Nithin Kamath, co-founder of Zerodha, has joined the growing chorus of industry leaders questioning the proposed UPI MDR structure for broking platforms. Speaking to CNBC TV18, Kamath acknowledged that UPI MDR was "probably inevitable" given the widespread adoption of digital payments, but emphasized that the current structure may not be suitable for all use cases. He specifically highlighted that "there is no guarantee that money transferred to a broker will actually result in a transaction" and that brokers cannot force customers to trade after transferring money. According to The Economic Times, Kamath stated that "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."
Kamath provided a stark example of the potential financial burden on broking platforms, calculating that 10,000 customers each making 50 UPI transfers of ₹2 lakh monthly without executing trades could cost brokers around ₹2 crore at the proposed MDR rate. This scenario demonstrates how the current structure could create substantial costs for platforms where customers frequently transfer funds without generating revenue. According to The Economic Times, Kamath illustrated the potential cost with an example, stating that "At the proposed MDR, this could potentially cost the broker around ₹2 crore, without generating any business." He noted that "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 National Payments Corporation of India (NPCI) announced that the government will introduce Merchant Discount Rate (MDR) on select UPI transactions from October 15 onwards, with merchants paying 0.4% on transactions above ₹2,000. As reported by The Economic Times, transactions worth up to ₹2,000 will continue to carry zero charges and account for more than 95% of UPI's P2M transaction volume. The NPCI clarified that MDR will be borne by merchants and cannot be passed on to customers, meaning consumers will continue to pay the listed price when using UPI with no separate transaction or platform fee imposed by UPI apps. According to The Economic Times, Kamath noted that "It could also lead to more competition, instead of just three apps accounting for more than 95% of the market."
Recognizing the unique challenges faced by broking platforms, Kamath proposed a more reasonable MDR structure for the financial services sector. He suggested an MDR of around 0.02% with a cap of ₹5 or ₹10 per transaction, which he considers more suitable for broking than the current cap of ₹300. As reported by The Economic Times, Kamath stated that "I think having an MDR is okay, but a lower rate would be more reasonable for broking." He emphasized that "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." This alternative structure would address the specific concerns of platforms where customers frequently transfer funds without generating trading activity. Kamath noted that "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."
Kamath highlighted another significant challenge for broking platforms: SEBI's Quarterly Settlement (QS) regulation, which requires brokers to return unused funds to clients monthly or quarterly. According to The Economic Times, "Most customers then transfer these funds back to their broking accounts, with more than 50% of these transfers happening through UPI." This regulatory requirement forces continuous movement of money, yet brokers receive no incremental benefit or revenue when funds return without generating trading activity. The current MDR structure could compound these costs, making it difficult for platforms to absorb the financial burden of these mandatory fund transfers. As Kamath explained, "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."
Despite the challenges, Kamath noted that UPI MDR could lead to more competition in the payments market, potentially reducing the current dominance of three apps that account for more than 95% of the market. Addressing immediate user concerns, Zerodha has confirmed it will not pass these costs to its investor base, with Kamath stating that the platform currently "does not charge brokerage on equity delivery trades because the economics allow it to offer them for free." However, he warned that if every UPI transfer starts carrying additional costs regardless of trading activity, "he does not see how the broker can absorb that cost indefinitely." According to The Economic Times, Kamath emphasized that he was "not opposed to MDR itself but suggested a lower rate and cap for the broking sector." 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.
