African fintechs suspend virtual dollar cards after surge in Union54 chargeback scam

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Last Friday Barterthe consumer app of Africa’s most valuable startup, Flutterwave, has informed customers via email that they will not be able to access its virtual dollar card service from July 17th. Consequently, customers will not be able to create new virtual dollar cards, fund existing ones, or make online and in-store payments and purchases with them.

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Subsequently, other African fintech companies such as Eversend, KlashaBusha, GetEquity and Payday sent out identical messages with different deadlines between July 17 and 18. They attributed the virtual dollar card service disruption to an update from a card partner, which turned out to be Union54, without giving an exact renewal time.

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This April, when we talked about Union54, whose API allows companies to issue debit cards to their customers and employees without the need for a bank or third party processor, he just raised seed extension, bringing the total seed round to $15 million (both rounds led by Tiger Global). We have other covers here as well as here.

The startup plays an important role in the development of the African fintech space through the issuance of cards. As part of its Mastercard Principle membership and Africa’s first fintech, Union54 acts as an “issuing bank” and can issue debit cards (physical and virtual). But in May, Union54 began experiencing some operational issues with its product, resulting in a temporary suspension of its Bank Identification Number (BIN), the first four to six digits on a payment card that identify the card issuer.

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According to a memo sent to customers in May and obtained by TechCrunch, Union54 said that while some of these issues have been resolved, some remain. And as the company searched for solutions, it became apparent that “there were some fundamental obstacles for Union54 operating a long-term and profitable card issuing product, mainly due to our partner’s commercial inflexibility and inability to quickly implement the technical solutions needed to solve the operational problems that we faced.”

Sources told TechCrunch that the main problem Union54 has faced since launch has been chargeback fraud. Here, cardholders claim they did not initiate purchases before proceeding to dispute the transaction, file a complaint, and contact the bank — in this case, Union54 — that issued the debit card for a chargeback. If Union54 deems the claim justified, it will remove the transaction amount from the merchant’s account and return it to the cardholder.

An additional note recently sent by Union54 to its customers confirms which sources and the local technical been told about these chargebacks. “Since we launched, there has been a steady increase in fraud related to our Bank Issue Number (BIN),” the memo reads. “During one of our conversations with Mastercard, they stated that never in their history had there been such frequent cases or instances of card fraud from this region.”

Upon further investigation, Union54 found that cardholders are increasingly trying to scam merchants by demanding chargebacks after their orders have been fulfilled. According to Union54, many cardholders have also tried to make purchases with blank cards. Another likely scenario, which Union54 did not name, could be the use of cards by fraudsters to complete transactions without the knowledge of the original cardholders.

Merchants who bear the brunt of the chargeback fees that could potentially affect their bottom line can dispute cardholder claims and ask the issuing bank to cancel the chargeback. And that’s what international sellers like Facebook, Google and AliExpress have done; in addition, they informed Mastercard of the Union54 BIN, which led to the suspension of its number.

First, Union54 decided to stop authorizing card payments on June 16th and cease operations by June 30th. The two-week deadline was to “allow card withdrawals and the return of remaining floating deposits, as well as provide our customers with access to any user, card or transaction data required for your ongoing operations.” In the first memorandum, Union54 stated that its API would no longer be available from July 1st. However, fintech pushed back the shutdown to July 18 as Mastercard, which requires merchants to maintain chargeback rates of less than 1.5% of transactions, Union54 said. which also doubles as an acquirer, an ultimatum to improve its processes.

In a subsequent memorandum, Union54 explained that the company was unable to remedy the situation despite the extension. Union54’s efforts “were deemed insufficient by Mastercard” as customers’ virtual dollar cards failed more frequently, disrupting the customer experience, the memo said.

However, Union54 hopes to get a decision soon. Fintech said it will work with its partners, merchants and Mastercard to restore service to its cards within the next 6-8 weeks.

The rest of the note read:

With regard to relatively new market innovations such as ours, we understand that we will encounter such problems from time to time. We want you to know that we did our best until the last minute to avoid this, but unfortunately it was not possible to fix it on the fly. Please accept our most sincere apologies for the impact this has had on your business and rest assured that the card service will come back better and stronger. The USDC wallet infrastructure and USDC international money transfer service to 79 countries are still fully functional. In the next few days, we will be adding local currency payout endpoints in 25 countries across huge trade corridors across Asia (China), Europe and Africa.

Some industry analysts say this event calls for more thorough card issuance KYC/AML compliance due diligence, as inconsistent due diligence on cardholder claims could lead to more fraudulent activity.

“It [The news] did not come as a shock to those who play according to the huge scam activities in space. Suppose a card scheme raises concerns that a lot of fraudulent activity is taking place in the region. In that case, you as a provider would probably want to exit the markets,” said Lanre Ogungbe, co-founder of Identitypass, a Nigerian digital compliance and security company that provides seamless identity verification solutions for African businesses.

“KYC is not AZ of security checks, but what it does is track down fraudulent transactions. And for many fintech companies in the region, we seem to focus more on aesthetics than compliance and security.” The report also comes at a time when various allegations of fraud have rocked leaders as well as companies in the region over the past few weeks.

Over the past couple of years, virtual dollar debit cards provided by fintech companies have proven to be a lifeline for many Africans and have replaced local alternatives from banks whose cards have transaction limits. With these cards, they can make international online transactions on platforms such as Alibaba, Google, Amazon, Netflix, and Spotify. Therefore, it is not difficult to understand why the customers (individuals and businesses) who had to rely on these virtual cards created on the basis of the Union54 back end expressed their dissatisfaction on social networks after the news. Many began to look for alternative options, including Sudo Africaanother card issuing platform and other fintechs that claim to be unaffected by Union54 downtime (as a result of using a different provider), such as Chipper Cash, Mono and Bitmama.

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