How a chargeback shockwave caused a fintech nightmare

About Fatu
By Fatu Ogwuche

Top of Mind: Happy Sunday!

In 2022, chargeback and other kinds of fraud disrupted and nearly collapsed a substantial portion of Africa’s cross-border payments infrastructure.

Millions of users could no longer pay for the world-class products and services they were used to.

Today’s issue shows you exactly what happened: the not-so-out-there Zambian startup powering most of Africa’s virtual USD cards, how the industry operates, and why it may happen again.

One big thing: How chargebacks caused a fintech meltdown

The short: Last year, millions of consumers across Africa suddenly could not pay for their favourite international services.

Users paying for services like Netflix, Apple Music, and other streaming platforms discovered that their virtual and physical dollar cards were no longer valid.

Fast forward to today, users are now back online.

Backstory: Let’s walk through how this happened – how an otherwise low fraud rate could stop millions of Africans from buying the products and services they love.

Union54 to the rescue: Traditionally, any financial institution that offers any debit card would have to go through a bank, become a bank, or work with a third-party processor.

Enter Union54.

Zambian startup Union54 provides an API that allows companies to issue physical and virtual USD cards to their customers without a band or third-party processor.

Basically, they serve as an “issuing bank”, allowing other fintechs to build on top of them.

Most startups – Eversend, Busha, GetEquity, and Payday use Union54 to offer their virtual USD cards, meaning that a substantial portion of Africa’s payment infrastructure is subtly dependent on one entity.

What could go wrong?

It turns out a lot.

Death by a thousand cuts: Everything was chugging along nicely, millions of consumers across Africa buying as usual until they couldn’t.

Multiple fintech startups informed their users that they would no longer be able to access their virtual USD cards, with some going as far as giving a timeline for restoring services.

Suddenly, users had to find other ways of paying for the products and services they loved.

Unfortunately, because most of the landscape is powered by Union54, some users had to return to their local banks.

What caused this?

Chargebacks fraud.

Chargeback fraud is when someone purchases a product or service and then tells their bank they didn’t – to get a refund. 

Make it relatable: Someone uses a stolen dollar card to purchase on Aliexpress. The card owner gets a notification and contacts the card company to inform them that they didn’t authorise the transaction and their card was stolen.

The card company refunds the card.

While the situation seems to have been resolved, here’s what happens:

  • Payment is initiated with the card, and Union54 facilitates the payment.
  • The user requests a chargeback.
  • The user gets their money back.
  • Union54 still has to pay transaction fees.
  • The merchant reports to the card company (for example, Mastercard).
  • Union54 gets penalised.

While the circumstances could be different, this is what happens.

It got so bad that in a meeting with Union54, Mastercard reportedly declared that “never in their history has there been such frequent instances or cases of card fraud from this region.”

As a result, multiple merchants like Meta, Google, and Aliexpress dealing with chargeback fees contested claims, reporting Union54’s Bank Issuing Number (BIN) to Mastercard, leading to its suspension.

To quantify this – Union54 co-founder and CEO Perseus Mlambo recently stated that over $1.2b worth of fraud was attempted with their cards.

Transaction declined, Union54 pays: Chargeback fraud isn’t alone in this. 

Aside from Mastercard, Union54 has various partners they rely on to process transactions. Because of this, even if a transaction fails, they still have to pay their suppliers.

According to Mlambo, Union54 had to pay almost $500k due to declined transactions during the height of the chargeback fraud.

Almost out of business: Due to chargeback and other types of fraud, Union54 almost shut down.

Thankfully, they’re back on, and they’ve made changes.

Fees & bans: With Union54 back on, fintechs across Africa have started charging fees for declined transactions and altogether banning users whose cards are declined a certain number of times.

For example, Chipper Cash debits a non-refundable amount of NGN500 or GHS5 from Naira/GHS Chipper wallets for every transaction that declines due to insufficient funds.

On the other hand, Payday charges a $1 fee for declined transitions due to insufficient funds.

Platform risk, industry risk: Union54 is a net good for the ecosystem. But are we too dependent on them?

On the one hand, they’ve powered the democratisation of payments, allowing millions of consumers across Africa to access the best products and services the world offers; they’ve allowed us to partake in the global economy.

On the other hand, however, their suspension brought it all down.

While everything seems to be back to normal, albeit with some changes, the fact is that the ecosystem is far too dependent.

Unfortunately, this is of no particular fault of their own.

Final thoughts: Do what they must – the rate of chargeback and other kinds of fraud keeps increasing across the continent. 

The only way to ensure we don’t have another cataclysmic meltdown is for the industry to develop better fraud detection, prevention and KYC technology.

We’ll have to innovate ourselves out of the problem.

Thanks for reading! We’d love to hear your thoughts about this week’s issue.

Please respond directly to this email or find me on Twitter @fatuogwuche 🙂

And follow us on Twitter @bigtechthisweek.

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