African Fintechs Are Battling A Disturbing Virtual Cards Headache

By  |  May 7, 2023

Over the last weekend, a number of African fintech firms said their users would no longer be able to use virtual dollar-denominated debit cards for international online transactions. This card service, which has become popular among African consumers looking to make international payments, had been abruptly shuttered. Again.

Chipper Cash and Payday are among notable startups that pulled the plug on the service and the outage lasted for a short while over the weekend of April 28th before the fintechs got it back up. It was the latest case of what has become a periodic sudden suspension of virtual card solutions in Africa, after the problems at Zambian card issuing startup Union54 led to the withdrawal of virtual card offerings at Flutterwave, Eversend, Busha, Vesti, Payday, etc., in July last year.

Virtual cards enabling payments in dollars are popular with African online shoppers and digital content consumers because they are much easier to sign up for compared to dollar-denominated accounts with physical cards at traditional banks.

Such cards also help locals to find their way around stifling currency controls, such as in Nigeria where a worrying FX crunch has resulted in a measly USD 20.00 monthly limit on regular naira-denominated debit cards issued by legacy banks, or, in some cases, no service at all for international online payments via naira cards.

Locals who need to perform transactions like paying for streaming service subscriptions or a course on some online learning platform have come to rely on virtual cards which can be set up in minutes and allows up to USD 10 K monthly spend in some cases.

Rising demand for the service has, in recent years, sparked heightened efforts at several consumer-facing fintech startups and neobanks serving African markets; dollar-denominated virtual cards have become a profit point as companies compete by offering attractive deals while earning from fees and fx arbitrage. But it’s not without problems as providers have come to discover.

Following last year’s high-profile incident, Union54 put its struggles down to alarming levels of chargeback fraud which soured its relations with the global card scheme Mastercard, which had made Union54 an official Mastercard issuer in Africa, before nixing the partnership and ultimately crippling the startup’s business. Union54 had been powering the virtual card service of several African startups, so its troubles disrupted the service across several fintech companies.

Similar challenges have come to the fore given the latest virtual cards crisis. Once again, chargeback fraud, which entails requests for reimbursement on false claims of undelivered or unauthorised transactions, has been highlighted as the reason for the recent interruption of virtual cards at Chipper Cash and others.

Another issue that has been raised is tied to rising cases of declined transactions due to insufficient funds. This can either be due to customer oversight or a deliberate attempt by users with insufficient funds to game service providers that are unable to debit customers for purchases instantly by making repeated purchases which the providers are unable to deduct.

All these cause problems for African fintechs providing virtual cards as they often have to pay the card scheme out-of-pocket to make up for the discrepancies, regardless of what customers have been up to. It is with a view to tackling this problem that Chipper revealed a few days ago that a non-refundable fee of NGN 500.00 will now be charged to accounts that initiate transactions that ultimately fail due to insufficient funds.

Payday, a neobank unlocking global payments for Africans which recently closed a USD 3 M seed round on the back of a growth tear and is possibly in line for an acquisition in the coming months, has also announced that a USD 1.00 charge will henceforth be placed on accounts where transactions fail due to insufficient funds. And it’s expected that others would soon follow suit, though lasting solutions remain elusive even as the service is now functional once again.

09/05/2023 22:37 WAT: Update to the article to reflect that the virtual card service offered by Chipper Cash and Payday has been restored as of May 1st.

Featured Image Credits: Borderless

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