After chargeback fraud, Union54 CEO says fintech in Africa ‘isn’t a joke’

Image credit: Union54

Last July, TechCrunch reported that customers of several fintech apps could not access the virtual dollar card service that these platforms provided. In addition, customers could not create new cards, finance existing ones or make payments and purchases online and in store with them.

At the heart of this problem was chargeback fraud, which Zambian startup Union54, whose API allows companies to issue physical and virtual local and dollar debit cards to their customers and employees without needing a bank or a third-party processor, was fighting. The YC-backed startup, which had raised over $15 million from global investors including Tiger Global, served as the default card partner of 100 fintechs serving the region; Stopping the services affected many startups for weeks before they found alternatives.

The event, more than ever, highlighted the need for better KYC/AML compliance checks in the card issuing space (indeed fintech in general), as inconsistent due diligence for cardholder chargeback claims can invite more fraudulent activities.

Union54, as an official Mastercard issuer, underwent a compliance audit and expected to have the platform up and running in a short period of time, two months at best. However, it hasn’t, at least not yet; instead, it’s biding its time before re-entering Africa’s tough fintech market, where it intends to apply lessons learned from the event and its current nine-month hiatus, co-founder and CEO Perseus Mlambo told TechCrunch in a recent interview.

Mlambo spoke candidly about the problems Union54 had to contend with, how the company was at risk of a total shutdown, and why fintechs need to be more transparent about fraud exposure. Excerpts from the conversation below have been lightly edited for length and clarity.

TC: It’s no news that Union54 suffered from chargeback fraud; However, no detailed explanation is given. Can you share what happened?

Mlambo: A few days before the article was published, we noticed a lot of fraud being attempted on our platform, which we detected and stopped. What people were trying to do was to effectively use funds they did not have. And just to give you an idea of ​​how much fraud we stopped, they tried to use the cards for over $1.2 billion in attempted fraud. We did the numbers; this volume was 600 times greater than our typical daily volume.

So we provide API access to fintechs and they provide card access to their customers. One of the companies we worked with operated in a new region of the continent and because of the way they had set things up made them vulnerable to this fraud attempt. And what we saw was people trying to buy a particular crypto on a particular cryptocurrency site. So it might be a bit easy to identify quite quickly that this was very unusual.

How did Union54 deal with this issue with this said company?

We have several clients that use us, and one of the things we do is work with them and let them know that these things affect them too. So what we did with that company was bring it to their attention and say, “Hey, we’re seeing a lot of volume coming from your side. We highly recommend you take a look.” At first they were adamant that this was normal and part of growth; they were even shocked that we were surprised by the volumes coming in. But after a few hours they said, “You know what? Something is wrong.”

Ultimately, what ended up happening was that while the cards were being used, we were declining them. We would see a transaction come through and say there is no corresponding balance for this transaction, so we stopped it. And because we kept stopping all these transactions, it led to a deterioration of our overall product because sellers like Netflix, Google or Spotify would also write to us and ask us why we stopped all these transactions because it affected the business.

It got so bad that we just kept denying every transaction during this period using our automated rules, users kept retrying these transactions which lengthened the process of stopping this fraud.

So Union54 stopped all transactions, including from people who wanted to buy things from these international sites, because they happened during the fraud incident?

Yeah, and that led to another complication, which I think we were maybe one of the few companies that went through it. So every time a transaction is stopped or rejected by our rules or system, we still have to pay for that transaction because there are so many different parties involved in the life line of a transaction and we have to pay our vendors. To give you an idea, we had invoices of up to half a million dollars from canceled transactions at the peak of this activity.

We were of the opinion that perhaps one of three things was going to happen. Either we would use all our operating funds to pay for these fees and then run out of money, which is not good because our basic rule is to stay alive. Or that we would go back to these affected fintechs and say, “Hey, you owe us half a million dollars,” knowing they don’t have half a million dollars. Or we’ll say, “you know what, we’ll be able to get this back from our vendors to get these refunds later when we appeal.”

At the end of the day, we chose the third one and had to pay for these declined transactions with our funds. Afterwards, we told our investors that we didn’t think it was wise to continue using the product until we fixed all of these issues.

In retrospect, couldn’t Union54 have started the company(ies) that caused this fraud?

So we tried that. But what happened, and another thing we learned, was that as soon as we started this company, the attackers who attempted this scam would find out that we were enabling another fintech to issue cards and would try to go through them.

It was quite a sophisticated endeavor and ultimately kicking off a fintech wouldn’t have helped because this happens all the time with even global fintechs. I think it’s time we start having that conversation in Africa. Fintech in Africa is difficult and most stakeholders still pretend this is child’s play. They don’t talk about the real problems. And I think that by coming out and saying, “you know what, we detected fraud and we stopped it, it just gives confidence to other people as well because these things happen all the time.”

It’s a bold move to come out and share lessons learned because most African founders usually don’t like to talk about failures or, in this case, setbacks.

Honestly, when you go through it, it feels like the world is falling apart because you’re building something, and then suddenly you lose control and people start spreading rumors.

It’s also a bit of a wet carpet when the market you live and operate in is dragged through the mud. And I feel like that’s why a lot of people don’t talk about these issues because they feel like it would be a disservice to the whole ecosystem. And that’s one of the reasons we didn’t say anything at first. We also didn’t refute anything when the allegations came out because that meant that for some of our customers it was a very life-and-death situation where if we said anything, they had to fight what we said. So we just complied with our legal obligations, did right by our shareholders and then continued to build our new product, which can give us sustainability.

As for the new product, sources told me late last year that Union54 was working covertly with a few clients. What was the result of that process?

Since we work with card schemes, what we did in that period was exchange API access for about three fintechs to measure and make a case for us to get specific reimbursements from one of our vendors. And in order for us to be able to get that data, we needed to prove effectively, as a baseline, reopening access to the product and say, “on a typical day, this is what the chargebacks look like, and this is what transactions look like, and this is the impact of the fraud we had seen.”

By having these points of comparison, we can go back to our supplier and say, “Look, ultimately we want to develop a company that can help anyone anywhere in Africa to issue cards, and these are some of the things that we have learned ; for example we was able to determine that working with larger companies was inflexible because they take longer to settle disputes. We also found that we needed to address our KYC processes.

The scale at which Union54 operated was fascinating because we would find fintechs in each country and give them access to the API as they are regulated in that country and would do KYC themselves. And because of that, we were able to integrate over 100 companies and create solutions that work in Ethiopia, which at the time was opening up, as well as Zambia, a unique market where ID documents are laminated and you can’t easily scan them at using a phone camera.

But still, we needed to be able to serve customers all around, which affected us in the long run. Some fantastic companies have emerged in the KYC space, but mainly operate or service a niche geography. Last time we checked, there is not yet a company that can provide Cape to Cairo KYC database coverage. Hopefully by the end of next year we will have someone who can do that. And that would be a game changer.

We also have maybe two or three companies that issue virtual cards in US dollars. But there are still complaints about their services, which shows that a Union54 with better KYC processes is still needed because the problems have not gone away. The usefulness of Union54 is only getting much wider and people are still emailing us to ask when we will start issuing again.

Is there an answer to that?

We have been grieving for the last few months because it is never easy to lose anything. But then after that, we took heart knowing that we’re still well funded and we’ve had time to develop something that can last regardless of the shocks that are currently happening in the ecosystem. And in order for us to be able to issue again, we have made several adjustments there which we will launch with our next product.

Meanwhile, one of the other things we learned is that despite all the layoffs and devaluation news coming out, the fintech scene in Africa is still alive and there are a lot of great products being developed and a lot of great companies. Nevertheless, it will take some time before we have a mature ecosystem.