Zerodha founder Nithin Kamath has raised concerns over the impact of the new Merchant Discount Rate (MDR) framework on stockbrokers, arguing that the proposed charges could create a significant cost for brokers even when customers transfer money without eventually placing a trade. Kamath said the introduction of MDR was 'probably inevitable' given the scale of UPI adoption and could encourage greater competition in a market where three apps account for more than 95% of transactions.
However, he questioned whether the proposed structure is appropriate for investing and broking-related payments, where transferring money into a brokerage account does not necessarily result in a revenue-generating transaction.
Under the framework announced by NPCI, UPI payments towards capital-market transactions, including mutual funds, securities, stockbrokers and dealers, will attract an MDR of 0.02%, capped at Rs 300 per transaction from October 15. The charge applies to specified merchant transactions rather than person-to-person transfers.
Kamath's concern is particularly around the disconnect between a UPI transfer and an actual brokerage transaction. "There's no guarantee that money transferred to a broker will actually result in a transaction," he said, adding that brokers cannot force customers to trade after funds are transferred.
He illustrated the potential economics with a hypothetical example: 10,000 customers each making 50 UPI transfers of Rs 2 lakh in a month, without executing a single trade. At the applicable MDR, Kamath said such activity could potentially cost a broker about Rs 2 crore without generating any business.
The issue becomes more pronounced because of SEBI's quarterly settlement requirement, according to Kamath. Under the framework, unused client funds have to be returned periodically, after which customers may transfer those funds back into their brokerage accounts. He said more than half of these returning transfers happen through UPI, meaning brokers could incur a charge on a regulatory-driven movement of funds without any corresponding revenue.
Kamath also highlighted the implications for the economics of discount broking. He said Zerodha currently offers equity delivery trades without brokerage, with the business model allowing the company to provide the service free of charge.
However, if brokers have to bear a UPI cost every time clients move money into their accounts regardless of whether they trade, Kamath questioned how long that cost could be absorbed.
The Zerodha founder did not oppose MDR in principle. Instead, he suggested that a much lower rate for broking-related UPI payments, potentially around 0.02% with a Rs 5-10 cap, would better reflect the economics of the business than a cap as high as Rs 300.
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