The potential introduction of a merchant discount rate on UPI transactions raises concerns among India’s mutual fund distributors, threatening margins and broader digital participation in financial services.
The prospect of a merchant discount rate on certain UPI transactions has stirred concern across India’s mutual fund and wealth management industry, with distributors warning that even a modest fee could quickly eat into already narrow margins. The government is weighing a charge on a limited set of merchant UPI payments above a threshold, while saying consumers would not be asked to pay, but investment firms want mutual fund transactions excluded altogether.
Industry executives say the biggest worry is not only the direct cost but also the risk that charges would be passed through to investors. One senior online investment platform executive said app-based distributors typically work on margins of about 0.75 per cent, making a fee of 0.25 per cent to 0.30 per cent material enough to trim roughly a third of earnings. He argued that such a move could also discourage first-time investors in smaller towns and cities from entering the formal financial system.
The concern is especially sharp for systematic investment plans, or SIPs, where small monthly contributions have increasingly moved on to UPI. VK Vijayakumar, chief investment strategist at Geojit Investments, said about 45 per cent of new SIPs are now routed through UPI, suggesting that the segment most likely to feel the impact is also the one driving much of the industry’s recent growth. By contrast, he said UPI accounts for only about 10 per cent of lump-sum mutual fund investments, so some investors may simply switch back to bank transfers if charges are introduced.
Feroze Azeez, joint chief executive of Anand Rathi Wealth, said the current direct-platform model is inexpensive for investors, with stamp duty alone costing ₹5 on a ₹1 lakh investment and no brokerage or separate platform fee. He said a 0.3 per cent MDR would lift that cost to ₹300 on the same transaction, although the effect on SIPs should be smaller because each instalment is relatively modest. Whether the burden ends up on investors will depend on how platforms and fund houses choose to structure pricing, he added.
Anuj Kumar, managing director of CAMS, said the final regulatory framework is still awaited but acknowledged that any shift in the MDR regime could raise costs for some distributor categories. Even so, he said the longer-term effect could be to deepen the UPI ecosystem and encourage more digital participation in mutual funds. Separately, Mint reported that the government’s proposal is aimed at large merchants and is still under review, while consumer payments through standard bank-account-linked UPI are expected to remain free.
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