Union54 fraud claims dim Africa’s cross-border payment

The recent fiasco affecting Union54 is seen to be posing an existential risk for Africa’s effort to remove frictions from cross-border payment and impacting the revenue of startups issuing virtual cards including Barter by Flutterwave, PayDay, Busha, Vella Finance, and Uganda-based Eversend, BusinessDay’s findings show.

On July 18, Union54 sent a message to its partners on the shutdown of its virtual cards, saying that despite its best efforts, cards would stop working on that day.

“We have a number of upgrades and work streams we will be implementing which might take us about six weeks before we can resume service again,” it said. “We had hoped to avoid this hiatus but it had proved impossible to do so. As such, please accept our apologies for the impact on your business and know that we will back with a stronger and more resilient product.”

Prior to this notification, Union54 said it discovered that end-users of its issued cards were using it to perpetrate frauds on other payment gateways, which were raising recurring flags with their card scheme, Mastercard.

Also, many cardholders tried to make purchases with empty cards, and fraudsters used some cards to perform transactions without the knowledge of the original cardholders.

Despite the development, Perseus Mlambo, its CEO, said in a tweet that the company had not left certain countries, gone bankrupt, or got hacked.

“We are well capitalised and are committed to serving our customers. Notwithstanding, the pause on service is part of the necessary compliance audit. Once the audit is completed, we’ll be live again. This should ideally take no more than two weeks,” it said.

Union54 is a Zambian startup that makes it seamless, reliable, and rewarding to issue virtual dollar cards in Africa. Before it was founded in 2021 by Mlambo and Alessandra Martini, Flutterwave was issuing Visa cards before it switched to Mastercard.

According to reports, startups who had previously issued virtual Visa dollar cards provided by Barter said they were not reliable enough, hence, they switched to Union54.

The founding of Zazu, a neobank that needed to issue debit cards to enable its users to spend their money anywhere, by the same founders led to the birth of Union54, with the purpose of allowing them to issue and acquire card transactions, making the issuing capability available to other African fintechs.

With Union54’s application programming interfaces (APIs), fintechs are able to issue debit cards without worrying about all the complexities of the card business.

According to the company, it takes care of the required bank sponsorship needed to work with the selected card scheme as well as facilitates transaction processing and settlement.

David Adeleke, founder of Zeeh Africa, said Africa’s payment infrastructure has a lot to put right.

He said: “An infrastructure is needed to facilitate the smooth operation of a continent-wide marketplace starting with the dire need of access to forex.

“Since we are talking of Africa at large here, I strongly recommend the African Development Bank could set the ball rolling with talking to stakeholders in the continent on the need to have a common/uniform currency where we don’t have to go through the hustle of sourcing for or depending on dollars before we can carry out trades or transactions within the continent. We have both the volume of people and in transactions.”

For Flutterwave, the suspension is due to “an update from the company’s card partner” whose API Flutterwave uses to offer dollar cards to Africans.

“One would ordinarily have thought that a company like Flutterwave, being one of the most valuable fintech startups in Africa, would be a principal member of either Mastercard or Visa card but unfortunately not so. We need more fintechs to invest, build and do everything possible to have direct integration with the international card companies to drive global commerce and cross-border payments in Africa,” Jacklyn Okafor, MD/CEO of eTOP, said.

Read also: Flutterwave to shut down virtual dollar card service

Since Union54 has a stake in quite a number of African infrastructural and cross-border payment startups, experts say the current virtual dollar card outage reported by some fintechs in Nigeria is believed to be a result of the investor’s downtime.

In October 2021, Union54 said over 50 companies were currently in its API sandbox environment. Four of them, namely Flutterwave, PayDay, Plumter, and Bitmama, were live. Union54’s clients include existing startups and new startups “founded on the basis of Union54’s availability”, Mlambo said.

However, experts say one of the major challenges faced by players in the card issuing sector is a high rate of chargebacks and fraud. A chargeback is a dispute raised by a customer when they didn’t get value for a transaction. Fraud occurs when someone tries to use a card that they are not authorised to use to authenticate a transaction.

“Chargeback fraud has been a major headache for most financial institutions, not just fintechs and one thing that seems to be a major issue is identifying the perpetrators of these fraudulent acts,” Okafor said.

Adeleke said the best way to solve this challenge starts by Know Your Customer and anti-money laundering compliance checks in the card issuing space.

“Also, there is actually a lot of disparity in carrying out due diligence for cardholder chargeback claims which in turn invokes more fraudulent activities,” Adeleke said.

Andrew Ali, former president of Africa Finance Corporation, thinks what Union54 needs is to get its compliance status in place.

“I suspect they had a lot of flagged transactions and need to get some compliance stuff in place before they can regain access. Probably not an ‘audit’ in the typical sense,” Ali said.

With Union54’s inability to bridge the gap of payments in Africa’s payment industry, many have begun to switch to alternatives including Sudo Africa.

“Similarly, fintech companies can actually explore the option of registering their business in the US, obtain their bank identification number or Tax ID, and integrate other payment companies like Paypal and Stripes for virtual cards,” Adeleke said.