The recent announcement of a 0.4 per cent Merchant Discount Rate (MDR) on specific UPI merchant transactions exceeding Rs 2,000 has led to a notable increase in the stock prices of Paytm, MobiKwik, and Pine Labs. On Wednesday, Paytm’s shares surged by as much as 7 per cent, reaching a new 52-week peak of Rs 1,855.50 during early trading. Meanwhile, MobiKwik observed gains of approximately 5 to 6 per cent, and Pine Labs initially rose before experiencing a decline in its share price later in the day.

The significant uptick in stock values was corroborated by Reuters, indicating that Paytm and MobiKwik, alongside financial institutions such as Yes Bank and Axis Bank, reported early trading gains between 2 to 8 per cent. Pine Labs, which saw a brief rise of around 2.2 per cent, ultimately retreated from its initial gains.

This positive market reaction follows a pivotal announcement from the National Payments Corporation of India, confirming the implementation of the 0.4 per cent MDR for qualifying person-to-merchant UPI transactions beginning October 15. The MDR will be capped at Rs 300 for transactions of Rs 75,000 or more. This alteration signals a transition from the zero-MDR regime that previously characterised UPI acquiring.

Market Outlook for Payment Companies

The primary driver of the market response appears to be the potential for payment companies to monetise a sector of the UPI merchant business that had yielded little to no direct transaction revenue in the past. Emkay Global Research noted that the newly established framework could be advantageous for both Paytm and Pine Labs, and subsequently updated its target prices to Rs 2,400 for Paytm and Rs 230 for Pine Labs.

According to the brokerage, Paytm has the potential to generate Rs 1,120 crore in UPI MDR revenue by FY28, while Pine Labs might achieve Rs 155 crore. This model is being regarded as a evolving revenue stream, enhancing the sustainability of the payments business. JM Financial has also expressed optimism regarding Paytm, raising its target price from Rs 1,950 to Rs 2,150, citing that the 40 basis points MDR is higher than its earlier projections of 25 basis points.

Furthermore, the new MDR could contribute an additional revenue of Rs 210 crore for Paytm in FY27 and Rs 470 crore in FY28, with expectations that a considerable portion of this revenue will impact EBITDA positively. Jefferies has echoed similar sentiments, adjusting its target price for Paytm to Rs 2,100 while retaining a ‘Buy’ rating, emphasising the company’s substantial merchant base.

Revenue Potential from UPI MDR Implementation

The revenue potential arising from the UPI MDR is considerable, given that UPI has become one of India’s predominant payment networks. Bernstein has projected that banks could generate approximately Rs 14,000 crore from this new revenue avenue, while payment applications are expected to see around Rs 7,000 crore and the network itself close to Rs 1,000 crore. Citi estimates that the banking sector might realise annual revenues between Rs 16,000 and 17,000 crore due to the new framework.

Despite these opportunities, it is important to note that the entire UPI ecosystem will not transition to a chargeable model overnight. Person-to-person transactions will remain free, and payments under Rs 2,000 will be excluded from the new MDR structure. The government asserts that roughly 96 per cent of person-to-merchant transactions will remain unaffected, thereby limiting the revenue potential to the eligible high-value merchant transactions that payment firms can capture.

Among payment companies, Paytm appears to be the clearest beneficiary, with analysts indicating its potential for significant earnings growth through the new MDR framework. Bernstein has issued a target price of Rs 2,200 for Paytm, projecting its earnings per share could climb to Rs 78 by FY29. Meanwhile, the precise distribution of the MDR revenue among stakeholders remains to be determined, particularly as the National Payments Corporation of India has yet to clarify how the revenue pool will be allocated.

Long or Short, get news the way you like. No ads. No redirections. Download Newspin and Stay Alert, The CSR Journal Mobile app, for fast, crisp, clean updates!

App Store –  https://apps.apple.com/in/app/newspin/id6746449540 

Google Play Store – https://play.google.com/store/apps/details?id=com.inventifweb.newspin&pcampaignid=web_share