New UPI MDR Explained: Impact on mutual funds, brokers & investors

Synopsis

The implementation of a new 0.02% merchant discount rate will influence certain UPI transactions, including one-time contributions to mutual funds and topping up broker wallets. Notably, recurring SIPs using UPI AutoPay will remain exempt from this fee. Discount brokerage firms may see a rise in operational costs, which could lead to indirect cost implications for their clients.

Mumbai: The introduction of a 0.02% merchant discount rate (MDR) on select UPI transactions will affect certain mutual fund and broking-related payments. A look at which segments are likely to be impacted the most and the least.

What are the charges that will be levied on UPI transactions?

The merchant discount rate (MDR) charge payable on UPI transactions from October 15 is 0.02%. It will apply to one-time mutual fund investments made through UPI, debt-market payments through UPI and UPI payments for broker wallet top-ups, subject to a maximum charge of ₹300.

This translates into a transaction-size-linked fee for payments below ₹15 lakh, while transactions above ₹15 lakh will attract a flat fee of ₹300.

Where do investors use UPI in capital market-linked payments?

Many use UPI for capital market transactions, including mutual fund and stock market investments.

Mutual fund investors use UPI mandates for recurring SIP payments, while some use UPI for one-time lump-sum investments. In the case of stockbroking, many investors transfer money to their brokerage accounts through UPI, instead of net banking, to buy stocks or ETFs.

Read more: Shriram Finance plans $500 million bond buyback

How are mutual fund investors impacted by the MDR?

The 0.02% UPI MDR is unlikely to affect mutual fund SIPs set up through UPI AutoPay, as recurring mandates are exempt from the charge. One-time mutual fund investments made through UPI will attract the 0.02% MDR. For other mutual fund transactions, industry sources said the impact is expected to be lower and the industry is likely to absorb the cost rather than pass it on to investors.

What will it cost fund houses? Fund houses could face higher costs in the case of frequent UPI transactions by individual investors.

For instance, if an investor puts ₹1 lakh in an overnight or liquid fund at the beginning of every month and withdraws it at the end of the month to meet regular expenses, and uses UPI for buying, the fund would incur a 0.02% charge each time. Over 12 months, this would amount to 0.24% plus GST, taking the cost to nearly 0.29%. Some fund houses could also encourage investors to use other payment methods such as net banking or NEFT/RTGS.

Read more: UPI MDR could create Rs 27,000 crore revenue pool by FY28: Bernstein

What about stock brokers?

All broking firms will come under the purview, but non-bank brokers especially discount brokers with high-value transactions and firms offering zero brokerage are likely to be the most affected by these norms. Apart from instances where investors use UPI to transfer funds to their trading accounts, brokers may face charges in other situations as well.

Brokers said money transferred by investors to trading accounts does not necessarily translate into trades or revenue. Brokers, particularly those dependent on UPI pay-ins from traders and active investors, could face additional costs without a corresponding increase in revenue.

Brokers would even incur charges when traders or investors top up their broking wallet using UPI, without actually trading with the balance," said Shripal Shah, MD & CEO, Kotak Securities.

What does this mean for clients of brokers? The move could lead brokerages to indirectly pass on some of these costs to customers, either through higher charges or by discouraging UPI transfers.

Nithin Kamath, founder and chief executive officer of Zerodha, said in a post on X: "...if every UPI transfer starts carrying an additional cost, irrespective of whether the customer actually trades, I don't see how we can absorb this indefinitely."