There’s a huge demand for virtual cards in Nigeria, and many fintechs are ready to supply. Fintechs are finding out the hard way that providing virtual cards also means dealing with expensive chargebacks.

Ask anyone and they’ll tell you: international payments in Nigeria–and much of Africa–are a pain. A self-inflicted FX crisis in Nigeria has seen the Central Bank place monthly limits on international payments. Every Naira card user can only pay $20 per month. But people need to pay for way more than that, creating a business case for fintechs to offer virtual cards that let you make international payments with no limits. 

The appeal of virtual cards is that they make FX payments easy and also help people sidestep the bank charges that come with domiciliary accounts.  For fintech startups, it’s a no-brainer. Virtual cards are a low-hanging fruit and a decent way of acquiring customers. Most of the work it takes to issue a virtual card is done by partnering with issuers like Visa. 

But virtual cards are difficult businesses. Every now and then, we get a glimpse into some of the more difficult parts of offering what seems to be a simple service. Because many Nigerian fintechs are reliant on foreign card issuers, they’re at their mercy. So service downtimes and shutdowns are common, and you’re likely to hear a lot about chargebacks. 

Chargebacks are a big problem for fintechs

Chargebacks happen when customers request the return of their monies after transactions have been completed, usually because they were unable to access the service or product they paid for. But fraudulent players often attempt to get their cash back even after obtaining the service, creating problems for fintechs in the process. 

In March, the CEO of Union54, a fintech startup whose APIs allow other companies to issue physical and virtual dollar debit cards, gave an uncharacteristically frank interview to TechCrunch. The publication quotes him as saying, “We noticed a lot of fraud being attempted on our platform, which we detected and stopped. What people were trying to do was effectively use funds that they didn’t have…they were trying to use the cards for over $1.2 billion of attempted fraud.” Union54 eventually paused its card-issuing business, leaving many other fintechs that depended on them for card issuing in the lurch. 

In the last week of April, most Nigerian virtual card issuers deactivated their services. The root cause again was traced to Mastercard’s displeasure with the increasing frequency of chargebacks in Nigeria. (Mastercard requires merchants to maintain a chargeback rate of less than 1.5% of transactions).

“Nigeria is a high-risk market for virtual card providers. It’s so bad that global providers like Mastercard have to constantly shut us down. Many users of virtual cards here have specialised in cashback fraud, lying to fintechs and requesting their money after successfully obtaining a service online. Others exploit the time gap between card payments and the actual debit to withdraw their money and escape payment. It’s just a big mess for us,” says an anonymous staff of an African-focused fintech with virtual card operations in Nigeria. 

Damilola Robert, a growth marketing manager at Bitnob, another African fintech that provides virtual dollar card services shared that vendors affected by chargeback fraud and failed transaction attempts kept reporting to the likes of Mastercard until something had to be done about it; including the recent 7-day switch-off that left thousands of Nigerian dollar card users in the lurch.  

Fintechs are taking a stand

For the affected fintechs, chargebacks mean more operational expenses because the issuer charges a fee even for declined transactions. Fintechs initially put up with these costs over the years as they strived to gain market share. But in an environment where capital efficiency has become a watchword, those costs are being passed on to customers. Chipper Cash’s recently introduced a ₦500 ($1.09) fee for transactions declined due to insufficient funds. 

“We have unfortunately had to introduce the decline fee on our Chipper Card product, as a result of the high card network and third-party provider charges for these types of transactions,”  Tefiro Serunjogi, Chipper Cash’s Head of Consumer Products, said in an email response to TechCabal.

Several other fintechs are taking steps to limit fraud cases and costs arising from transactions. Robert told TechCabal that some startups will charge customers about $0.5 for such declined transactions, while others still looking to attract customers are taking a milder approach: creating reminders for customers to top up and deactivating cards after a maximum of three failed transactions.  

“Many virtual card providers have also cut down the possible number of virtual cards each customer can obtain on their platform. They realised that giving a fraudulent customer five cards was tantamount to strengthening him to commit fraud in multiple volumes,” Robert added. 

Such moves by fintechs also underscore a determination to spend responsibly, stay EBITDA positive and remain compliant with their third-party providers, says Christian Bwakira, the CEO of Global Technology Partners, an MFS-Africa subsidiary that provides fintechs with the infrastructure to issue virtual cards. 

Can collaboration save the day?

The common issue with chargeback fraud is that perpetrators are able to replicate their tricks and milk multiple startups connected to a common provider. This was the exact trend in Union54’s shutdown. To avoid this, fintech startups can leverage the power of collaboration by designing systems that restrict fraudsters from jumping across platforms, especially as they often do so with a unique ID. 

This solution may bear some semblance to Project Radar, the move by 13 African fintechs—including Flutterwave—to collaborate in an attempt to check repetitive fraud. However, data privacy concerns remain associated with these kinds of solutions. But when push comes to shove, and a handful of fraudsters are consistently shutting down an essential service for a whole country, then maybe a concession—or at least some considerations—have to be made. 

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