Union54 fraud allegations cloud cross-border payments in Africa
The recent fiasco affecting Union54 is seen as posing an existential risk to Africa’s efforts to eliminate cross-border payment frictions and impacting the revenue of virtual card-issuing startups including Barter by Flutterwave, PayDay, Busha, Vella Finance and Eversend, based in Uganda. , show the findings of BusinessDay.
On July 18, Union54 sent a message to its partners about stopping its virtual cards, saying that despite its best efforts, the cards would stop working that day.
“We have a number of upgrades and workflows that we will be implementing, which could take us around six weeks before we can resume service,” he said. “We had hoped to avoid this disruption, but it turned out to be impossible. As such, please accept our apologies for the impact to your business and know that we will come 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 fraud on other payment gateways, which raised recurring flags with their card scheme, Mastercard.
Additionally, many cardholders have attempted to make purchases with empty cards, and fraudsters have used certain cards to complete transactions without the knowledge of the original cardholders.
Despite the development, Perseus Mlambo, its CEO, said in a tweet that the company did not leave certain countries, go bankrupt or get hacked.
“We are well capitalized and committed to serving our customers. Nevertheless, the break in service is part of the necessary compliance audit. Once the audit is complete, we will be live again. It should ideally take no more than two weeks,” he said.
Union54 is a Zambian startup that makes virtual dollar card issuance seamless, reliable and rewarding in Africa. Before being founded in 2021 by Mlambo and Alessandra Martini, Flutterwave issued Visa cards before switching to Mastercard.
According to reports, startups that had previously issued virtual dollar Visa cards provided by Barter said they were not reliable enough, therefore, they switched to Union54.
The foundation of Zazu, a neobank that needed to issue debit cards to allow its users to spend their money anywhere, by the same founders led to the birth of Union54, with the aim of allowing them issue and acquire card transactions, making issuance capacity available to other African fintechs.
Using 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 bank sponsorship required to work with the selected card scheme and facilitates the processing and settlement of transactions.
David Adeleke, founder of Zeeh Africa, said payment infrastructure in Africa has a lot to do.
He said, “An infrastructure is needed to facilitate the smooth functioning of a continent-wide market, starting with the urgent need for access to forex.
“Since we are talking about Africa as a whole here, I strongly recommend that the African Development Bank set the tone by talking to stakeholders on the continent about the need for a common/uniform currency where we don’t have to go through the hustle and bustle of supply for or based on dollars before we can trade or transact on the mainland.We have both the volume of people and 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 normally think that a company like Flutterwave, being one of Africa’s most valuable fintech startups, would be a Mastercard or Visa card principal, but unfortunately that is not the case. We need more fintechs to invest, build and strive to have direct integration with international card companies to drive global trade and cross-border payments in Africa,” said Jacklyn Okafor, MD/CEO of eTOP.
Also read: Flutterwave to shut down virtual dollar card service
Given that Union54 has a stake in a number of African infrastructure and cross-border payment startups, experts say the current virtual dollar card outage reported by some fintechs in Nigeria is a result of the downtime of the investor.
In October 2021, Union54 said that more than 50 companies are currently in its API sandbox environment. Four of them, namely Flutterwave, PayDay, Plumter and Bitmama, were live. Union54’s customers include existing startups and new startups “founded on the basis of Union54’s availability,” Mlambo said.
However, experts say that one of the main challenges faced by players in the card issuing industry is a high rate of chargebacks and fraud. A chargeback is a dispute raised by a customer when they have not obtained value for a transaction. Fraud occurs when someone tries to use a card they are not authorized 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 with knowing your customer and anti-money laundering compliance checks in the card-issuing space.
“Furthermore, there is actually a wide disparity in performing due diligence on cardholder chargeback requests, which in turn invokes more fraudulent activity,” Adeleke said.
Andrew Ali, former chairman of Africa Finance Corporation, thinks what Union54 needs is to get its compliance status in place.
“I suspect they’ve had a lot of reported transactions and need to put 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 payments gap in the payments industry in Africa, many have started looking to alternatives, including Sudo Africa.
“Similarly, fintech companies can really explore the possibility of registering their company in the United States, obtaining their bank ID or tax ID, and integrating other payment companies like Paypal and Stripes for virtual cards,” Adeleke said.