UPI MDR 'inevitable', says Zerodha's Nithin Kamath amid digital payment surge
Synopsis
Zerodha's Nithin Kamath says UPI MDR was always coming — and he may be right. But his deeper warning is for the broking industry: SEBI's quarterly settlement rules could force brokers to pay crores in UPI charges on circular fund transfers that never generate a single trade. It's a structural flaw that regulators will need to address before the MDR framework is finalised.
Key Takeaways
Zerodha CEO Nithin Kamath called UPI MDR 'probably inevitable' given the scale of digital payment adoption in India.
He argued MDR could break the dominance of three apps that currently hold over 95% of the UPI market.
Kamath warned that brokers could face costs of around ₹2 crore per month if 10,000 customers make 50 UPI transfers of ₹2 lakh each without trading.
SEBI's quarterly settlement norms require brokers to return unused client funds regularly; more than half of such return transfers reportedly occur via UPI, multiplying MDR exposure.
The final MDR framework — including any sector-specific exemptions — is yet to be notified by regulators.
Zerodha co-founder and CEO Nithin Kamath on Wednesday, 16 September publicly endorsed the newly introduced Merchant Discount Rate (MDR) on person-to-merchant UPI transactions, calling it a near-certain outcome given the explosive growth of digital payments in India. Kamath made the remarks in a post on social media platform X, adding that the charge could also shake up a heavily concentrated UPI market.
Kamath's Case for MDR
In his post, Kamath argued that the scale of UPI adoption had made some form of MDR structurally unavoidable. “I 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,” he wrote.
He pointed to the current concentration in the UPI ecosystem, where three apps collectively account for more than 95 per cent of the market. The introduction of MDR, he suggested, could lower barriers for smaller payment players and diversify the competitive landscape.
Why Broking Is a Special Problem
Despite backing the principle of MDR, Kamath flagged serious concerns about its application to the investing and broking sector. His core argument: brokers cannot guarantee that funds transferred into their accounts via UPI will result in an actual trade, meaning they could absorb costs without generating corresponding revenue.
He illustrated the scale of the problem with a specific example — if 10,000 customers each make 50 UPI transfers of ₹2 lakh in a single month without executing a single trade, the broker could face a cost of approximately ₹2 crore under the proposed MDR structure, with no offsetting income.
Quarterly Settlement Rules Add to the Burden
Kamath also highlighted how Securities and Exchange Board of India (SEBI) regulations compound the issue. Under quarterly settlement norms, brokers are required to return unused client funds every month or quarter. Clients frequently transfer these funds back to their broking accounts, with more than half of such return transfers reportedly happening through UPI.
“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,” Kamath wrote. The result, he warned, is that brokers could end up bearing UPI charges on repeated, circular fund transfers without generating any incremental revenue from them.
Wider Context: MDR Debate Reignites
The reintroduction of MDR on UPI has reignited a long-running debate between the payments industry and the government. UPI transactions have grown dramatically since the zero-MDR regime was formalised, with monthly volumes now running into billions of transactions. Payment service providers and fintech firms have repeatedly argued that the absence of MDR makes the ecosystem financially unsustainable at scale.
Notably, this is not the first time the MDR question has surfaced — industry bodies have flagged the issue repeatedly since 2020, when MDR on RuPay and UPI was scrapped. Kamath's intervention carries added weight given Zerodha's position as India's largest retail brokerage by active clients.
What Comes Next
The proposed MDR structure is still being debated, and its final form — including whether sector-specific carve-outs will be permitted — remains to be determined by regulators and the government. Broking platforms, fintechs, and merchant associations are expected to submit detailed representations before any final framework is notified.
Point of View
Which has largely avoided publicly backing any UPI charge for fear of customer backlash. But the more important signal is his warning about broking — it exposes a genuine regulatory blind spot where SEBI's quarterly settlement mandate and a new payment charge interact in ways that could impose real, recurring costs on an industry that never had a say in either rule. If regulators push through a uniform MDR without sector-specific carve-outs, the unintended victims won't be the big payment apps — they'll be mid-sized brokers whose margins are already thin. The debate so far has centred on merchants and consumers; the broking angle deserves far more scrutiny before the framework is locked in.
NationPress
16 Sept 2026
Frequently Asked Questions
What is UPI MDR and why is it being introduced?
UPI MDR (Merchant Discount Rate) is a fee charged on person-to-merchant UPI transactions. It is being reintroduced to make the UPI ecosystem financially sustainable at scale, after MDR on UPI and RuPay was scrapped in 2020. Proponents argue it could also encourage more competition among payment apps.
Why does Nithin Kamath support UPI MDR?
Kamath said MDR on UPI was 'probably inevitable' given how widespread adoption has become, and that it could reduce the dominance of three apps that currently hold over 95% of the UPI market. He believes it may attract more players and improve competition in the digital payments space.
Why is UPI MDR a problem for stock brokers?
Brokers cannot guarantee that funds transferred via UPI will result in a trade, meaning they could absorb MDR costs with no corresponding revenue. Kamath estimated that 10,000 customers making 50 UPI transfers of ₹2 lakh each in a month without trading could cost a broker around ₹2 crore under the proposed structure.
How do SEBI's quarterly settlement rules worsen the MDR impact on brokers?
SEBI requires brokers to return unused client funds every month or quarter. Clients often transfer these funds back via UPI, with more than half of such transfers reportedly happening through UPI. This creates a cycle of repeated UPI charges on the same funds, with no incremental revenue for the broker.
When will the UPI MDR framework be finalised?
The final MDR framework, including any sector-specific exemptions, has not yet been notified by regulators. Broking platforms, fintechs, and merchant bodies are expected to submit representations before the framework is formally announced.
