The introduction of Merchant Discount Rate (MDR) on certain UPI transactions has raised questions among investors about its impact on mutual fund Systematic Investment Plans (SIPs) and stock investments. While the new charges apply to specified person-to-merchant (P2M) transactions, individual customers will not be directly charged, ensuring that their recurring investments via UPI AutoPay remain unaffected.
The new MDR framework distinguishes between regular UPI payments and recurring transactions. For mutual fund investors, this distinction is crucial as recurring SIPs set up through UPI AutoPay will not incur the prescribed MDR. However, capital-market transactions, including payments for mutual funds and stock investments, will have a separate MDR structure set at 0.02% of the transaction value, capped at Rs 300.
Zerodha Founder Nithin Kamath highlighted the potential challenges for brokers, noting that while MDR on UPI was expected due to widespread adoption, its application to broking transactions could be problematic. Brokers cannot guarantee that transferred funds will result in transactions, potentially imposing costs without generating 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.”
Nithin Kamath, Founder of Zerodha
The National Payments Corporation of India (NPCI) announced that from October 15, merchants will pay 0.4% MDR on transactions above Rs 2,000, with a maximum fee of Rs 300 for payments of Rs 75,000 or more. Importantly, consumers will not bear these charges, as the MDR will be absorbed by merchants.
The Reserve Bank of India (RBI) supports the MDR introduction, viewing it as a measure to ensure the sustainability of India's digital payments ecosystem. The RBI emphasizes the need for digital payments to remain accessible, affordable, and safe while being financially sustainable.
Background
The introduction of MDR on UPI transactions marks a significant shift in India's digital payment landscape. UPI has grown rapidly over the past seven years, offering quick and free transactions. The MDR aims to address the costs associated with maintaining and expanding this infrastructure.
As the new MDR framework rolls out, investors should monitor its impact on capital-market transactions. While recurring payments through UPI AutoPay remain unaffected, the separate MDR for capital-market transactions may influence investment decisions.
