Debit Cards, Once A No-Brainer For Africa’s Hottest Fintechs, Turn Nightmare

For the past few years, Africa’s most promising fintech startups jumped headfirst into the world of debit cards. It seemed like a no-brainer. Partner with global payment giants like Visa and Mastercard, issue virtual and physical cards, and empower a new wave of African consumers to transact seamlessly online.

But things have taken a sharp turn lately. One after another, these fintechs are rethinking or outright quitting the very card services once heralded as a plus to their business models.

The latest fintech to make this strategic shift is Rise, a Nigerian investment startup notably in the news of late for completing a couple of acquisitions. However, Rise announced it would discontinue its virtual card services by September 30, 2024.

The reasons? The same challenges plaguing other fintechs: fluctuating exchange rates, unreliable card providers, and the rising costs of maintaining these services. In a message to its users, Rise highlighted that the pressures of exchange rate volatility and delays in issue resolution made it hard to continue offering the service.

This isn’t the first time a Nigerian fintech has stepped back from debit cards. Earlier this year, Carbon, one of the country’s leading neobanks, pulled the plug on its debit card operations, raising eyebrows across the ecosystem.

Addressing the nixing of the card product in a witty Substack post, co-founder Ngozi Dozie explained the move as part of a strategic reflection, hinting that the high operational costs, largely denominated in US dollars, were unsustainable. “With the benefit of hindsight,” Dozie mused, “I question why practically all neobanks are pushing cards or even getting into it.”

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For many of these fintechs, debit cards initially seemed like a logical extension of their mission to broaden financial access and strengthen appeal. Carbon, for example, launched its debit card service in June 2021 through a five-year partnership with Visa, aiming to provide customers with virtual and physical cards for seamless transactions across Africa.

The initiative was well-received, but the reality of running card services soon clashed with financial sustainability. In his commentary, Dozie questioned whether issuing debit cards was the right strategy for fintechs like Carbon. “If I had done the analysis… I don’t think I would have been that gung-ho about pushing a strategy to provide consumers with their fifth debit card,” he reflected, alluding to a lack of real differentiation in an oversupplied environment.

The economics of running card services in Africa are increasingly being scrutinised. Tunde Adewole, co-founder of Y Combinator-backed Bridgecard, told TechPoint last year that chargeback rates—where users dispute transactions—are a significant challenge.

Mastercard and Visa impose a 1% chargeback rate, but many African fintechs experience higher rates, resulting in extra costs. Adewole noted that these schemes also charge fees for declined transactions, which can range from USD 20 to USD 100. When coupled with the challenges of currency volatility and the heavy reliance on foreign exchange, the economics start to look less appealing.

On his part, Dozie reflected on the unsustainability of Carbon’s card business, citing the high fixed costs of card operations, which were exacerbated by dollar-denominated expenses. He also speculated that low disposable income and infrequent card use compared to Western markets may have made the economics less favourable. The fintech exec suggested that if one were to calculate the unit economics of running card services and compare fintechs like Carbon to traditional banks, the income potential for fintechs would likely fall short, raising questions about the long-term viability of offering cards.

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Some fintechs, like Payday, have responded to these challenges by tweaking how they offer card services. In 2023, Payday, which Bitmama later acquired, warned users that their cards would be terminated if transactions were declined due to insufficient funds. Similarly, Chipper Cash announced that it would begin charging a NGN 500 non-refundable fee for transactions declined due to insufficient funds—a clear indicator that fintechs are shifting from a “growth-at-all-costs” mindset to one focused on sustainability.

Union54, a Zambian fintech, also ended its virtual card services in 2022, citing chargeback fraud as a major factor. The startup found itself facing unsustainable losses due to fraudulent chargebacks, forcing it to halt operations and plot another path with its new product ChitChat. In a recent interview, Union54 CEO Perseus Mlambo told WT that ChitChat eschews the pitfalls that plagued the previous card business.

For fintechs still offering cards, such as Kuda, Moniepoint, and others, they’ve had to strike a balance between cost management and customer satisfaction. Some have opted for local alternatives like Verve, which helps sidestep the dollar-denominated costs of global card schemes like Visa and Mastercard.

While the discontinuation of card services has prompted speculation about these companies scaling down, fintech founders like Dozie argue that such moves should be viewed through a different lens. “The paucity of failure stories is actually a sign of a lack of experimentation,” Dozie remarked, urging observers to resist framing every service shutdown as a sign of distress. Instead, he suggested, this shift reflects a broader strategic realignment as fintechs reassess which products offer the most sustainable value in a challenging economic environment.

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The operational costs tied to debit cards—particularly those denominated in foreign currencies—have made fintechs rethink their priorities. The Nigerian naira’s depreciation has only exacerbated the issue, making it increasingly expensive to maintain services tied to the US dollar. In his post, Dozie revealed that Carbon’s card operation bill was denominated in USD, a major factor behind the decision to exit.

In the face of these challenges, some fintechs are pivoting. While cards may have initially helped attract users, they’re now seen as costly and inefficient for businesses with smaller margins or a more localised user base. For fintechs like Carbon, the decision to halt cards is part of a broader move to focus on products that align with long-term sustainability. Rise, too, is likely to focus on its core investment products as it navigates the shifting terrain.

The honeymoon period for African fintechs offering debit cards seems to be over. The strategy that once appeared obvious now seems fraught with challenges, from high operational costs to chargeback fraud and currency volatility. As these startups reassess their approach, it appears they are pivoting away from costly services in favour of more viable long-term offerings.