Flutterwave led the train, and conversations on impropriety were rekindled. People tried to link the discontinuation of the virtual dollar card to underlying issues with Africa’s most valuable fintech company. But, it isn’t.
Then, other African fintech companies like Eversend, Klasha, Busha, GetEquity and Payday also announced, between July 17 and 18, that their virtual cards were shutting down. That is when everyone looked to Union54.
All the announcements attributed the sudden disruption to an update from the card partner – Union54.
What is Union54?
Founded in 2020 by Perseus Mlambo and Alessandra Martini, and based in Lusaka, Zambia, Union54 (…just like the 54 African countries) is a fintech company that offers card issuing services in partnership with licensed card issuers like Mastercard. Union54 provides an API for any company to issue virtual and physical cards without a bank partner or processor.
In other words, Union54 allows any software company to issue debit cards to their customers without needing any bank or credit card processor. It provides BIN sponsorship, transaction processing, and settlement.
Union54 is a project from the couple’s earlier startup, Zazu – launched in 2015 as a challenger bank in Zambia.
The partners had realised a major problem with the issuance of debit cards and decided to approach Mastercard, where they got a Principal Membership.
This gave Zazu became the authorisation to act as an “issuing bank.” So, they could provide debit cards and as “acquirers,” which means they can provide transaction processing services.
Mlambo and Martini then created Union54 out of Zazu, a platform that now has several APIs that make it simple for any fintech to issue programmable debit cards.
We’ve now used our membership to be able to help other companies and any African fintech who wants to issue their cards. They can just come to us, plug into our APIs, and move quickly without needing to spend a long time negotiating.
Perseus Mlambo said in an interview with TechCrunch.
Mlambo added that the company targets fintech companies that don’t want to make avoidable expenses in setup fees to get virtual or physical cards.
Fintech companies using Union54 are also allowed to design the cards and set the currency in which they want the cards to be charged, and set an extensive catalogue of who will use them, what they will be used for, and when they will be used and how they will be used.
How it works — Union54 onboard a fintech company, using Union54’s API to issue a single card to an employee. When the employee uses the card to shop or pay for utilities online, probably a Disney+ subscription, the fintech earns 1% of that transaction.
“Not only are we allowing Fintech companies to go to market faster than any bank or card issuer could ever dream of doing, but we’re also really showing that our incentives are very much aligned,” Mlambo said.
“We only make money when they do, and that’s why we’re happy to give a guarantee with that interchange.”
The startup gained significant traction in 2021, pioneering the entrant of Zambian startups into YCombinator, and is the first YCombinator-backed startup in the country.
“Our approach is unique in that for the first time, all of these Fintech companies that have done really well in their home countries can integrate with Union54; they can wake up and offer their customers a debit card,” Mlambo said in a statement.
“We can also process virtual debit cards for online and e-commerce payments. We occupy a really unique position in that we allow all of these Fintech companies to be able to introduce debit cards.”
In April 2022, Union54 closed a $12 million seed extension round – the founders were looking at an extension of its services.
The company claims that over 100 fintech companies and 20 websites are plugged into its API.
We don’t see Zambia as the only market for us. We see the whole continent as a potential market.
Earlier, in October 2021, Union54 got a major venture capital firm on its term sheet: Tiger Global, which led its $3 million seed round.
“The purpose of this funding is to help us find the best African talent, people who want to work on big problems. The investment helps us to be able to go to them and say, ‘hey, we’re a well-funded company, we’ve got customers using us, we’re earning revenue, and this is going to be one of the most important companies to come out of Africa.’”
The virtual cards are provided by Mastercard through Union54.
The bug on the screen
Reports emerged that there was a surge in fraudulent transactions on the cards Union54 powers.
In a report by TechCrunch, in May, the fintech company temporarily suspended its Bank Identification Number (BIN) – the first four to six numbers on a payment card that identifies a card issuer – after operational issues were identified.
The report says Union54 reported in a memo that it had resolved the issues, but some remained.
In an attempt to clear out the pending issues, the company noticed “some fundamental blockers to Union54 operating a long-term, profitable card issuing product, mainly due to our partner’s commercial inflexibility and inability to move quickly to implement technical solutions that are required to solve the operational issues we have experienced.”
In internal memos, there were reports of suspicious chargeback requests, where Union54 complained that “there’s been a consistent increase in fraud cases emanating from our Bank Issuing Number (BIN)”.
During one of our conversations with Mastercard, they declared that never in their history has there been such frequent instances or cases of card fraud from this region.
A Union54 memo said.
According to TechCrunch, Union54 has always experienced chargeback fraud since its launch.
The real issue – Union54 discovered that many cardholders tried to make purchases without funding the card. In another case, cardholders were increasingly attempting to defraud merchants by requesting chargebacks after their orders had been fulfilled. Also, Union54-powered cards were probably been used without the authorisation of the original cardholders.
But, some companies would not let the cat go, mainly when the chargebacks affected them. Merchants started contesting the chargeback claims and reported Union54’s BIN to Mastercard.
As a result, Union54 decided to stop authorising card payments on June 16 and cease operations by June 30. The two-week timeframe was to “allow for the defunding of cards and refunds of remaining float deposits, as well as for our clients to access any user, card or transaction data required for your ongoing operations.”
In a memo, Union54 said its API would no longer be available from July 1. However, the fintech company postponed the shutdown to July 18 as Mastercard gave the company an ultimatum to improve its processes. But Union54 said it could not meet the requirement, notwithstanding the extension.
Union54’s efforts “weren’t deemed enough by Mastercard” as clients’ virtual dollar cards failed more frequently, disrupting customer experiences.
An excerpt from the memo read.
What are chargebacks?
“A chargeback is a charge returned to a payment card after a customer successfully disputes an item on their account statement or transactions report. A chargeback may occur on debit cards (and the underlying bank account) or credit cards,”
– Investopedia
The chargeback process can be initiated by either the merchant or the cardholder’s issuing bank. Chargebacks – an inevitable consequence of a digital economy – may also be called payment disputes.
How it works – the bank (Union54 this time) will charge back the amount of the disputed transaction to the merchant, returning the money to the cardholder without needing the merchant’s approval.
In some cases, a cardholder might dispute a charge because they feel they didn’t get what they paid for and the merchant has refused to resolve the issue.
Chargeback gurus
For cardholders, chargebacks act as a shield against criminals or fraudulent business practices. For merchants, however, chargebacks can pose a serious threat to revenue and business sustainability.
Chargebacks are important protection that increases public confidence in credit and debit card payments, especially online transactions. However, they can also be a means to a sinister end, as with Union54.
Union54’s message to its Partners on its virtual cards’ downtime
"Dear Partners; Despite our best efforts, on July 18, cards will stop working. We have a number of upgrades and work streams we will be implementing, which might take us ~ 6 weeks before we can resume service again. As a reminder, you can defund cards and process float funds via: https://docs.union54.technology/docs/float-refunds. Please make sure to defund all cards by July 17, 2022, in order for us to effect a bank transfer of any remaining floating float funds on July 20. 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. For the purpose of clarity: new card issuance and transaction processing will stop on July 18. All issued cards will not work during this hiatus. Onwards and upwards,
…as published by Benjamin Dada.
Mlambo’s response
Perseus Mlambo, CEO of Union54, tweeted on July 18 that the suspension of the virtual card was because of an ongoing audit of the company’s system for compliance. Mastercard requested the audit, according to Mlambo.
But, nobody is buying that. An audit should not warrant the discontinuation of service.
Union54 may just be taking a step back to build better operational processes so as not to kill its relationship with Mastercard and not to kill a great idea.
The CEO, Perseus Mlambo did not respond to requests for clarification and/or comments on the issue of fraud, and how it will affect the perception of the company.
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