Zerodha founder Nithin Kamath says proposed MDR on broking doesn't make sense

With the government levying a fee on transfers worth more than Rs 2000 made to merchants through the UPI platform Zerodha founder Nithin Kamath on Wednesday said that the online brokerage firm could start charging a fee on equity delivery trades that are currently free to customersBrokers cannot absorb the MDR costBy the way we currently dont charge brokerage on equity delivery trades because the economics allow us to offer them for free But if every UPI transfer starts carrying an additional cost irrespective of whether the customer actually trades I dont see how we can absorb this indefinitely he said in a post on social media platform XI think MDR on UPI was probably inevitable at some point especially given how widespread UPI adoption has become It could also lead to more competition instead of just three apps accounting for more than 95 of the market That being said there are some use cases like investing and broking where the proposed MDR structure doesnrsquot really make sense The problem with broking is that there is no guarantee that money transferred to a broker will actually result in a transaction As brokers we canrsquot force a customer to trade after transferring money And if we canrsquot 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 Just as an example 10000 customers could each make 50 UPI transfers of 2 lakh in a month without executing a single trade At the proposed MDR this could potentially cost the broker around 2 crore without generating any business What makes this even more challenging is quarterly settlement QS This is a SEBI regulation that requires brokers to send unused funds back to clients every month or quarter Most customers then transfer these funds back to their broking accounts with more than half of these transfers happening through UPI So 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 By the way we currently donrsquot charge brokerage on equity delivery trades because the economics allow us to offer them for free But if every UPI transfer starts carrying an additional cost irrespective of whether the customer actually trades I donrsquot see how we can absorb this indefinitely I think having an MDR is okay It still doesnrsquot solve the problem of customers transferring money without transacting but something like 002 with a cap of 5 or 10 per transaction seems much more reasonable for broking instead of a cap as high as 300mdash Nithin Kamath Nithin0dha September 16 2026The government on Tuesday had introduced 04 per cent charge on Unified Payments Interface UPI payments above Rs 2000 to merchants and capped the fee at Rs 300 for payments of Rs 75000 and above from October 15 ending nearly six years of fully free UPI paymentsMoney transferred to broker may not result in tradeKamath pointed out that the proposed MDR structure doesnrsquot really make sense in cases such as investing and broking as a broker cannot guarantee that money sent to trading account will actually result in a tradeThe problem with broking is that there is no guarantee that money transferred to a broker will actually result in a transaction As brokers we cant force a customer to trade after transferring money And if we cant 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 saidTo drive his point he gave an example where 10000 customers could each make 50 UPI transfers of Rs 2 lakh in a month without executing a single trade In this scenario at the proposed MDR it could potentially cost the broker around Rs 2 crore without generating any businessHe also flagged the impact of quarterly settlement requirements under which brokers are required to return unused client fundsWhat makes this even more challenging is quarterly settlement QS This is a SEBI regulation that requires brokers to send unused funds back to clients every month or quarter Most customers then transfer these funds back to their broking accounts with more than half of these transfers happening through UPI he saidSo 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 addedAsks for MDR capped at Rs 300 for broking to be reducedKamath said the MDR rate that is capped at Rs 300 for broking is quite steep especially when the transactions may not generate businessI think having an MDR is okay It still doesnt solve the problem of customers transferring money without transacting but something like 002 per cent with a cap of Rs 5 or Rs 10 per transaction seems much more reasonable for broking instead of a cap as high as Rs 300 he saidMDR could lead to competition in UPI ecosystemGiven the widespread adoption of digital payments he noted that the charge on UPI was inevitable and could lead to competition in the UPI ecosystem where it is largely dominated by three playersI think MDR on UPI was probably inevitable at some point especially given how widespread UPI adoption has become It could also lead to more competition instead of just three apps accounting for more than 95 per cent of the market he saidOn Tuesday the National Payments Corporation of India NPCI that operates UPI said an MDR of 04 per cent will be levied on Person to Merchant transactions above Rs 2000 while MDR will be capped at Rs 300 per transaction on highvalue payments of Rs 75000 and aboveEssential sectors like telecom insurance fuel sectors will pay a flat MDR of Rs 5 per transaction while payments towards mutual funds and stock brokers will attract an MDR of 002 per cent capped at Rs 300However small merchants receiving up to Rs 1 lakh per month will have mandatory zero MDR for all transactions