Global Courant 2023-05-12 17:47:44
A curious story is unfolding in Nigeria’s fintech scene.
It all started on an eventful Friday, April 28, 2023, when Payday, a well-known startup that offers virtual card services, sent an email to its users. The message contained a mix of reassurance and caution, informing customers of upcoming changes to their card services. While Payday promised a quick fix, Payday advised users to make sure they had enough money in their accounts to cover their card transactions.
Meanwhile, Chipper Cash, another prominent player in the Nigerian fintech arena, faced challenges of its own. The company announced a non-refundable fee of ₦500 for transactions declined due to insufficient funds. Payday and Chipper Cash were not alone in their struggle, as several other card providers struggled with the complexities of the landscape, leading some to temporarily halt their card issuing services.
The main culprit here is Nigeria’s turbulent economy. Everyone agrees: making international payments in Nigeria and other parts of Africa is a hassle. The Central Bank of Nigeria (CBN) created its own problem by imposing monthly limits on international payments so that naira card users can only spend $20 per month. But people have to spend a lot more than that. It thus opened up the possibility for fintech companies to offer virtual cards that enable unlimited international payments.
Virtual cards are attractive because they make foreign currency payments easy and help people avoid the banking fees associated with direct debit accounts. For fintech startups, it’s an easy decision. Virtual cards are easy to win and a great way to attract customers. Most of the work involved in issuing virtual cards is handled by partnering with established card issuers such as Visa.
But running a virtual card business is not without its challenges. Every now and then we catch a glimpse of some of the more difficult aspects of delivering what seems like a simple service. Since many Nigerian fintechs rely on foreign card issuers, they are at their mercy. As a result, service interruptions and stops are common, and problems with customers requesting refunds, known as chargebacks, are also common.
Chargebacks: the elephant in the room
Chargebacks create significant problems for fintechs. They occur when customers request a refund after completing a transaction, usually because they were unable to access the product or service they paid for. However, there are also fraudulent individuals who try to get their money back even after using the service, causing headaches for fintech companies.
In March, the CEO of Union54, a fintech startup that provides APIs to other companies for issuing physical and virtual debit cards, gave a surprisingly honest interview with TechCrunch. He revealed: “We noticed many fraud attempts on our platform, which we detected and stopped. People tried to use money they didn’t have… they tried over $1.2 billion worth of fraudulent transactions.” As a result, Union54 had to temporarily pause its card issuance business, putting many other fintechs that relied on them in a difficult position.
Mastercard has one policy (PDF) that requires issuers (in this case African fintechs) to limit chargeback rates to 1%. But the sheer number of fraudulent transactions makes it difficult to stay in that category. Meanwhile, these startups must pay chargebacks and card rejection fees to the card schemes — be it Mastercard or Visa — out of pocket. It doesn’t matter if the transactions in question arose from a customer’s false claim; someone has to pay them. Notably, sometimes it’s not even the customer’s fault as service providers can also cause failed transactions.
Still, fintechs want that burden off their shoulders. So they pass the cost on to the customers. This step should help reduce fraudulent transactions. However, regular customers, who outnumber the bad guys, get the short end of the stick.
This also points to how fintechs are gradually moving away from the ‘freebie’ model that has become popular in recent years. The race to acquire users led to several startups offering free banking services, but now the game is changing and survival is more important. Venture capital financing is no longer as cheap as it used to be, so companies need to be as financially efficient as possible.
However, chargebacks are clearly an issue that fintechs will need to think about more carefully. For now, simply charging customers for failed transactions may suffice. But fraudsters are getting smarter and service providers have not compromised on efficiency.
