The new 0.02% MDR on UPI payments for investing in stocks and mutual funds is unlikely to hurt long-term investors or SIP flows, but analysts and industry players see some pressure building for brokers as active traders make frequent UPI pay-ins and some brokers have called for a rethink on the same saying their margins don’t allow them to take more hit on their already wafer-thin margins.
The development has had most listed broking firms falling on Wednesday; led by Groww (Billionbrains Garage Ventures) plunging close to 5% primarily because there was a block deals `2,000 crore at a discount on Wednesday. Angel One and Motilal Oswal both closed 1.5% down, and Geojit Financial was down 0.5%. However, IIFL Anand Rathi Share & Stock Brokers closed over 3% up, Nuvama 1.9% up and Geojit closed 0.53% up.
Nithin Kamath, the founder of discount brokerage Zerodha which pioneered the segment, was more vocal on the hit on margins front, while Dhiraj Relli, chief executive of full service brokerage HDFC Securities which also has a discount arm called HDFC Sky is of the view that the impact on brokerages is practically minimal.
“In investing and broking the MDR structure doesn’t 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 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 said in a X post.
Quantifying the impact he said if 10,000 customers make 50 UPI transfers of Rs 2 lakh each every month without executing a single trade, the 0.02% MDR could potentially cost the broker around Rs 2 crore, without generating any business.
“What makes this even more challenging is quarterly settlement. Most customers then transfer these funds back to their broking accounts, with over half of these transfers happening through UPI. So regulation essentially forces this movement of money every month/quarter, and the broker could end up bearing the cost when the money comes back, without any incremental benefit or revenue,” he said and warned that Zerodah which currently does not charge brokerage on equity delivery trades, if every UPI transfer starts carrying an additional cost, I don’t see how we can absorb this indefinitely.”
And suggested something like 0.02% 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.
Noting that UPI has become the backbone of retail investing, Dhiraj Relli of HDFC Securities said, “the practical impact of the MRD is minimal on brokers community as SIPs set up through UPI autopay fall outside this framework entirely, and one-time transfers will carry a cost of a few rupees at most, and not more than Rs 300. As an industry, we should read this not as a new cost, but as a considered decision to protect retail access to markets."
Relli further said the charge on brokerages is only a twentieth of the standard rate of 0.4%, and it isn't incidental as the decision to carve out capital market transactions into their own category at just 0.02%, and capped at Rs 300 was well thought out.
Nirav Shah of Equirus Capital, said looking at the industry as a whole, and netting out exemptions, the Rs 300 cap and merchant-category allowances, the total addressable revenue comes to about Rs 10,000-20,600 crore per year. This is much less than a simple calculation based on 40 bps applied to everything would indicate, since only about 4% of P2M transactions by volume, though around two-thirds by value, exceed the Rs 2,000 threshold.
Similarly, CapitalMind has also spoken out against MDR as it feels that the new fee is more expensive than previous transaction fees and can exceed fees earned by low cost funds.
Capital Mind founder Deepak Shenoy said the MF industry currently pays a flat Rs 2/3 per transaction, regardless of amount invested, and there are situations, like in case of liquid funds that the UPI charges could exceed earnings for the fund.
“The higher amount transactors are charged even lesser. And this cost is borne by the AMC so that it doesn’t hit fund investors in their expense ratios. If this increases to 0.02%, which would translate to Rs 10 for an investment of Rs 50,000, this would definitely have to be borne by the fund,” he said.
Another investing app IndMoney also flagged the MDR warning that they could incur charges on fund transfers without necessarily generating corresponding trading revenue.
Using a example Indmoney founder Ashish Kashyap said , an investment app receiving Rs 200 crore through UPI each day would incur Rs 4 Lakh in MDR at the 0.02% rate. Assuming 24 trading days a month, this would translate into an annual cost of Rs 11.52 crore.
