It's almost impossible to think about it today but there was a time when standing in long queues to withdraw cash was the norm for Nigerians because online payments were not available. That card payments are now common is thanks to the pioneering work of companies like Interswitch and Unified Payments.
Riding on the infrastructure provided by these payment service providers, a new wave of startups has been built to facilitate transactions for those who need to make payments on international platforms. However, since 2022, local commercial banks have revised card limits for international transactions causing fintechs that provide virtual dollar cards to quickly gain market share.
Where banks have charged a card issuing and maintenance fee, these fintechs have shelved card issuing fees in favour of earning from transaction fees. That all seems to be coming to an end as frequent cases of chargeback fraud and declined transactions have forced startups like Chipper Cash and Payday to start charging customers.
In search of solutions, some experts have spoken of the need for a local card scheme that considers the peculiarities of operating in Africa. I explore this claim and its merits in this article.
Defining the problem
In an earlier article, I looked at the challenge that fintech startups have faced in issuing virtual dollar cards, namely chargeback fraud and declined transactions caused by insufficient funds.
For those who may not have read the article, I'll attempt a brief definition of both terms, but you should still read it.
Chargeback fraud occurs when a customer disputes a successful transaction which they initiated. For example, imagine Tolu purchases a pair of shoes from Amazon and pays using a card he got from a fintech in Nigeria, but after receiving the shoes, he disputes the transaction with his card provider and requests a refund.
Declined transactions due to insufficient transactions are easier to understand since almost every banking customer has experienced it. For another example, imagine you wanted to sign up for a free trial of Skillshare and your card details are requested. Knowing you may forget to cancel your subscription, you decide to use a virtual card which you only fund when you need to.
While this may not look like much, card providers are charged for such transactions. At scale, this amounts to significant costs for the provider, hence the decision to start charging for failed transactions.
The case for a local card scheme
As fintechs scramble to solve these problems, a number of solutions have been mooted. One is the creation of a local card scheme to rival Mastercard and VISA, the most popular card schemes on the continent. The CEOs of Eversend and Union54 hinted at this following the changes made by Chipper Cash and Payday.
"The solution to Africa's virtual card (payments) problem is building our own payment network," Stone Atwine, CEO of Eversend wrote on Twitter.
Perseus Mlambo of Union54 added, "Glad to see the conversation regarding declined transactions and liability. In my view, the ultra long-term view should be the creation of Africa's own Visa and Mastercard."
The only problem is, an African card scheme already exists in the form of Verve, Interswitch's brainchild. Speaking with Techpoint Africa, Abiodun Adebisi, Interswitch's Lead for Verve Digital, explained that Verve provides physical and virtual cards and is building partnerships that increase its international acceptance.
"Verve offers both virtual and physical cards that facilitate payment for an increasing number of international services in local currency, and we have made significant progress in that aspect, having achieved merchant acceptance with platforms such as Flywire, Facebook, Microsoft, Uber, Showmax, Netflix, and Amazon Prime, to mention a few major merchants. We continue to drive such partnerships that provide users in Africa with convenient opportunities to access global services in local denominations," she said.
Already, OPay issues Verve cards and Interswitch says its volumes are larger than that of some commercial banks. However, Adebola Adefarati, Head of Marketing at SeerBit, adds that Verve's limited acceptance internationally presents challenges.
Can an African card scheme limit chargeback fraud?
Will a card scheme put an end to these challenges? Francis Ogbuka, Chief Sales Officer at Zone, is emphatic in his response, pointing out that while local card schemes will provide an alternative, these challenges are not necessarily problems with the card scheme.
"These challenges aren’t necessarily a scheme problem, even though I do think an African card scheme that has established global acceptance either directly or via a partnership, may offer other alternatives to African fintechs at managing this," he says.
Seerbit's Adefarati agrees, "It can be a good step in the right direction in terms of reducing processing costs, but it doesn’t address the core problem which is acceptance and unlocalised payment operations."
Meanwhile, Adebola Adeniran, Chief of Staff at Moni, has a slightly different opinion. An African card scheme, he says, will cater to the African nuances.
"For the most part, yes, an African card scheme could solve the problem. There’ll be fewer intermediaries when processing a transaction and the card schemes will cater to the nuances of the African market."
Ogbuka and Adefarati's scepticism stems from the fact that a local card scheme will likely employ a similar business model whereby card issuers are charged a fee for every transaction they process. Therefore, without fixing the twin issues of declined transactions and chargeback fraud, a local card scheme will only offer an alternative.
With international transactions often requiring customers to pay in dollars, Adefarati argues that the business of using virtual cards for international payments isn't sustainable.
"The virtual card market for international payments exists simply because of the payment acceptance gap created by international companies having their African payment operations primarily in non-African currencies. This means people have always sourced foreign currency to make payments to them. Until the issue of acceptance is addressed and the foreign businesses localise their payment and currency operations like Netflix, Google Play, and others have done, this gap would continue to exist."
Stricter measures required
Despite having different opinions about the necessity of a local card scheme, most of the experts we spoke to agree that fintechs need to employ stricter measures to combat these challenges.
Adefarati cautions that fintechs do not sacrifice strict KYC regulations for customer acquisition, while Ogbuka suggests that fintechs have round-the-clock transaction monitoring and alert systems.
The importance of conducting adequate KYC is emphasised by Smile Identity's 2022 State of KYC report. The report states that identifying potential fraudsters before they get access to a startup's system is invaluable as startups could suffer significant losses afterwards.
"The short-term cost of checking biometrics prior to transacting almost always outweighs the long-term cost of identifying and offloading fraudsters once they have access to your systems," it says.
For Adebisi, collaboration among fintechs is necessary, even as he argues that merchants can aid the fight by insisting on address and card verification from customers.
"There certainly are opportunities for all players within the ecosystem to work together to enhance processes and controls to better mitigate the incidence of chargeback frauds, as separate from insufficient funds issues. Enhanced payment verification and security play a significant role in tackling chargeback fraud.
"A lot of responsibility rests with merchants to ensure adoption of AVS and CVV (address and card verification, respectively) as well as fraud detection tools and services," he says.
Semafor Africa recently reported that some African fintechs were collaborating to build a blacklist for fraudsters. However, as the report mentioned, many fintechs are still unwilling to share their customer data which could present a stumbling block in the fight against fraudsters.
An escrow system that verifies a customer's claim is another solution Adeniran proffers.
"I believe that we need some sort of an escrow service that actually works. A service that can truly verify that a user got value for their purchase rather than it being the word of the merchant against the word of the customer."