The responses below represent my answers to the Techpoint Africa team during my interview with them. The published article on Techpoint is available here.
First off, do you think an African card scheme would solve the problems African fintechs face with virtual cards?
For the most part, yes, an African card scheme could solve the problem.
There’ll be fewer intermediaries when processing a transaction and the card schemes will cater to the nuances of the African market.
If yes, what should be in place before that happens? If No, what are your reasons?
The card scheme would need to be globally competitive and accepted by most of the merchants that already accept payments from other global card schemes. Also, we would need to be able to agree on a settlement currency that’s easily accessible within Africa. Right now, I don’t think that currency exists. Payments are still a major problem in Africa. There are still financial borders that exist as a result of different countries using different currencies that are not tradeable between African countries. You’ll still need to carry USD when you travel to most African countries, rather than carrying the local currency of the country you live in.
Interswitch operates Verve. Why are fintechs not issuing Verve cards?
I’d say acceptance. When you walk into your bank to request a card, the bank asks you to select a card scheme — somehow, we’re programmed to immediately choose either a Visa or a MasterCard. Users are more comfortable with the brands they’re familiar with and would gravitate towards that. Visa and Mastercard sponsor some of the world’s most televised events which makes those cards recognizable.
On the other hand, Verve only recently became globally acceptable and it will take some time to build awareness, and brand recognition and consequently, acceptance.
Lastly, Fintechs will use any card scheme that is easy to integrate and has a very high rate of success — typically a 99% uptime. If Verve cards were very reliable, and usable at the same merchants on offer by other global card schemes, and the pricing is right, fintechs will definitely use them. In fact, we would be the first to jump ship. I believe in buying locally.
Does having a local card scheme solve the problem of chargeback fraud and insufficient funds?
Yes and No. Local card schemes can cater to our own unique use cases. Since some of these problems are peculiar to Africa, a local card scheme can simply implement certain layers of checks before processing a payment. That being said, as long as you have cards, chargeback fraud will always be a possibility. Fraudulent users will always find a way to claim they never received value for successful transactions.
I believe that we need some sort of escrow service that actually works. A service that can truly verify that a user got value for their purchase rather than it being the word of the merchant against the word of the customer.
Beyond chargebacks and declined transactions, what other challenges do virtual card providers face?
I think chargebacks and declined transactions account for most of the challenges virtual card providers face.
I gather that card issuers are charged for declined transactions caused by insufficient funds. Do you have an idea how much this is?
Different card schemes charge different amounts. Card issuers aren’t actually charged for declined transactions caused by insufficient funds. There’s a cost to process every transaction (processing fees) and regardless of whether or not a transaction is successful, the card issuer will still be charged.
At scale, these fees can become a huge burden on the card issuer’s revenue. Usually, card issuers can pass on this cost to the customer but in a case where the customer doesn’t have enough funds in their account, the card issuer will need to find some way to recoup the lost funds.
Do customers have a role in reducing these challenges and what should they do?
Customers should be honest (LOL).
I think Fintechs and customers have a role to play. We can all help each other. Fintechs can send you a notification about an upcoming charge to remind you to fund your wallet. Customers can also do well by funding their wallets upfront.
What are other strategies that African fintechs can employ to combat chargeback fraud and insufficient funds?
To combat the issue of insufficient funds, I believe we need to find a way to process payments directly via wallets/accounts rather than cards. A wallet/account can have multiple use cases e.g buying airtime, saving, transfers, etc. Because wallets have more use cases than virtual cards, the chances that a user’s wallet will be funded are higher than getting them to fund their virtual card which is usually only used for a specific type of transaction.
Also, a lot of users simply use virtual cards as a quick way to access free trials on platforms without any risk of being charged at the end of the trial. Fintechs can allow users to indicate that they’re adding their card to a platform for a free trial period and let users select the duration of the free trial, meaning the cards can expire before the merchant will attempt to charge the card. Going this route would also mean allowing users to create multiple cards for each platform they’re trying to access.
For chargeback fraud, like I mentioned earlier, it will continue to remain cumbersome except we can agree on a way to verify that both merchants and customers get value during a transaction. I believe an escrow system can solve this but it still remains a tough problem to solve because of the number of players that may be involved in a given transaction.
Special thanks to Victor Olomo who provided additional insights for this article.