ₹2 crore, he said.

Quarterly settlement adds to the burden

Kamath also flagged the impact of SEBI’s quarterly settlement (QS) requirement, under which brokers are required to return unused client funds at prescribed intervals.

Customers often transfer the money back into their broking accounts after the settlement, with more than half of such transfers taking place through UPI, according to Kamath.

“Regulation essentially forces this movement of money every month or quarter, and the broker could end up bearing the cost when the money comes back, without any incremental benefit or revenue,” he said.

The additional cost could also put pressure on the economics of zero-brokerage offerings. Kamath said Zerodha currently does not charge brokerage on equity delivery trades because its business model allows it to offer the service for free.

“But 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.

Kamath proposes lower MDR cap for broking

Kamath said he was not opposed to the introduction of MDR on UPI transactions, but argued that the structure should account for the economics of different use cases.

“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.

The comments come as the proposed UPI MDR structure has renewed debate among banks, payment companies, merchants and financial services firms over how transaction costs should be distributed across different use cases.