Last Friday, Barter, the consumer app of Africa’s most highly regarded startup Flutterwave, told customers via email that they would no longer be able to access its virtual dollar card service from July 17. Therefore, customers would not be able to create new virtual dollar cards, fund existing ones or to pay and make purchases online and in-store.
Subsequently, other African fintechs such as Eversend, Klasha, Busha, GetEquity and Payday sent identical messages with different timelines between July 17 and 18. They attributed the disruption to the virtual dollar card service to an update from a card partner — who happens to be Union54 — without citing a definite reboot time.
Back in April, when we talked about Union54, whose API allows companies to issue debit cards to their customers and employees without needing a bank or a third-party processor, it had just increased a seed extension, increasing the total seed round came to $15 million (Tiger Global led both rounds). We have other coverages here and here.
The startup is playing a vital role in the growth of the African fintech space with its card issuance product. As part of the Mastercard Principle membership and the first fintech from Africa, Union54 acts as an “issuing bank” and can issue debit cards (physical and virtual). But in May, Union54 ran into operational problems with its product, resulting in the temporary suspension of the Bank Identification Number (BIN), the first four to six numbers on a payment card that identifies a card issuer.
According to a memo sent to its customers in May and obtained by australiabusinessblog.com, Union54 said that while it fixed some of these issues, some remained. And as the company looked for solutions, it became clear that there were “some fundamental blocks to Union54 from operating a profitable, long-term, profitable card issuance product, mainly because of our partner’s commercial inflexibility and inability to act quickly.” to implement technical solutions necessary to solve the operational problems we experienced.”
Sources told australiabusinessblog.com that the main problem Union54 had encountered since launch was chargeback fraud. Here, cardholders claim that they made no purchases before disputing a transaction, making a complaint, and contacting the bank – in this case Union54 – that issued the debit card for a chargeback. If Union54 deems the claim valid, it will remove the transaction amount from the merchant’s account and return it to the cardholder.
A recently sent follow-up memo from Union54 to its customers confirms which sources and local technical publicationsBenjamindada.com, have said about these chargebacks. “Since we launched, there has been a constant increase in fraud cases coming from our Bank Issuing Number (BIN),” the memo read. “During one of our conversations with Mastercard, they stated that there has never been more cases or instances of card fraud from this region in their history.”
Upon further investigation, Union54 found that cardholders increasingly attempted to defraud merchants by requesting chargebacks after their orders had been fulfilled. Many cardholders also tried to make purchases with blank cards, Union54 said. Another plausible scenario, which Union54 did not mention, could be the use of the cards by fraudsters to transact without the knowledge of the original cardholders.
Merchants – who suffer most from chargeback fees that could potentially affect their profits – can dispute cardholder claims and ask the issuing bank to reverse the chargeback. And that’s what international merchants like Facebook, Google and AliExpress did; moreover, they reported Union54’s BIN to Mastercard, which resulted in the number being suspended.
Initially, Union54 decided to stop authorizing card payments on June 16 and cease operations by June 30. user, card or transaction data necessary for your ongoing operations.” In the first memo, Union54 said its API would no longer be available from July 1. However, the fintech pushed the shutdown to July 18 when Mastercard, which requires merchants to maintain a chargeback rate of less than 1.5% on transactions, issued an ultimatum to Union54, which also acts as an acquirer, to improve its processes.
In the follow-up note, Union54 explained how the company was unable to resolve the situation despite the extension. Union54’s efforts “were not deemed sufficient by Mastercard” as customers’ virtual dollar cards were more likely to fail, disrupting customer experiences, an excerpt from the memo read.
However, Union54 hopes to get a solution soon. The fintech said it would work with its partners, merchants and Mastercard to bring its card service back up and running within the next 6-8 weeks.
The rest of the memo read:
For a relatively new market innovation like ours, we are aware that we will periodically face such challenges. We want to let you know that we did everything we could until the last minute to prevent this, but unfortunately it was impossible to fix it along the way. We sincerely apologize for the impact on your business and rest assured that the map service will be back, better and stronger. The USDC Wallets Infrastructure and International USD Wire Service to 79 countries is still fully functional. In the coming days, we’ll be adding local currency payout endpoints to 25 countries along huge trade corridors in Asia (China), Europe and Africa.
Some industry analysts say this event calls for better KYC/AML compliance checks in the card issuance space, as inconsistent due diligence on cardholder chargeback claims could fuel more fraudulent activity.
“It [The news] did not come as a shock to those who played in agreement due to the massive fraudulent activity in space. Let’s say a card system is raising red flags that a region has a lot of fraudulent activity. In that case, you probably want to withdraw from the market as a provider,” said Lanre Ogungbe, co-founder of Identitypass, a Nigerian digital compliance and security company that provides seamless identity verification solutions to African businesses.
“KYC is not the AZ of security checks, but what it does is find and trace a fraudulent transaction. And for many fintechs in the region, we seem to be putting more emphasis on aesthetics than on the compliance and security side of things.” The report also comes at a time when several allegations of fraud have been rocked executives and businesses in the region in recent weeks.
In recent years, virtual dollar debit cards issued by fintechs have proven to be a lifeline for many Africans, replacing local alternatives to banks whose cards have transaction limits. These cards allow them to make international online transactions on platforms such as Alibaba, Google, Amazon, Netflix and Spotify. So it’s not hard to see why customers (individuals and businesses) – who had to rely on these virtual cards built on Union54’s backend – expressed their dismay on social media after the news. Many have started looking for alternative options, including Sudo Africa, another card issuing platform, and other fintechs that claim not to suffer from Union54’s downtime (due to using another provider), such as Chipper Cash, Mono, and Bitmama. .