Last week, Nigerian fintech Carbon suspended its debit card service, which it launched in 2021. It had informed users of this development in May, adding that it was in the market for a new card provider.
The last time I wrote about cards, the focus was on virtual card providers who were struggling under the weight of chargeback fraud and insufficient funds.
At the time, I queried whether a local card scheme was the solution to the woes faced by these fintechs. But while Carbon has promised users virtual cards for some time, it has never really launched any, as it focused on physical cards.
Although many fintechs have figured out a way to reduce cases of insufficient funds, there's still the tiny (read major) problem of chargebacks. To be clear, Carbon has not stated this as its reason for shutting down, but this article by CEO Ngozi Dozie raises a few questions.
While he does not explicitly state the rationale behind this decision, we can make some informed assumptions.
Less than ten years ago, card payments were rare in Nigeria, but a lot has changed about payments in Nigeria. Today, if you live in Nigeria's urban areas, you're more likely to whip out your card at the cashier's stand than you are to pay with cash.
For a long time, cards were exclusively offered by commercial banks who made customers fill out forms and stand or sit for a couple of hours before they could get one. Ever the disruptors, fintechs made that process easier. My first Carbon card was delivered to my doorstep, but that's as far as the comparison goes.
I've had a bank account and debit card for a few years, and not once has my bank sent me an email telling me they were pausing or suspending card services, so what are they doing differently?
Why have fintechs struggled with cards?
Much of the struggles that fintechs face with cards boils down to the cost of card operations, according to several industry experts.
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"If anybody was shutting debit cards down, the reason anybody would be doing that is that cost is high and the revenue opportunity is hard. Many of these cards cost dollars. Meanwhile, there's no revenue to be earned [in dollars]," Adedeji Olowe, CEO of Lendsqr tells me.
Thanks to Central Bank of Nigeria (CBN) regulations, financial institutions have gradually reduced how much customers can spend on purchases denominated in foreign currency. Like most crises, it created an opportunity to provide virtual cards, which many fintechs capitalised on. However, that has not gone well for most players.
But before we get to the point where users begin to use cards, let's take some steps backward.
A fintech needs at least a microfinance licence to issue physical debit cards. However, the cost of acquiring one is prohibitive and out of the reach of many players.
There's also the cost of producing and distributing these cards. Unlike banks, many fintechs opted to provide cards for free, where banks charged approximately ₦1,000. Interestingly, fintechs such as Carbon, Moniepoint, and OPay that possess licences have opted to charge users for providing a card.
Freebies hurt fintechs
To differentiate themselves and attract users, fintechs have typically neglected to charge customers some fees that banks charge, including card maintenance and transaction fees. In fact, zero card expenses were a major selling point for many fintechs. But that position changed in the past two years as funding dried up.
Olowe notes that regulation has also played a role in how much financial institutions can earn from card services. The cost of providing a card to users, for example, is capped, while using a card for withdrawals only attracts charges (₦35) after the third withdrawal in a month and only applies when cards are used on another bank's ATM.
So why do fintechs struggle where banks appear to be cruising?
Financial viability of card services for fintechs
According to Olowe, banks operate on a much larger scale and can offset the expenses incurred by their card operations with revenue from other business arms. Fintechs, on the other hand, do not have the same luxury.
Despite providing seamless financial services, they're still not as large as most traditional financial institutions, have largely not attained the stickiness that most banks have, and still remain a secondary financial institution for many.
"I can have ₦10 million in my Carbon card and I can have ₦500,000 in my UBA card but UBA is going to make more money from that ₦500,000 than Carbon is going to make from the ₦10 million," a former product marketer at a Nigerian fintech notes.
"If I have a Carbon card, I'm not using that card for anything. I'm probably just putting money in my Carbon account when I'm taking a loan and I want to repay but my UBA card is one I use every day. And it is per transaction that UBA makes money," he adds.
Yet, while providing card services for customers may cost more than fintechs make, he points out that a permanent suspension is hardly possible.
"At some point in the future, they'll definitely bring it back because Nigeria is still heavily dependent on card transactions."