MDR applied on the UPI transactions will result in another cost aspect for the broking industry. Even though the clients will not be charged any fees, the broking companies may incur this cost on transactions that qualify for MDR charges. This aspect will become quite important especially when the clients keep transferring money into their accounts without making any trade deals.
Why Could UPI MDR Become a Cost for Brokerages?
According to the proposed system, eligible capital-market payments to stockbrokers will attract 0.02% MDR, capped at ₹300. The broader UPI framework applies 0.4% MDR to eligible merchant transactions above ₹2,000, while transactions up to ₹2,000 remain outside the framework. Brokers may have to absorb the capital-market MDR.
What matters most is that the transfer of money to the broker may not necessarily mean that there will be a trade done. There is the possibility that a client can simply deposit cash in the broking account and yet not use the money. The UPI cost will then have been incurred without any extra revenue being generated.
This results in a disparity in terms of cost of payments and revenues generated. A little fee per trade can add up if large sums of money are continuously moved to and from a client’s account in the case of high volume brokers.
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Nitin Kamath Flags the Cost Problem
Zerodha founder Nitin Kamath said MDR on UPI was probably inevitable given the widespread adoption of the platform and could also encourage greater competition among UPI apps.
But he contended that the new framework does not suit investment and broking purposes as well. “Brokers can’t compel the customers to transact once the funds have been transferred to their accounts,” says Kamath. Moreover, if the charge for the UPI is not passed onto the customer, it may lead to an infinite charge without earning any money for the brokers.
He gave an example where 10,000 customers make 50 UPI transfers of ₹2 lakh each in a month without executing a trade. At the proposed MDR, Kamath said this could potentially cost a broker around ₹2 crore, without generating any business.
Quarterly Settlement Could Add to the Pressure
Kamath emphasized the effects of the Quarterly Settlement (QS) obligation as well. In SEBI regulations, brokers are supposed to refund unutilized money belonging to clients periodically. Clients can then remit the same back into their broking accounts, with Kamath adding that over 50% of such remittances are done via the UPI platform.
This would create a potential cycle, where money flows out of the account of the broker, gets refunded to the client, and again flows into the account via UPI. In case MDR is applicable for such transactions, brokers may incur expenses even without the increase in the trading volumes. It will be increasingly difficult for brokers who trade on low-cost or no brokerage basis in particular products to bear such costs endlessly.
Stocks That Could Be Affected
Angel One
Since Angel One already has a significant retail client base along with the digital broking business model, the frequent fund transfers through the UPI channel may become an operational expense for the company in case it takes on the responsibility of MDR. The exact margin hit will be dependent upon the number and amount of transactions eligible for MDR.
Motilal Oswal Financial Services
Similarly, Motilal Oswal’s broking business may be faced with marginal payment costs for eligible UPI transactions. This would be determined based on its customers’ transaction patterns, usage of UPI and the percentage of transactions that do not result in trading.
Nuvama Wealth Management
Also, there would be incremental costs involved for Nuvama in terms of the framework from its broking division. Nevertheless, the composition of its clients and businesses is different from those of broking firms that are primarily geared towards retail clients.
5paisa Capital
Furthermore, there may be additional costs associated with payments from customers using UPI, assuming customers continue to use UPI as a mode of making payments for their trading account at 5paisa Capital. With the firm’s business model being one of digital broking for individual customers, payments made by customers, which do not translate into trades, can be costly. While absorbing such costs would keep the firm’s cost structure low, there will be some margin pressures.
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Billionbrains Garage Ventures Ltd (GROWW)
Groww may also have to bear incremental costs due to payments under the new UPI MDR structure, considering that it serves a substantial number of retail customers through its digital broking platform. Often, users transfer money to their trading accounts without making any transactions right away, thus resulting in the broker bearing the cost of MDR without generating revenues from the transactions. In case the company chooses to cover the cost itself, in order to preserve its cost advantage, then the company may bear some pressure on its margins.
How Could Brokers Tackle Higher UPI Costs?
There are many methods that brokerage firms may try out in order to minimize the effect of increased charges in relation to UPI. They may opt to minimize their reliance on UPI in terms of account funding and instead use conventional banking systems such as net banking or IMPS.
The brokers may also consider creating incentives for their customers when they utilize the other means of payment. A third option might be a change in the fee structure for the brokerage services or adding a small charge on some services to offset the cost of payment. Nevertheless, it must be taken into consideration that the broking market is very competitive and that offers of low and no-broking fees continue to exist.