MDR may alter payment choices, but ‘won’t curtail market participation’

The government's decision to impose a Merchant Discount Rate (MDR) on UPI transactions exceeding ₹2,000 for capital market-related payments is anticipated to influence payment behavior among investors. However, industry experts anticipate the long-term impact on investment activity to be minimal. The MDR framework encompasses regulated capital market entities, including mutual fund asset management companies, SEBI-registered stockbrokers, securities dealers, and investment platforms.

It pertains to UPI payments for equity and debt investments, mutual fund acquisitions, and broker wallet replenishments. The charge is set at 0.02 percent of the transaction value, with a cap of ₹300 per transaction. Consequently, for a ₹10,000 investment, a charge of ₹2 would be applied.

NSE Managing Director and CEO Ashish Chauhan suggested that the introduction of MDR might temporarily impact transaction volumes. Despite this, he predicted that activity would stabilize as the market adjusts to the new fee structure. Industry participants concur that the move is unlikely to deter retail participation in mutual funds.

Piyush Jhunjhunwala, Founder and CEO of Stockify, stated that investors may adopt alternative payment methods when confronted with MDR fees, but do not foresee a significant effect on Systematic Investment Plan (SIP) flows. He emphasized that while some investors might consider alternatives, this possibility is unlikely to affect SIP investment volumes unless MDR fees become unaffordable or recurrent.

Jhunjhunwala added that investors can readily transition to alternatives such as e-NACH, which enables automated bank debits for recurring investments. "Creating new mandates to shift from UPI to bank debits can be accomplished within a few working days," he noted.

According to Gibin John, Senior Investment Strategist at Geojit Investments, the broader impact may fall on intermediaries rather than investors. If mutual funds are categorized under the merchant category, it could augment the cost of processing SIP and lump-sum investments via UPI, he explained. John pointed out that the additional charge would typically be borne by receiving entities such as asset management companies (AMCs) rather than investors directly.

Consequently, the operating costs of AMCs may rise, which could indirectly affect investors over time. Experts believe the new MDR regime could foster a gradual transition from UPI to bank-based payment systems for investment transactions, while preserving overall capital market participation largely unchanged.